Insurance (Chapter 1 &2) Flashcards
Accepting some or all of the potential loss exposure for risks that are low in frequency and severity
Risk Retention (ie. deductibles and co-payments where the insured is sharing in the first dollar of financial loss)
Risk management technique used for any risks that are high in frequency and severity
Risk Avoidance
The immediate cause and reason for a loss occurring
Peril (ie. accidental death, disability caused by sickness, property loss caused by fire, windstorm, tornado)
Specific conditions that increase the likelihood of a loss occurring.
Hazards
The potential for loss caused by the character of the insured such as filing a false claim.
Moral Hazard
Indifference to risk due to the fact that the insured has insurance.
Morale Hazard (ie. leaving the car running with keys in the ignition while running into gas station)
How do insurers prevent morale hazard.
Deductibles or making the insured pay the first dollars of loss
Physical condition that increases the likelihood of a loss occurring.
Physical Hazard
The more similar the events or exposures, the more likely the actual losses will equal the expected losses
Law of large numbers
What elements must be present for an insurance contract to be valid?
1) Mutual Consent
2) Offer and Acceptance
3) Performance or Delivery
4) Lawful Purpose
5) Legal Competency of all parties
“What is written prevails.”
Parol Evidence Rule
Asserts that the insurer will only compensate the insured to the extent that the insured has suffered an actual financial loss. (The insured cannot make a profit from the insurance.)
Principle of Indemnity
Requires that the insured relinquish a claim against a negligent 3rd party if the insurer has already indemnified the insured.
Subrogation Clause
Asserts that an insured must suffer a financial loss if a covered peril occurs, otherwise no insurance can be offered.
Principle of Insurable Interest
Asserts that an insured must suffer a financial loss if a covered peril occurs, otherwise no insurance can be offered
Principle of Insurable Interest
When must an insurable interest exist for a life insurance policy?
Only at the inception of the policy
The 3 legal doctrines that are followed during the application and throughout the life of an insurance policy.
1) Representation
2) Warranty
3) Concealment
A statement made by the applicant during the insurance application process.
Representation
A promise made by the insured that is part of the insurance contract. (ie. promising to install fire alarms, getting the coverage, and then neglecting the promise to install)
Warranty
When the insured in intentionally silent regarding a material fact during the application process.
Concealment
The insured has no ability to negotiate the terms of the contract - since this is true, if ambiguities are found, the courts will rule in favor of the contract.
Adhesion
The dollar amounts exchanged between the insured and the insurer are unequal.
Aleatory
Insurance contracts are ___________ in that there is only one promise made, and it is made by the insured to pay the beneficiary in the event of a covered loss.
Unilateral
The insured must abide by all of the terms and conditions of the contract if the insured intends to collect under the policy.
Conditional
Can any insurance contracts be assigned without the consent of the insurer?
Life insurance, because the contract continues to cover the insured regardless of who owns the policy
Specifically outlines the duties, responsibilities, and scope of authority can act upon and thus bind the principal.
Express Authority
When a customer walks into an office they will see company logo on door, signs on the wall, and business cards on the desk. What kind of authority is this?
Implied Authority
When 3rd party believes implied or express authority exists, but no authority actually exists.
Apparent Authority (ie. if an agent were to keep signs of principal after termination of relationship up leading the customer to a false judgement).
Relinquishing a known legal right
Waiver
Esai is applying for a health insurance policy which requires that Esai complete an application and physical exam. If she completes the application but never finishes the exam and the insurance company accidentally issues her a policy who is at fault?
The insurance company because by issuing the policy, the insurer waived the physical exam requirement and are liable to pay claims.
How long is the suicide clause typically in an insurance contract?
2 years (at that time only premiums are typically returned to beneficiary)
Where a person is denied a right he might otherwise be entitled to under the law.
Estoppel
Mutual Company Insurers
- Owned by policy holders, not share holders.
- Policy holders elect the Board of Directors for a mutual company
- Profits are returned to policy holders in the form of a dividend (the dividend is not treated as taxable income but is a return of premiums paid.)
Legal representatives of an insurer and act on behalf of an insurer. Only permitted to sell policies written by their company.
Agent
Temporary insurance coverage until the insurance company issues the permanent policy.
