Life & Health: General Terminology Flashcards
1
Q
Definition:
Insurance
A
A contract that transfers the risk of financial loss from an individual/business to an insurer
2
Q
Definition:
Loss
A
Reduction in the value of an asset
3
Q
Definition:
Exposure
2 Parts
A
- The risk assumed by an insurer
- The amount that the insurer is responsible to pay
4
Q
Definition:
Peril
A
The thing that caused the loss
Examples:
* Death (Life Insurance)
* Accident/Illness (Health Insurance)
* Fire/Lightning/Flood (Property/Casualty Insurance)
5
Q
Definition:
Risk
A
Uncertain (but possible) chance that a loss will occur
6
Q
What are the 2 types of Risk?
A
- Speculative Risk
- Pure Risk
7
Q
Definition:
Speculative Risk
2 Types of Risk
A
Chance of a Gain or a Loss
Not Insurable
Examples:
* Gambling
* Bad Investments
8
Q
Definition:
Pure Risk
2 Types of Risk
A
Chance of a Loss (only)
Insurable
Examples:
* Illness
* House Fire
* Car Accident
9
Q
Definition:
Hazard
A
Anything that increases the chance that a loss will occur
10
Q
What are the 3 types of Hazards?
A
- Physical
- Moral
- Morale
11
Q
Definition:
Physical Hazard
3 Types of Hazards
A
A hazard that can be seen or determined
(Physically Identifiable Factors)
Example:
* Wet Floor
12
Q
Definition:
Moral Hazard
3 Types of Hazards
A
Intentionally causing a loss
A deliberate change with the intent to cheat or benefit from such circumstances
(An Individual’s Character)
Example:
* Lying on application
13
Q
Definition:
Morale Hazard
3 Types of Hazards
A
Untentionally causing a loss
An unconscious change in a person’s actions or behaviors
(Carelessness)
Example:
* Leaving a door unlocked
14
Q
What are the 5 Methods of Handling Risk?
A
- Sharing
- Transfer
- Avoidance
- Retention
- Reduction
Think “STARR”
15
Q
Definition:
Sharing Risk
5 Methods of Handling Risk
A
2+ individuals agree to pay a portion of the loss incurred by any member in the covered “group”.
Example:
* Corporate stockholders share the risk of profit/loss
16
Q
Definition:
Transfer of Risk
5 Methods of Handling Risk
A
The Insurer agrees to pay if an individual/business has a loss
Example:
* Standard Insurance
17
Q
Definition:
Risk Avoidance
5 Methods of Handling Risk
A
Eliminating a particular risk by not engaging in a certain activity
Example:
* Not driving on icy roads
18
Q
Definition:
Risk Reduction
5 Methods of Handling Risk
A
- Lessening the chance that a loss will occur
or - Lessening the extent of a loss that does occur
Examples:
* Wearing a seatbelt
* Installing a smoke detector
19
Q
Definition:
Risk Retention
5 Methods of Handling Risk
A
The individual will pay for the loss if it occurs
Example:
* No Health Insurance
20
Q
What is the idea behind “The Law of Large Numbers”
A
The larger a group…
The more accurate losses can be predicted
21
Q
What are the 6 Elements of Insurable Risk?
A
- Calculable
- Affordable
- Non-catastrophic
- Homogeneous
- Accidental
- Measurable
Think “CANHAM”
22
Q
Definition:
Calculable (Risk)
6 Elements of Insurable Risk
A
Premiums must be calculable based upon prior loss statistics for that particular risk in order to predict future losses
23
Q
Definition:
Affordable (Risk)
6 Elements of Insurable Risk
A
The premium for transferring the risk should be affordable for the average consumer
24
Q
Definition:
Non-Catastrophic (Risk)
6 Elements of Insurable Risk
A
Insurance cannot insure events that cause widespread losses to large numbers of insureds at the same time.
