General Insurance Principles Flashcards
Insurance companies that is owned by stockholders who purchase shares of stock as an investment. do NOT issue participating policies, and pay stock dividends to
stockholders.
Stock Insurance Company
Insurance companies that are owned by policyowners, issue participating policies which pay policy
dividends to their policyowners.
Mutual Insurance Company
Bigg Insurance Company, which is organized as a stock insurance company, is owned by its:
Stockholders
Ann, an agent, tells Julia that the homeowners policy she is selling to Julia will provide full coverage on Julia’s $5,000 cocktail ring against any loss. This is not true, because coverage for theft of jewelry is limited to a smaller amount. What duty to her client did Ann fail to properly discharge?
a duty to fairly represent the terms or conditions of a proposed policy
After finding it difficult to obtain the insurance it needs, Mathews Corporation joins other companies in the same industry and forms an insurance company that they all own. The insurance company they formed is most likely organized as a(n):
captive insurance company
The chance of loss
Risk
Unplanned reduction in
economic value
loss
State of being subject to a
possible loss
High exposure = high
risk
Exposure
The cause of a loss (fire,
flood, theft)
Peril
Condition that increases
the chance of a peril
Hazard
Hazard Example: Alcohol abuse, bad credit
Moral Hazard
Hazard Example: Driving recklessly, not
locking doors
Morale Hazard
Hazard Example: Slippery floors, congested
traffic
Physical Hazard
3 Types of Hazards
- Moral
- Physical
- Morale
Transferring of financial risk
An economical way for an individual or group to transfer the financial risk
of loss to an insurance company.
Insurance
transfers to a property insurance company the risk of financial loss resulting from damage or destruction of the insured’s personal or commercial
property.
Property Insurance
also called liability insurance) transfers to a casualty insurance
company the risk of financial loss resulting from damage to a person or commercial
property due to the insured’s words, actions or failure to take corrective action.
Casualty Insurance
Process we all use to manage life’s risks
Risk Management:
The risk management role played by insurance
risk transfer:
Requirements for an insurable risk?
- loss must be definable, measurable, outside of applicant’s control, not catastrophic
- only pure risks are insurable
Tendency of high risks to seek insurance
Adverse Selection:
Mathematical principle of probability underlying insurance
Law of Large Numbers:
Mutual companies that operate in a limited geographical area. Originally property insurance, now other types also
County mutuals
Groups of members that insure each other through contracts of indemnity.
Reciprocal insurers
These companies; sell insurance to members of a fraternal benefit society
Fraternal Insurance Companies
Federal government insurance programs:
NFIP, Crop Insurance, Social Security, Medicare
State government insurance programs:
Workers Compensation, Unemployment, Medicaid, FAIR Plans
Admitted vs. non-admitted?
• Admitted companies need a Certificate of Authority from the state
Authority which is explicitly stated (expressed) by the principal in the insurer’s agency agreement.
Express authority
Authority which consists of those actions that may extend beyond the rights and powers explicitly provided in the agency contract that are incidental and necessary to carry out a grant of express authority.
Implied authority
Authority which is is not granted by the principal directly to the agent but arises out of the impression the principal gives that the agent is authorized to act a certain way.
Apparent authority
Producer’s responsibilities to applicants and insureds
Full disclosure of all relevant information
Honest representation (no misrepresentation)
Suitable recommendations
What is, “• Errors and Omissions (E&O) Insurance
“ ?
Protects producer against unintentional mistakes (not willful misconduct)
Consideration: By applicant
Premium Payment
Consideration: By Insurer
Good faith promise to honor contract
Three requirements for a legal offer
- Offer
- Acceptance
- Consideration
• Contract of Adhesion?
• Ambiguities in the contract are interpreted to the benefit of the policyowner
• Indemnity vs. Valued Contracts
- Indemnity: Reimburse loss (most property insurance)
* Valued: Pay policy face amount (hard-to-value property)
What is an insurer’s promise in a legal contract?
Warranties
What are an applicant’s “representation.”?
Applicant’s truthful statements on application
Is it a misrepresentation if the applicant believes the statements were truthful
False/No
• Deliberate act to deceive; misrepresentation
Fraud
