Kaplan - Unit 1- General Insurance - Definitions Flashcards
Life & Health Certification
Annuity
An annuity is a written contract typically between you and a life insurance company in which the insurance company makes a series of regularly spaced payments to you in return for a premium or premiums you have paid. An annuity is not life insurance. A life insurance policy provides benefits to your family if you die.
Insurance
A contract that transfers the risk of financial loss from an individual or business to an insurer. In return the insurer agrees to cover the individual or business for certain losses if they occur.
Risk
Uncertainty about whether a loss will occur. If a loss is certain to occur, it does not involve risk. In regard to life insurance, although death is certain to occur to everyone, the timing of that loss is uncertain.
Speculative Risk
A possibility of a loss and also a possibility of making a gain (gambling or investments for example). Loss is NOT INSURABLE
Pure Risk
Only loss can occur (car accident for example). Loss IS INSURABLE.
Loss
A reduction in the value of an asset. To determine the amount of a loss, the value of the asset is measured before and after the loss. Value Before Loss - Value After Loss = Total amount of loss
Exposure
The risk assumed by an insurer and the amount that the insurer is responsible to pay out at any given time. Exposure is the risks for which the insurance company would be liable.
Peril
Cause of loss. The insurer agrees to cover losses caused by a specified peril. For life insurance, the peril is death. For health insurance, the perils are accidents or illness. For property & casualty, the peril is fire, lightning, hail, etc.
Hazard
Anything that increases the chance that a loss will occur. The three types of hazards are:
Physical - can be seen or determined
Moral - intentionally causing a loss
Morale - carelessness (like leaving the doors and windows unlocked)
Methods of Handling Risk
STARR
Sharing
Transfer
Avoidance
Retention
Reduction
Methods of Handling Risk - SHARING
Two or more individuals agree to pay a portion of any loss incurred by any member in the group. Stockholders in a corporation share the risk of profit and loss.
Methods of Handling Risk - TRANSFER
The insurer agrees to pay an if individual or business has a loss. The large number of insureds who do not have an accident will be paying for the losses of the few who do have an accident. This is the only way that insurance can work.
Methods of Handling Risk - AVOIDANCE
Eliminating a particular risk by not engaging in a certain activity. For example, work from home if the roads are covered in ice.
Methods of Handling Risk - REDUCTION
Lessening the chance that a loss will occur or lessening the extent of a loss that does occur. For example seatbelts or smoke alarms.
Methods of Handling Risk - RETENTION
Risk retention means the individual will pay for the loss if it occurs. Paying for a hospital bill without health insurance for example.
Law of Large Numbers
The larger the group - the more accurate losses can be predicted.
Elements of Insurable Risk
CANHAM
Calculable
Affordable
Non-catastrophic
Homogeneous
Accidental
Measurable
Calcuable
Premiums must be calculable based upon prior loss statistics for that particular risk in order to predict future losses.
Affordable
The premium for transferring the risk should be affordable for the average consumer.
Non-catastrophic
Insurance cannot insure events that cause widespread losses to large numbers of insureds at the same time. That is why the peril of war is excluded.
Homogenous
The individual risks that the insurer covers must all be similar, or homogeneous, in regard to factors that affect the chance of loss.
Accidental
Insurance is a method of handling risk. If a loss is certain to occur, there is no risk.
Measurable
It must be possible to estimate the loss as a dollar amount. Insurance covers the financial loss of unexpected death or medical bills from sickness.
Adverse Selection
The tendency for higher-risk individuals to get and keep insurance more than individuals who represent an average level of risk. To avoid adverse selection, insurers make an extensive evaluation of information related to a particular risk - a process called underwriting.
Risks that have a greater than average chance of loss.
Reinsurance
Protects insurance company from catastrophic losses in certain geographical areas.
An insurance company (the ceding company) paying another insurance company (reinsurer) to take some of the company’s risk of catastrophic loss.
Facultative
The reinsurer evaluates each risk before allowing the transfer to be made from the ceding company.
Treaty
The reinsurer accepts all risks of a certain type from the ceding company.