Example:
* The peril of war is excluded from most policies because the risk is too large for the insurance company to pay
25
Definition:
**Homogenous (Risk)**
## Footnote
6 Elements of Insurable Risk
The individual risks that the insurer covers must all be similar (homogeneous) in regard to factors that affect the chance of loss
26
Definition:
**Accidental (Risk)**
## Footnote
6 Elements of Insurable Risk
The chance of loss must be uncertain/accidental
## Footnote
*(If a loss is certain to occur, there is no "risk")*
27
Definition:
**Measureable (Risk)**
## Footnote
6 Elements of Insurable Risk
It must be possible to estimate the loss as a dollar amount
## Footnote
Examples:
* Financial loss of unexpected death
* Medical bills from sickness/injury
28
Definition:
**Adverse Selection**
Risks that have a greater than average chance of loss
29
Definition:
**Underwriting**
An extensive evaluation of information related to a particular risk
## Footnote
Used to avoid "Adverse Selection"
30
Definition:
**Reinsurance**
" Insurance for Insurers"
Transfers risk from one insurer to another insurer, for a Premium
31
What are the 2 Types of Reinsurance?
What makes them different?
**Facultative Reinsurance**
* The Reinsurer evaluates each risk **before** allowing the transfer
**Treaty Reinsurance**
* The Reinsurer accepts the transfer according to an agreement called a treaty
32
What are the Differences?:
**The Ceding Insurer vs. The Reinsurer**
## Footnote
Reinsurance
**The Ceding Insurer**
* The company reducing its risk
**The Reinsurer**
* The company assuming the risk
33
What are the Differences?:
**Brokers vs. Agents**
**Brokers** represent the insured
**Agents** represent the insurer
34
What are the 6 Types of (Private) Insurers?
1. Stock Insurers
2. Mutual Insurers
3. Fraternal Insurer *(a.k.a. Fraternal Benefit Societies)*
4. Reciprocal Insurers
5. Risk Retention Groups (RRG)
6. Self-Insurers
35
Key Features:
**Stock Insurers**
| 5 Parts
## Footnote
6 Types of (Private) Insurers
1. Business formed as a Public or Private Corporation
2. Owned by stockholders/shareholders
3. Board of directors chosen by the stockholders/shareholders
4. Any company profits may be paid to the stockholders/shareholders *(as a taxable dividend)*
5. Issues non-participating *(non-par)* policies
36
Key Features:
**Mutual Insurers**
| 4 Parts
## Footnote
6 Types of (Private) Insurers
1. Owned by the policyholders (customers)
2. Board of directors chosen by the policyholders
3. Any company excess premiums can be returned to its policyholders
*(as a non taxable dividend)*
4. Issues participating *(par)* policies
37
Key Features:
**Fraternal Insurers**
| 6 Parts
## Footnote
6 Types of (Private) Insurers
1. They exist for the benefit of its members
2. Provides life insurance (and other benefits)
3. Provide social activities
4. Engage in charitable/benevolent causes
5. Organized under a lodge system
6. Operate as a nonprofit and receive some income tax advantages
38
Fraternal Policy Characteristics
| 4 Parts
## Footnote
6 Types of (Private) Insurers
1. Fraternal Policies are called "Certificates"
2. Members who own a policy are called "Certificate Holders"
3. The Insurance Programs operate under a special section of the state insurance code
4. The policies are typically "Open Contracts"
*(The Cert. Holders may be assessed additional charges if premiums are not sufficient to pay claims during a given period)*
39
Key Features:
**Reciprocal Insurers**
| 5 Parts
## Footnote
6 Types of (Private) Insurers
1. Unincorporated group of individuals
2. Members are known as "Subscribers"
3. Members are assessed the amount they owe if a loss to any member occurs
4. Run by an attorney-in-fact
5. The attorney-in-fact is controlled/overseen by an advisory committee of subscribers
40
Key Features:
**Risk Retention Groups (RRG)**
| 5 Parts
## Footnote
6 Types of (Private) Insurers
1. Owned by the insureds/members
2. Sole purpose is to provide liability insurance for its policyholders
3. Policyholders must all be members of the same industry
4. Regulated by the state they are headquartered in (Can operate in other states, as well)
## Footnote
Example:
* Car Dealerships
41
Definition:
**Lloyd's Associations**
1. Individual underwriters providing insurance *(Not insurance companies)*
2. Provide a hub for the exchange of information among member underwriters
3. Members are individually liable/responsible for the contracts they enter into
4. Typically used for insuring unusual "risks"
## Footnote
Examples:
* Hole-in-One contests
* Athletes Hair
* Celebrity Body Parts
42
Key Features:
**Self-Insurers**
| 4 Parts
## Footnote
6 Types of (Private) Insurers
1. A business that pays its own claims *("Risk Retention")*
2. Sets aside savings to cover potential future losses
3. May have an insurance claim system (like insurance companies)
3. Often contract with an insurance company to manage the day-to-day business operations/needs
43
What are some Government Insurance benefits?
