Insurance Exam Flashcards
Indemnity
To restore policyholder to pre-loss condition; make whole
- no better, no worse
Reinsurance
The insurance company’s insurance company
- insurance company determines retention limit and buys reinsurance for the balance - also known as "pooling the risk"
Risk
Uncertainty of Future Outcome, Financial Loss
Pure = Chance of Loss Only > covered by insurance
Speculative = chance of loss or gain > cannot be covered by insurance
STARR - Methods of handling risk
Methods of Handling Risk:
> Sharing = chance of loss is shared among many individuals - called pooling the risk
> Transfer = shifting financial burden of loss from insured to another party. This is thee purpose of insurance
> AVOIDANCE - avoiding a particular activity that could turn into a loss
> Retention - Accepting the possibility of a loss yourself by insuring only above a certain $ amount
- deductible is a certain type of risk retention
> Reduction - Taking action to reduce the possibility of loss - control
CANHAM - Elements of Insurable Risk
Elements of an Insurable Risk
> Calculable - prior loss statistics available
> Affordable - premium affordable to consumers
> NON-CATASTROPHIC - no earthquake, war, terrorism
> Homogenous Exposures - similar exposures
> Accidental - not intentional
> Measurable - # & $ amounts
Perils
- Policy Written in 2 Forms
Causes of Loss = Common Causes incl fire, wind, lightning
Policies written in 2 forms:
- Specified (named) = Perils covered specifically listed in policy
- Open Peril (All Risk) = specifically lists excl, everything else is covered
Hazard
- PMM
Hazards increase the chance of loss
- Physical - material characteristics
- Moral - dishonest tendencies
- Morale - careless irresponsible attitude
> Statement that best describes Hazard
- a condition increasing chance of loss
Hazard increase the chance or severity of loss
- cracked sidewalk - intentionally burn down house - leave keys in unlocked car
Insurable Interest
- PEP
- All ins contracts are required to contain an element of:
All insurance contracts are required to contain an element of insurable interest:
- Personal/ Financial Interest
- Economic Loss ($$) Required
- For Property and Casualty must exist @ time of loss
PQ: All of the following are examples of insurable interest EXCEPT….
- Property person expects to inherit
Loss Valuation
The process of determining the value of the loss:
- Replacement Cost - today’s cost to fully replace lost/damaged property w/ like kind or quality property - w/o deduction for depreciation
- Actual Cash Value (ACV) - replacement cost minus depreciation > wear, tear, obsolescence
Valued Policy
- a loss valuation
- law
- is an exception to the principal of indemnity. Under this provision the insurer is liable for the full amount of damages up to the policy value
- insurer responsible regardless of loss
- 90 days to see
Proximate Clause
The cause responsible for the loss:
- closely related to direct loss; insured peril is required
- unbroken chain of events
- had it not been for THIS occurring THIS would not have occurred
> Look for what started the loss
Limits of Liability
- 3 different ways
Max amount of coverage agreed to be paid in the event of a loss. > Stated 3 Different Ways: - Combined - Split Limits - Aggregate Limit
Deductible
Deductible is an example of Retention
- is a certain type of risk retention
Retention = accepting the possibility of a loss yourself by insuring only above a certain $ amount
Accident / Occurrence
An event that is sudden & unexpected
- financial loss occurs
- the specific time & place can be proven
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An event that happens over time
- can be a series of accidents
- can be continuous or repeated exposure to conditions
- results in injury or disease (black lung disease)
> is not expected
Short Rate / Pro-Rate
> Company keeps penalty (service charge)
Insurer cancelled; insured received full unearned premium; no penalty
- part of policy termination
- how premium is refunded
CLAC
- Elements of Legal Contract
Elements of Legal Contract:
> Competent Parties = not minors, mentally/ legally incompetent, alcohol/drug influence, enemy aliens
> Legal Objective = contract must be purchased for a legal purpose
> Agreement = offer & acceptance
> Consideration = exchange of values ($ = promises)
Unilateral Contract / Aleatory Contract
Part of special features of Ins Contracts
Only enforced by one party to the contract
- one sided, only the insurer has promise to keep
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Insurance Contract is valid even though there are unequal exchanges between parties
- small premium paid or partial accident occurs full limit is paid out regardless
Insured
is policyholder, person, business, or entity whose interest is protected in policy.
- Named Insured = specifically designated by name (Dec page)
- First Named Insured = listed first on Dec, may have a higher level of duties or rights under the policy
- Additional Insured = in addition to the Insured, is listed on Dec Page has an insurable interest
Legal Issues Affecting Insurance Contracts
- RURWCFBW
> Reasonable Expectations = what the avrg persn would infer from a policy or contract
Utmost Good Faith = honest, cooprtn, and full disclosur or parties to a contract
Representations = oral or written statements, true to the best knowledge & belief of party making stmnt
Warranty = guarantees answers on the app, these can void the policy
Concealment = failure to disclose all material facts
Fraud = intentional misrepresentation of a material fact
Binder = temp contract pending issue of the policy
Waiver = voluntary relinquishmnt of a known right
Surplus Lines Insurance
Insurers risks not available in standard market due to unusual risk characteristics
Producer/Principal Relationship
Agent = someone who acts on behalf of another Principal = party to whom action is taken
> Agent (Producer) represents Principal (Carrier)
Broker represents client
3 Types of Authority
- AIA
> Actual/ Expressed = written authority
- authority as specified in the producer’s contract
Implied = authority not expressly granted, but a producer is assumed to have in order to transact the biz of the principal
Apparent = authority a reasonable person would assume a producer has based on the producer’s actions and statements
Insurers/ Insurance Organizations
Domicile
Domestic = w/in state Foreign = outside of state Alien = outside U.S.
Stock Insurers
Owned by their stockholders who rcv dividend as stock value or periodic dividend payments
Reciprocal Insurer
Insurance Companies made up of policyholders who insure other policyholders
Reciprocals are managed by an Atty-in-fact
Mutual Insurers
Owned by their policyholders who rcv the dividends directly as end-of-yr policy additions or cash
- Not for profit
- Issue participating policies
Underwriter
EE of Insurance Company who is responsible for the selection, classification, and acceptance or rejection of a proposed Insured
U/W does not make proposals, producers do
Adverse Selection
Tendency for pple w/ greeater-than-ave exposure to loss to purchase insurance
- pple living near earthquake fault lines will want earthquake ins
Insurance Company that write too many greater-than-ave risk (exposure) is subject to adverse selection and may experience financial loss & decreased profitability
U/W are responsible for protecting the insurer against adverse selection
Insurance
Transfer of risk from insured to insurer
- Transfer chance of loss to insurer - Thru legal contract