Stock Insurer
- Publicly owned by stakeholders/shareholders
- If the company makes money, a taxable dividend from the profits may be paid to the stockholders/shareholders
- Issues non-par. policies
Mutual Insurer
- Owned by the policyholders (customers)
- If the company is profitable, can return excess premium to its policyholders - nontaxable dividend
- Issues participating policies
Fraternal Insurer
- Provides insurance and other benefits
- Must be a member of the society to get the benefits
Reciprocal Insurer
- Unincorporated
- Members are assessed the amount they have to pay if a loss to any member of the group occurs
- Run by Attorney-in-fact
Lloyd’s Association
insurance provided by individual underwriters not companies
Risk Retention Group
Liability insurance company created for and owned by policyholders from the same industry. Example - car dealers RRG - only car dealers can be policyholders
Risk Purchasing Group
- A group of businesses from the same industry joining together to buy liability insurance from an insurance company
- The RPG is NOT the insurance company
Self-Insurance
A business that pays its own claims
Residual market
Insurance from the state or federal government
Insurance company location
- Domestic - state where company is incorporated
- Foreign - any state or U.S. territory other than the state where incorporated
- Alien - incorporated in any country other than USA
Certificate of Authority
State license for an insurance company
Admitted or Authorized
State requires the insurance company to have a Certificate of Authority
Non-Admitted
Unauthorized - Insurance company not required to have a Certificate of Authority from the state
Surplus Lines
- Insurance sold by unauthorized/non-admitted insurers - if on the states approved list of surplus insurers
- Can only be sold to certain high risk insureds
- Cannot be sold just for a cheaper rate than licensed/admitted insurers
Financial Strength Rating
A report card of the company
Methods of Marketing
- Independent
- Exclusive or Captive
- General Agents or Managing General Agents
- Direct-writing companies
- Direct Response - no agent/producer involved
Agency
The insurance agent acts on behalf of the principal (insurance company)
Agent Authority
EXPRESS - what the agents written contract with the company says
IMPLIED - not written but are the things agents normally do to sell insurance
APPARENT - things the agent does that a reasonable person would assume as authority, based on the agents’ actions and statements
Fiduciary-Trust
- Promptly send premiums to insurer
- Knowledge of products
- Comply with laws and regulations
- No commingling
Legal Contract (CLOAC)
Consideration
Legal purpose
Offer
Acceptance
Competent parties
Consideration
Giving something of value
- Insured gives information and money (premium) to the insurance company
- Insurance company gives a promise to pay (policy) to the insured
Legal purpose
Risk transfer doesn’t violate the law
Offer (made by insured)
- Insured submits application and first month’s premium to insurer
- Counteroffer (made by insurer) - agrees to issue policy but with higher premium or restrictions/exclusions. Insured either accepts the conditions or withdraws the application
Acceptance
Insurer accepts risk as presented
Competent parties
Insured age 18 and sane
Adhesion
- Policy written by the insurance company
- If ambiguous (not clear), court will take the side of the insured
Aleatory
Not equal value - small premium for a large amount of coverage
Utmost Good Faith
The insured and insurance company have a right to expect honesty from each other
Unilateral
Only ONE promise made
- Insurance company PROMISES to pay for a covered loss
- Insured does NOT promise to pay premium
Personal
Contract between the insurance company and the insured. Cannot be changed to someone else.
Conditional
Insured must pay the premium for the coverage and file a claim if a loss occurs
Indemnity
Pay for the loss but with no gain
Representation
Believed to be true.
Misrepresentation
Information given that is not true, however; the correct information would not affect the insurance company’s decision. Insured mistakenly gives one number of their address wrong doesn’t void the coverage.
Material Misrepresentation
Information given that is not true. This information DOES affect the insurer’s decision. Insured has a conviction for driving while intoxicated which could void the coverage.
Warranty
Promise
- Always made by the insurance company. If promise to pay is broken, the company could be sued by the insured.
- May be made by the insured. If promise is broken, the insured may have no coverage.
- Guaranteed to be true
Concealment
Failure to disclose.
- If intentional and the information is material (important), the coverage could be voided.
- If NOT intentional, the coverage cannot be voided
Fraud
Intentional act to cheat another
Waiver
Voluntarily giving up a right
Estoppel
Actions reasonably relied on by the one party can’t be denied by the party that accepted same previously
Fraud and False Statements
- Fine and/or imprisonment (10-15 years)
- Embezzlement included