**(Federal Level)**
| 5 Parts
1. Social Security
2. Military Life Insurance
3. Federal Employee Compensation
4. Federal Employee Retirement Programs
5. Suports/Subsidizes Insurance Programs designed to cover catastrophic risks
Examples:
Insurance for War, Flood, Natural Disasters, Cop Losses, etc.
44
What are some Government Insurance benefits?
**(State/Local Level)**
| 4 Parts (State) | 3 Parts (Local)
**State Level**
1. Unemployment
2. Workers' Compensation
3. Disability
4. Medical (Medicaid)
**Local Level**
1. Medical
2. Disability
3. Retirement Benefits
45
What are the 3 Location Classifications for an Insurer?
| 3 Parts
1. Domestic
2. Foreign
3. Alien
46
Definition:
**Domestic Insurer**
| 2 Parts
## Footnote
3 Location Classifications for an Insurer
1. The state in which the insurer was formed and is headquartered *(chartered/incorporated)*
2. The insurer's home state is also called its **State of Domicile**
47
Definition:
**Foreign Insurer**
| 1 Part
## Footnote
3 Location Classifications for an Insurer
If an insurer does business in any State/U.S. Territory other than its "Home State"
*(Located in Texas, but selling insurance in Wisconsin)*
48
Definition:
**Alien Insurer**
## Footnote
3 Location Classifications for an Insurer
Formed/Incorporated under the laws of another country
*(other than the US and its Territories)*
49
What are the Differences?:
**Authorized vs. Unauthorized**
(Insurers)
**Authorized**
* The state **requires** a Certificate of Authority
* (Admitted/Authorized/Approved)
**Unauthorized**
* The state **does not require** a Certificate of Authority
* (Non-Admitted/Unauthorized/Non-Approved)
*(Certificate of Authority - A license to sell insurance in the state)*
50
What are **"Surplus Lines"** Insurers?
| 4 Parts
1. Insurance sold by unauthorized/non-admitted insurers
*(must be on the states "Approved list of surplus insurers")*
2. Individuals/Businesses with an exceptionally large/specialized risk that an
authorized insurer can't/won't cover
3. Can only be sold to certain high risk insureds
4. Can't be used to get a cheaper rate
(a.k.a. "Excess and Surplus Lines")
## Footnote
Examples:
* Gaming
* Casinos/Entertainment
* Mining
* Skyscrapers
51
Definition:
**Financial Strength Rating**
A report card of the company *(Each firm uses a different rating scale)*
Examples:
* AM Best, Inc. (A++)*
* Standard & Poor (AAA)*
* Moody's (Aaa)*
* Duff & Phelps
* Weiss Ratings
52
What are the 4 Types of Insurance Agents?
