Lesson 2: Insurance Basics - a Safety Net Flashcards
Insurance
a contract, called a policy, in which an individual or organization receives financial protection and reimbursement of damages from the insurer or the insurance company. At a fundamental level, it provides some form of protection from any possible financial loss.
Insurance used to hedge againsy
the risk of a contingent or uncertain loss
Structure coverage
Structure coverage helps protect the physical structure of a home, like the walls and roof.
Alien insurers
formed in another country
Indirect loss
Indirect loss is an expense caused by damage or injury to covered people or property, which is beyond the scope of the covered damage. This expense is attributable to the covered loss but is not part of the covered loss itself.
Personal Property coverage
Personal property covered in a typical homeowners insurance policy may include:
Indoor and outdoor furniture
Clothing
TVs
Kitchen appliances
Bikes
Rugs
Lawn care equipment
Trampolines
Direct Loss
Direct loss is damage to covered real or personal property caused by a covered peril.
Personal insurance
Personal insurance refers to any insurance that covers individuals or families. Example: auto, boat, or homeowners insurance. Personal lines of insurance also include damages where you are held liable.
Commercial insurance
Commercial insurance refers to insurance sold to businesses and other commercial entities. Example: commercial lines of insurance typically cover property, offices, auto, inventory, and professional liability.
Reciprocal Insurance company
owned by their members/subscribers. Deals only with P&C insurance, no life and health. Example USAA
mutual company
insurance co owned entirely by its policyholders. Profits are retained by company or rebated to policyholders via dividend distributions or reduced premiums. NONPROFIT
Fraternal insurance company
members of the org can choose to purchase a policy that is underwritten for the entire group; like group insurance cov through employers
Lloyds of London
British insurance market where members ‘join hands’ as syndicates to insure and spread risks of different businesses, orgs, and individuals. Syndicates are specialized in different ty pes of risk; offers membership to wealthy individuals
Govt insurance
state-created insurance meant to provide coverage for citizens. May have private partners. It can be mandatory or can act as a govt counterpart to a private insurer. Govt insurance is largest provider of insurance of coverages like social security, Medicare, Medicaid, flood, and nuclear insurance
Stock company
corporation owned by its stockholders or shareholders, and objective is to make a profit for them, Policyholders don’t share in the profits or losses of the company directly
Speculative Risk
Speculative risk is a category of risk that can be taken on voluntarily and will either result in a profit or loss. All speculative risks are undertaken as a result of a conscious choice: loss, gain, or stays the same. Example: Gambling would be an example of speculative risk.
Foreign Insurers
Foreign carriers are formed in another state. State Farm is domestic to Illinois but foreign to all the other states.
Domestic Insurers
Domestic insurers refer to companies formed under the laws of the state where they are home-based (domiciled) and charted. Example: Georgia Farm Bureau is domestic to Georgia but foreign to all other states.
Admitted vs. Non-Admitted Companies
Admitted Companies are approved and authorized to conduct business in the state. These carriers are backed by a solvency fund that pays losses to the insured if the company goes out of business. Non-Admitted Companies are available when there is a hard-to-place or an unusual type of high-value risk.
Regulation of Insurance
States have licensing jurisdiction. The McCarran-Ferguson Act gives states the power to regulate insurance laws. However, the federal government has the power of oversight and can intervene in instances where states do not do an adequate job.
Two Chief Characteristics of Insurance:
- Transfer of Risk from the individual to the insurance company who now has the risk.
- Sharing In Losses among all those who have exposures. Example: Everyone who drives a high-performance vehicle may carry a similar type of insurance with a similar premium.
Example A: Youthful males typically have similar characteristics when driving a vehicle. They all pay like or similar premiums. This is an example of shareable.
Example B: In a hurricane-prone area, when a disaster occurs, 5% of houses may be damaged, while 95% are not damaged. All of the residents in the area will pay premiums that cover that peril: hurricane damage. This is sharing in losses.
