principles of insurance

Question 1

insurance is used as a protection against ______ risks

Answer 1

pure

Question 2

pure risk

Answer 2

create either a loss or no loss

ex. house fires, auto accidents, personal illness

Question 3

speculative risk

Answer 3

change of profit, loss or no loss

generally undertaken by entrepreneurs

generally voluntary risk and not insurable

Question 4

subjective risk

Answer 4

differs based on an individual’s perception of risk

Question 5

objective risk

Answer 5

does not depend on an individual’s perception, but is measurable and quantifiable

Question 6

severity

Answer 6

the actual dollar amount of the loss

more important than the probability of a loss

Question 7

the law of large numbers helps to reduce….

Answer 7

objective risk

Question 8

perils

Answer 8

the actual cause of loss

ex. fire, wind, tornado, earthquake, burglary, collision

Question 9

hazard

Answer 9

a condition that increases the likelihood of a loss occuring

Question 10

moral hazard

Answer 10

a character flaw

character flaw would lead to filing a false claim

Question 11

morale hazard

Answer 11

the indifference created because a person is insured

Question 12

physical hazard

Answer 12

a tangible condition that increases the probability of a peril occurring

Question 13

adverse selection

Answer 13

the tendency of persons with higher than average risks to purchase or renew insurance policies

managed through underwriting, denying insurance on the front end and raising premiums on the back end

Question 14

requirements for insurable risks

Answer 14

not catastrophic, homogenous exposure units, accidental, and measurable and determinable

Question 15

elements of a valid contract

Answer 15

competent parties
offer and acceptance
legal consideration
lawful purpose

Question 16

principle of indemnity

Answer 16

insured is only entitled to compensation to the extent of the insured’s financial loss

insured cannot make a profit from an insurance contract

Question 17

subrogation clause

Answer 17

insured cannot receive compensation from both an insurer and a third party for the same claim

Question 18

principle of insurable interest

Answer 18

an insured must have an emotional or financial hardship resulting from damage, loss, or destruction

property and liability - must have insurable interest at time of inception and at time of loss

life insurance - must have insurable interest only at time of inception

Question 19

void contract

Answer 19

was never valid and thus never came into existence

Question 20

voidable contract

Answer 20

valid contract that allows cancelation by one of the parties however the other part is bound by the agreement

Question 21

warranty

Answer 21

a promise made by the insured to the insurer

breach of warranty is grounds for avoidance

Question 22

representation

Answer 22

statements made by the insured to the insurer during the application process

Question 23

concealment

Answer 23

when the insured is silent about a fact that is material to the risk

Question 24

adhesion

Answer 24

basically “take it or leave it”
no negotiations over terms and conditions
any ambiguities in an insurance contract are found in favor of the insured

Question 25

aleatory

Answer 25

money exchanged may be unequal

Question 26

unilateral

Answer 26

only one promise is made by the insurer which is to pay in the event of a loss insured is not obligated to pay the premiums

Question 27

conditional

Answer 27

insured must abide by the terms and conditions of the insurance contract if the terms and conditions are not followed, the insurer may not pay a claim

Question 28

agent

Answer 28

a legal representative of the insurer

Question 29

general agent

Answer 29

represents one insurer such as a State Farm or Allstate Insurance agent

Question 30

independent agent

Answer 30

represents multiple, unrelated insurers

Question 31

broker

Answer 31

represents the policy owner, not the insurance company

Question 32

express authority

Answer 32

given through an agency or written agreement insurer is responsible for acts of an agent based on express authority

Question 33

implied authority

Answer 33

authority that the public perceives and a valid agency agreement exists the actual delivering of an insurance contract and accepting a premium is an example insurer is still responsible even if a client is misled

Question 34

apparent authority

Answer 34

when the insured believes that agent has authority to act on behalf of the insurer when in fact, no authority actually exists could be inferred based on business cards or a sign on the wall, but the agency agreement actually expired

Question 35

regulation of the insurance industry is done at the _____ level

Answer 35

state

Question 36

what are the goals of state insurance regulation?

Answer 36

protect the insured maintain and promote competition maintain solvency of insurers

Question 37

replacement cost

Answer 37

the current cost of replacing the property with new materials of like kind

Question 38

actual cash value

Answer 38

essentially replacement cost, less depreciation used for auto polices

Question 39

agreed-upon value

Answer 39

a value that is determined jointly by insured and insurer typically used for arts and antiques

Question 40

deductible

Answer 40

a stated amount the insured must pay before the insurer will make payments help eliminate small claims and reduce premiums used mainly for property, health and auto policies a form of retaining risk

Question 41

copayments

Answer 41

insured pays a portion of the losses incurred 80/20 copayment = insured is responsible for 20% of expenses above deductible

Question 42

coinsurance

Answer 42

requires the insured to cover at least a stated percentage of the property value if coverage meets or exceeds the coinsurance requirement, then the insurer pays the lesser of: face value of policy, replacement cost, or actual expenditures

Question 43

coinsurance formula

Answer 43

(face value / coinsurance) x loss - deductible

Question 44

National Association of Insurance Commissioners (NAIC)

Answer 44

has no regulatory power over the insurance industry it provides a watch list of insurance companies based upon financial ratio analysis

Question 45

what are the 6 steps of risk management?

Answer 45

1. determine the objectives of the risk management program 2. identify the risks to which the client is exposed 3. evaluate the identified risks as to probability of occurance and potential loss 4. determine alternatives for managing risks, and select the most appropriate alternatives for each 5. implement the program 6. evaluate, monitor, and review (die die) dont insure everything

Question 46

what are the four underwriting policy ratings for insureds?

Answer 46

preferred - provides the lowest policy premiums, exceeds the requirements for a standard ratings standard - an average risk for the insurance company rated - there is a scale for rated decline - insurance companies will not accept the risk of issuing a policy