Lesson 1 - General Flashcards
What is insurance?
Transfer of pure risk from one party to another for a price through a legal contract
What’s needed for insurance to be used? (Elements of insurable risks)
1) Loss must be unexpected and accidental
2) Coverage cost must be affordable to almost everyone
3) Risk must be calculable
4) Risk must be one of larger # of risks
Law of Large Numbers (Law of Averages)
Mathematical principle that states actual results have a tendency to equal expected or probable results.
What is risk?
Uncertainty of financial loss/chance of loss/probability of loss
Type of risk that is uninsurable and why?
Speculative risk; involves the chance for loss or gain
Multi step process used to control, prevent, reduce risk?
Risk management
Four step process of risk management?
1) Identify possible risks present
2) Determine what action to take to reduce risk
3) Implement specific action
4) Monitoring action taken to make changes as needed
Methods with which to handle risks?
1) Avoidance
2) Retention (most common method)
3) Transfer
4) Sharing
5) Reduction
What is hazard?
Condition that increases the chance of loss
Two class hazards?
Physical hazard : Gasoline, unsafe car brakes, cracked sidewalks
Moral/Morale hazard : Mental attitudes, carelessness, dishonest acts
Insurance transfer?
Risk transfer accomplished by individual purchasing insurance contract
Perils?
Events which cause a loss such as burglary, fire, flood damage etc.
Two ways loss can be classified?
Direct Loss Indirect Loss (Consequential Loss)
Indemnify?
Placing an insured in the same financial position following a loss that he existed in before the loss occurred
Insurable Interest?
Where individual may suffer economic loss if property is damaged/destroyed
Insurable Interest Requirements in property being insured?
1) Prevents/avoids gambling/wagering
2) Measures insured’s possible economic loss
3) Helps guard against moral hazards
Two basic loss valuation methods?
Replacement Cost & Actual Cash Value
Valued Policy/Form?
Contract which establishes value for items insured at the time the contract is written
Agreed Value/Optional Coverage?
Suspends co-insurance provision for 1 year, guaranteeing the insured will not suffer co-insurance penalty
Stated Amount?
Limits of coverage is fixed for certain types of eligible property (mostly auto)
Proximate Cause?
Broken chain of events led up to an occurrence. (Original cause of loss or damage)
Aggregate Limit?
Maximum amount an insurer will pay for a covered loss on a per location or per project basis
Restoration/NonReduction of Limits
Without aggregate limit, limits are applied to a single loss and restored in event of future occurrence WITHOUT reduction
Restoration with aggregate limit?
Coverage is reduced by amount paid for loss for duration of policy period…Full coverage amount is restored at policy renewal
Deductible?
Portion of loss that is the responsibility of insured
Co-Insurance?
If insured does not carry a specified percentage (80% the most common for property insurance) for value of property, they won’t collect entire amount of partial loss
Accident?
Event taking place without one’s foresight or expectation; fortuitous event
Occurence?
Continuous or repeated exposure to conditions
Provision found in property contracts that automatically extends to an insured any advantages made in later edition of policy.
Liberalization Clause
Open Peril Insurance/All Risk Coverage
Protects against all risks of physical loss except perils specifically excluded or limited in policy
Insurers are able to use insured’s legal right of recovery against at-fault party for purpose of recovering amount that was paid for the loss
Subrogation/Transfer of Rights of Recovery
Two basic cancellation concepts in property and casualty insurance?
Short Rate Cancellation & Pro-Rata Cancellation
Aggregate Excess Insurance?
Activated when total losses during specified period reach a specified amount
Specific Excess Insurance?
Limits maximum cost of any 1 accident during coverage period.
When the insured and insurer do not agree on the existence of coverage for a particular loss…
Arbitration
Appraisal
Acknowledges existence of claim but the amount of loss cannot be agreed upon by either party
Foreign Insurance Company
Company incorporated under the laws of another state, but licensed and permitted to conduct insurance business in USVI
Alien Insurance Company
Company incorporated outside the US, but licensed in the USVI
Mutual Insurance Company
Company owned by policy holders
Reciprocals
Characteristics of a mutual insurer and Lloyds association (individuals who assume risks); cooperative insurance
Special type of insurer providing insurance benefits for its members as well as tax exemptions
Fraternal Benefit Society
Authorized/Admitted Insurance Company
Company that received a certificate of authority from USVI and is licensed/authorized to conduct insurance business here
Risk Purchasing Group
Members whose business are similar and their purpose is purchasing insurance on a group basis
Risk Retention Group
Members whose business are similar and their primary activity is spreading all/any portion of liability exposure. (Only Liability Insurance)
Representatives who operate under authority given them by insurers to make legal transactions with consumers of insurance
Agency System
The exception to the general rule that insurance is sold mainly through producers
Direct-selling systems
How may direct selling be accomplished
1) Utilizing Mail
2) Telephone without a producer
Independent Agency System
Where producer represents several or many insurers
Exclusive Agency System
Where producer represents only one company
Provides field supervision of sales in a given territory for the insurer
General agents
Two areas that consumer should review when choosing an insurer
Solvency & Liquidity
Reinsurance (Insurance purchased by insurers)
Transfer of insurance from one insurance company to another and allowing an insurance company to underwrite higher limits of coverage
Two principle forms of reinsurance agreements
Specific/Facultative & Treaty/Automatic
National Association of Insurance Commissioners (NAIC)
Voluntary organization formed to achieve uniformity in state insurance laws
Surplus Lines Company
Common form of unauthorized carrier; when insurance can’t be supplied, a surplus lines carrier is utilized
Lloyds of London
Voluntary association who agree to share in insurance contracts (not an insurance company)
Salvage
Value recoverable by insurance company after paying for loss
Short Rate Cancellation
When insured cancels contract & return premium is reduced
Pro-Rata Cancellation
When insurer cancels contract with no penalty charge
When 2 or more policies provide coverage that is equally specific so share coverage
Contribution by Equal Shares
Concurrency
Policies designed to cover identical properties & should be written as alike as possible
Another name for residual markets
Shared/Non-Voluntary Markets
Three Marketing Systems
1) Independent Agency System
2) Exclusive Agency System
3) Group Insurance