Sample Premium:
A house with a replacement value of $100,000
It is insured for: $100,000
The premium is: $300
Fair Reporting Act
A consumer reporting agency is often hired to obtain information (such as personal character, reputation, habits, lifestyle, and credit) when an individual applies to an insurance company. The Fair Credit Reporting Act regulates the collection of consumer credit information. It protects consumers by requiring notifications when credit inquiries are made, and by establishing provisions for removing outdated or inaccurate information on an applicant’s credit report.
Indirect Loss
In business insurance policies, indirect losses are often referred to as “consequential losses.” Losses not inflicted by the peril itself but constitute losses suffered as a result or consequence of the direct loss. Example: An indirect loss is the consequence of a direct loss, such as the need to stay in a hotel after your home floods.
Avoidance
The technique of risk management involves taking steps to remove a hazard or engaging in an alternative activity.
Pure risk
Pure risk is defined as an event/threat beyond human control that, if it occurs, has only one possible outcome: loss. There is no possibility of gain.
Direct loss
A direct loss is damage to covered real or personal property caused by a covered peril. Direct loss coverage includes the cost to replace or rebuild.
Managing risk
avoidance, reduction and control, retention, transfer
Retention
Planned acceptance of losses by deductibles, deliberate non-insurance, and loss-sensitive plans where some, but not all, the risk is consciously retained rather than transferred.
Reduction and control
Risk management technique that reduces financial losses by implementing measures that will prevent actualizing risks.
Transfer of risk
Risk management and control strategy that involves the contractual shifting of a pure risk from one party to another.
Indemnification
Indemnity is a contractual obligation of one party to compensate for the loss incurred by the other party due to the acts of the Indemnitor or any other party. The duty to indemnify is usually, but not always, coextensive with the contractual duty to “hold harmless” or “save harmless.” Must be shown at the time of loss. There can be more than one entity with insurable Interest. The policy must reflect the insurable interest.
Named Peril
A property insurance term referring to policies that provide coverage only for loss caused by the perils specifically listed as covered. It contrasts with all risks coverage, which applies to loss from all causes not specifically listed as excluded.
Open Perils
Refers to property insurance that insures against loss to covered property from all causes except those that are specifically excluded.
Moral hazard
when someone has a lack of character
Morale hazard
when someone has an attitude of indifference
physical haards
tangible hazards that increase the possibility of loss
legal hazard
rise in the chance of a loss due to legal action
Loss Valuation
valuation of loss refers to the process of applying a monetary value to property loss. After a policyholder files a claim, the valuation helps insurers determine the appropriate compensation to repair or replace damaged property, within the limits of the policy.
replacement cost
The replacement cost is the actual cost to replace an item or structure at its pre-loss condition. $20k to replace damaged roof, ins co pays $20k
ACV
The Actual Cash Value (ACV) is not equal to replacement cost value (RCV). ACV is computed by subtracting depreciation from replacement cost. costs $24k to replace roof, but roof is 10 years old so has depreciated, so only pay $20k to replace bc that’s what it costs
market value
The market value is the price an insured asset in its current state would be able to command in a competitive market setting from a willing buyer.
stated value
Stated value is the amount of coverage limits that the insured wants and selects, example $250,000 on the dwelling. An agreed-upon property value at beg. of policy period
agreed value
Agreed Value is the amount both an insured and the insurer agree will be paid in case of a loss, example Antiques $575,000.
value policy
A valued policy is an insurance policy in which the amount payable for a claim is agreed upon when the policy is issued and is not related to the actual value of a loss.. Ex. if house destroyed, ins co pays value of policy
apportionment
when more than 1 ins co covers structure
subrogation
the legal right held by most insurance carriers to legally pursue a third party that caused an insurance loss to the insured. It ensures insurer’s right of recovery. (car wreck; ins co’s pay, then go after each other)
Proximate cause
Proximate cause means “legal cause,” or one that the law recognizes as the primary cause of the injury. It may not be the first event that set in motion a sequence of events that led to an injury, and it may not be the very last event before the injury occurs.