Temporary Binder
Legal representatives of the insured and act in the best interest of the insured. These individuals may sell insurance policies from any one of a number of different insurance companies.
Broker
Means by which an insurance company transfers some or all of its risks to another insurance company.
Reinsurance
This section of an insurance policy describes exactly which property or person is being covered.
Declarations section
This section of an insurance policy describes exactly what is being insured.
Description Section
What is the peril covered for a term life insurance policy?
Death of the insured within the term period
Identifies the amount of time after the due date of the premium that the policy will stay in force. Policy will lapse after this time if premium is not paid.
Grace period (Typical grace period is 31-60 days).
If there are conflicting terms between the policy and the rider or endorsement, what language prevails ?
The Rider or endorsement language
Tendency of those that most need the insurance to seek it while those with the least perceived risk avoid paying the premiums by not buying insurance.
Adverse Selection
Process of classifying applicants into risk pools, selecting insureds, and determining a premium.
Underwriting
Loss sharing arrangements whereby the insured pays a flat dollar amount or percentage of the loss in excess of the deductible.
Copayments
In property insurance, this encourages insureds to cover their property to at least a stated percentage on their properties value or else suffer a financial penalty.
Coinsurance
What is the coinsurance formula?
(Amount of Insurance Carried) / (Amount of Insurance Required) X Covered Loss - Deductible = Amount Insurer Pays
Will the insurer ever pay more than what is lost?
No, the maximum amount the insurer will pay is up to the covered loss or the Face Value of the policy or policy limits, less any deductible, even though the coinsurance formula may result in a percentage greater than 100%
How do insurance policies generally value and pay losses (ie. 3 valuation methods)
1) Actual Cash Value
2) Replacement Cost
3) Appraised or agreed upon value
Represents the replacement cost less the depreciated value of the property
Actual Cash Value
Represents the amount to repair or replace property, without any deduction for depreciation.
Replacement Cost
Legislatures job in regard to insurance regulation…
1) Pass laws to regulate how insurance companies conduct business in their state
2) Controls how insurance agents are licensed
3) Protects consumer rights by passing consumer protection laws
Judicial Branch’s job in regard to insurance regulation…
1) Rules on the constitutionality of laws passed by the legislative branch and the executive branch
2) Provides oversight to other branches (Legislative and Executive) as well as the insurance industry
Role of the Executive Brach (a.k.a State Insurance Commissioner)
1) Enforcing the legislatures laws and regulations
2) Licensing of insurance agents
3) Reviewing Rate Increases
4) Auditing Insurance Companies
What are the goals of the NAIC?
1) Protect the public
2) Promote Competition
3) Promote fair treatment of insurance consumers
4) Promote the solvency of insurance companies
5) Support and improve state regulation of insurance
To promote solvency and avoid insurers from not being able to pay claims, life and health insurance companies are subject to ___________?
(RBC) Risk Based Capital tests: measures how much capital invested and riskiness of investments
An insurance company must file the rate increase request with the State’s Insurance Commissioner office and the request will either be approved, disapproved, or modified.
Prior Approval Law
Permit an insurance company to file the rate increase with the state insurance commissioners office and immediately implement the increase. The state insurance commissioner may later deny the rate increase in which case the insurance company must rebate the premiums paid under the denied rate.
File and use law
Permits an insurer to increase rates, but they must file the rate increase within a specific time period as determined by state law.
Use and File Law
This Law allows insurers to set their own rates, and the state presumes that supply and demand will determine the appropriate rates for various insurance products. (State assumes this will best promote efficient pricing).
Open Competition
Measures the number of losses expected to occur.
Frequency
Measures the potential size in dollars of the loss.
Severity
The insured and the insurer must be forthcoming with all relevant facts about the insured risk and coverage provided for that risk
Utmost Good Faith
The insured must be subject to emotional or financial hardship resulting from the loss.
Insurable Interest
What will be the result if you misstate your age on a life insurance policy?
The death benefit will be recalculated upon your death based on your actual age when the policy was issued
When must an insurable interest exist for a life insurance claim?
At policy inception only
When must an insurable interest exist for a property insurance claim?
At the point of inception and time of loss