1. Independent Agents
2. Exclusive/Captive Agents
3. General Agents/Managing General Agents *(GA's/MGA's)*
4. Direct-Writing Companies
53
Definition:
**Independent Agents**
| 3 Parts
## Footnote
4 Types of Insurance Agents
1. Independent contractors that represent several companies
2. They are not employees of the insurer(s)
3. Own the renewals of the policies they sell
| *Represent = Sells their insurance products*
54
Definition:
**Exclusive/Captive Agents**
| 3 Parts
## Footnote
4 Types of Insurance Agents
1. Independent contractors that represent one company
2. They are not employees of the insurer
3. The insurance company owns the renewals of the policies sold
| *Represent = Sells their insurance products*
55
Definition:
**General Agent/Managing General Agents**
| 2 Parts
## Footnote
4 Types of Insurance Agents
1. Hire, Train, and Supervise other agents (within a specific geographical area)
2. Receive overriding commissions on the business produced by their agents
56
Definition:
**Direct-Writing Companies**
| 4 Parts
## Footnote
4 Types of Insurance Agents
1. Salaried employees of the insurance company
2. Sell their company's products from a company office
3. Typically don't receive a commission
4. The insurer owns all of the business produced
57
What is **Direct Response Marketing**?
1. No agent/producer involved
2. Policies are sold directly to the public (by the insurer)
3. Conducted through the mail, newspapers/magazines, TV/radio, or online
58
What is **"The Law of Agency"**?
A relationship in which one person is authorized to represent and act for another person/corporation
59
Who are the 2 parties involved in **The Law of Agency**?
## Footnote
The Law of Agency
**Agent**
* The person authorized to act on behalf of the other
**Principal**
* The person/corporation on whose behalf the agent acts
* *(Liable for the statements/actions of their agents)*
60
What are the 3 Types of Authority under **The Law of Agency**?
## Footnote
The Law of Agency
1. Express Authority
2. Implied Authority
3. Apparent Authority
61
Definition:
**Express Authority**
## Footnote
3 Types of Authority (The Law of Agency)
The wording in the contract that specifically tells the producer what they can/cannot do
*("The authority made explicit in a producer's written agency agreement with the
insurer")*
62
Definition:
**Implied Authority**
## Footnote
3 Types of Authority (The Law of Agency)
Not written in the agency contract, but assumed to be granted to an agent
*(in accordance with general business practices)*
63
Definition:
**Apparent Authority**
## Footnote
3 Types of Authority (The Law of Agency)
Authority that others **believe** the agent has
(based on the agents actions/statements)
*(The insurer may still be bound by the actions if the agent's apparent authority
creates a "presumption of agency" in the mind of the insured)*
64
What is an agent's **Fiduciary Responsibility** relating to applicants/insured individuals?
| 4 Parts
## Footnote
The Law of Agency
1. Promptly send Premiums to the Insurer
2. Knowledge of Products (Suitability Considerations)
3. Comply with Laws and Regulations
4. No Commingling of Assets
65
What are the 5 Elements of a Legal Contract?
## Footnote
The General Law of Contracts
**"CLOAC"**
1. **C**onsideration
2. **L**egal Purpose
3. **O**ffer
4. **A**cceptance
5. **C**ompetent Parties
66
Definition:
**Consideration**
## Footnote
The General Law of Contracts
An exchange of value
*Each party must give something valuable to the other*
**"Consideration" = "MONEY"**
67
Definition:
**Legal Purpose**
## Footnote
The General Law of Contracts
Must be for a legal purpose and not contrary to public policy
## Footnote
Example:
* An agreement to purchase stolen goods would not be a valid contract because it lacks legal purpose
68
Definition:
**Offer**
## Footnote
The General Law of Contracts
Must be unconditional and unqualified
69
Standard Process:
Applicant **Offer**
Insurer **Acceptance**
| 2 Parts
## Footnote
The General Law of Contracts
**Applicant - Offer**
* Submits a completed application to an insurer (along with the first premium payment)
**Insurer - Acceptance**
* The policy is issued (as applied for) by the insurer
70
Standard Process:
**"Invitation"**
Insurer **Offer**
Applicant **Acceptance**
| 3 Parts
## Footnote
The General Law of Contracts
**Applicant - "Invitation"**
* Submits a completed application to an insurer (**without** the first premium payment)
**Insurer - Offer**
* The Insurance Company makes an offer by issuing the policy
**Applicant - Acceptance**
* The applicant accepts it by paying the first premium
71
Definition:
**Acceptance**
| 3 Parts
## Footnote
The General Law of Contracts
If Acceptance is qualified or conditional - **No Agreement has been reached**
*(A Qualified Acceptance = A rejection of the offer and called a "Counter Offer")*
72
Definition:
**Competant Parties**
| 2 Parts
## Footnote
The General Law of Contracts
**Both parties must have the legal capacity to make a contract**
1. Must be of legal age (18+)
2. Must be mentally competent
*(Applications of minors must be signed by a parent or guardian)*
73
Definition:
**Adhesion**
## Footnote
Characteristics of Insurance Contracts
**The policy is written by the Insurance company**
If ambiguous (not clear) then the court will take the side of the Insured
74
Definition:
**Aleatory**
## Footnote
Characteristics of Insurance Contracts
**Not of equal value**
Small premium for a large amount of coverage
75
Definition:
**Utmost Good Faith**
## Footnote
Characteristics of Insurance Contracts
Each party is entitled to a "Reasonable Expectation" that the other party will not try to conceal pertinent information or act deceptively
*(Violation of this could void the claims of the offending party)*
76
Definition:
**Unilateral**
## Footnote
Characteristics of Insurance Contracts
**Only one promise made**
* Insurance company promises to pay for a covered loss
* Insured does not promise to pay the premium
77
Definition:
**Personal Contract**
## Footnote
Characteristics of Insurance Contracts
Made with a particular person and no one else
*(The contract cannot be transferred to a different person)*
78
Definition:
**Conditional**
## Footnote
Characteristics of Insurance Contracts
Require certain conditions to be fulfilled in order for the contract to be enforced
## Footnote
Example:
* Insured must pay the premium for coverage to continue
* Insured must file a claim if a loss occurs
79
Definition:
**Indemnity**
## Footnote
Characteristics of Insurance Contracts
Intends to restore the insured to the financial state enjoyed prior to the loss
**No better, No worse**
*(Does not apply to Life Insurance)*
80
True or False:
Life and Health insurance policies are "Personal Contacts"
## Footnote
Characteristics of Insurance Contracts
**False**
* Property and Casualty policies are
* Life and Health policies are not
81
Definition:
**Representation** vs. **Misrepresentation**
**Representation**
* A statement that is believed to be true at the time it is given
**Misrepresentation**
* A representation that is false
* *(Do not necessarily void insurance contracts)*
## Footnote
Example of Misrepresentation:
* The insured mistakenly gives one number of their address wrong
82
Definition:
**Material Misrepresentation**
The false information must have been a determining factor in the insurer's acceptance of the risk
## Footnote
Example:
* Saying you were never treated for a heart condition, but you actually were
83
Definition:
**Warranty**
A statement that is guaranteed to be true
*(If a warranty is not kept, the contract may be voided)*
## Footnote
For Life/Health Insurance:
Most State laws say that statements/responses on an application are "Representations" and not "Warranties"
84
Definition:
**Concealment**
The intentional failure to disclose known (material) facts
## Footnote
* If Intentional - Coverage could be voided
* If Unintentional - Coverage cannot be voided
85
Definition:
**Fraud**
Intentional act to cheat another - Voids the policy
## Footnote
* May involve misrepresentation, concealment, or both
* Not all acts of misrepresentation or concealment are acts of fraud
86
Definition:
**Waiver**
Voluntarily giving up a right
87
Definition:
**Estoppel**
Legal doctrine that prevents a party from denying an action if it had already been accepted
88
What are the consequences for someone who intentionally makes Fraudulent and False statements?
| 2 Parts
## Footnote
Federal Regulation 18 USC (Sections: 1033 & 1034)
1. Fine
2. Prison (10-15 Years)
## Footnote
* Also applies to Officers, Directors, Agents, and Employees who willfully embezzle/misappropriate funds
