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Fundamentals and Insurance > Principles of Insurance (Lesson 1) > Flashcards

Principles of Insurance (Lesson 1) Flashcards

1
Q

What type of risk is insurance used to protect against

A

pure risk

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2
Q

What does insurance involve

A

the transfer of loss and the sharing of losses with others

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3
Q

What is a pure risk

A
  • there is a chance of loss or no loss
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4
Q

What is a speculative risk

A
  • there is a chance of profit, loss, or no loss
  • undertaken by entrepreneurs
  • is a voluntary risk and not insurable
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5
Q

What is a subjective risk

A
  • differs based upon an individuals perception of risk
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6
Q

What is an Objective risk

A
  • does not depend on an individuals perception but is measurable and quantifiable
  • measures the variation of an actual loss from expected loss
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7
Q

What is the definition of a probability of Loss

A
  • chance of a loss occurring
  • measure of the long run frequency with which an event occurs
  • Useful measure for insurers because it quantifies the expected cost of claims
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8
Q

What is the definition of severity

A
  • actual dollar amount of loss
  • more important than the probability of a loss
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9
Q

What is the definition of law of large numbers

A
  • specifies that when more units are exposed to a similar loss the predictability of such a loss to the entire pool increases
  • law of large numbers helps reduce objective risk
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10
Q

What is a peril

A
  • the actual cause of a loss
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11
Q

What is a hazard

A
  • a condition that increases the likelihood of a loss occurring
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12
Q

What are the three types of hazards

A
  • Moral
  • Morale
  • Physical
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13
Q

What is a moral hazard

A
  • a character flaw
  • may lead to filing a false claim
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14
Q

What is morale hazard

A
  • the indifference created because a person is insured
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15
Q

What is a physical hazard

A

is a tangible condition that increases the probability of a peril occurring

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16
Q

What is adverse selection

A
  • is the tendency of persons with higher than average risks to purchase or renew insurance policies
  • Premiums are dependent upon a balance between favorable and unfavorable risks in the pool of insured
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17
Q

How is adverse selection managed

A
  • through underwriting
  • denying insurance on the front end
  • raising premiums on the back end
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18
Q

What are the requirements for an insurable loss

A
  • a large number of similar exposure units
  • losses must be accidental from insureds viewpoint
  • losses must be measurable and determinable so that the insurer can accurately forecast actual losses
  • losses must not pose a catastrophic risk for the insurer
  • Premiums must be affordable
  • cannot insure moral hazards
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19
Q

Insurable risks are CHAD

A
  • not Catastrophic
  • Homogeneous exposure
  • Accidental
  • measurable and Determinable
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20
Q

What are elements of a valid contract

A

(A legal contract requires COALL)

  • Must be legal and competent parties
  • offer and acceptance
  • Must be legal consideration
  • contract must pertain to a lawful purpose
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21
Q

Is signing an application and making the first months premium payment considered a valid contract?

A

Yes as long as the applicant is insurable. Example of a conditional acceptance by the insurer

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22
Q

What is the principle of indemnity

A
  • insured is only entitled to compensation to the extent of the insureds financial loss
  • individual cannot profit from an insurance contract
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23
Q

What is the subrogation clause

A
  • insured cannot receive compensation from both the insurer and a third party for the same claim
  • the insurer steps into the shoes of the insured to recoup any restitution from the 3rd party or the 3rd parties insurer
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24
Q

What is the principle of insurable interest

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

Property liability insurance

  • Insured must have insurable interest at time of policy inception and at time of loss

Life insurance

  • the insured only needs an insurable interest at the time of policy inception
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25
Q

What is a void contrat

A

void contract was never valid and thus never came into existence

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26
Q

What is a voidable contract

A

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

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27
Q

What is a warranty

A
  • is a promise made by the insured to the insurer
  • A breach of warranty is grounds for avoidance
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28
Q

What are representations

A
  • statements made by the insured to the insurer during the application process
  • must be a material misrepresentation to void an insurance contract
  • EX: misrepresenting age on a life insurance contract is not material misrepresentation the insurer will simply adjust your death benefit up or down
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29
Q

What is concealment

A

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

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30
Q

What does adhesion mean

A
  • policy is 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
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31
Q

What does aleatory mean

A
  • money exchanged may be unequal
  • small premiums large benefit
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32
Q

What does unilateral mean

A
  • only one promise is made by the insurer which is to pay in the event of a loss
  • insured is not obligated to pay premiums, but if premiums are not paid there is no promise by the insurer
33
Q

What does conditional mean

A
  • 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
34
Q

What is a waiver

A

Occurs when a party relinquishes a known right

35
Q

What is estoppel

A

takes place when a party is denied assertion of a right to which they are otherwise entitled

36
Q

What are waiver provisions

A

insurer may seek to avoid liability associated with a loss due to their agent offering policy changes not authorized by the company

37
Q

What is the Parol evidence rule

A
  • once the contract is placed in written form all previous and prior understanding may not contradict the written contract
  • contract reflects the complete understanding of both parties
38
Q

What is reformation

A
  • contractual remedy in which the contract is revised to express the original intent of all parties
39
Q

What is recission

A
  • deems a contract void from inception
40
Q

What is an agent

A
  • legal representative of the insurer
  • agent enters into agreements on behalf of the insurer
41
Q

What is a general agent

A
  • represents one insurer such as state farm or allstate
42
Q

What is an independent agent

A
  • represents multiple unrelated insurers
43
Q

What is a broker

A
  • represents the policy owner not the insurance company
44
Q

An agents authority to legally bind the insurer arises from these three types of authority

A
  • Express Authority
  • Implied Authority
  • Apparent Authority
45
Q

What is express authority

A
  • given through the agency or written agreement
  • insurer is responsible for acts of an agent based on express authority
46
Q

What is implied authority

A
  • authority that the public perceives and a valid agency agreement exists
  • actual delivering of an insurance contract and accepting a premium is an example of implied authority
  • insurer is still responsible even if a client is mislead
  • Is based upon the agents business card, letterhead, and insurance company sign on the door
47
Q

What is apparent authority

A
  • apparent authority is when the insured believes that agent has authority to act on the 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
  • is basically when no authority actually exists
48
Q

What are conditions of an insurance contract

A

details the duties and rights of the insured and insurer

49
Q

What are declarations of an insurance contract

A

includes the name of the insured, description of the property, amount of coverage, amount of premium, term of the policy, and inception/termination date

50
Q

What are exclusions of an insurance contract

A
  • section outlines specifically what will not be covered
51
Q

What are riders and endorsements of an insurance contract

A
  • are written additions to an insurance contract
  • make it possible to customize an insurance contract for items that may be limited in coverage under the normal terms and conditions of a contract
  • take precedence over conflicting terms in policy
52
Q

Is regulation done for insurance at the state or federal level

A

State

53
Q

What does the legislative branch do

A
  • provides for licensing of agents and enacts laws and requirements for doing business in a particular state
54
Q

What does the judicial branch do

A
  • rules on constitutionality of laws passed by the legislative branch
  • render decisions and interpretations regarding policy terms
55
Q

What does the executive or state insurance commissioner do

A
  • administers, interprets, and enforces insurance laws
  • state insurance commissioner does NOT make law
56
Q

What are the goals of state insurance regulation

A
  • protect the insured
  • maintain and promote competition
  • maintain solvency of insurers
57
Q

What is the replacement cost of insured property

A
  • is the current cost of replacing property with new materials of like kind
58
Q

What is the actual cash value of insured property

A
  • essentially replacement cost less depreciation
  • can impose serious financial burden on the insured
  • almost all auto policies are ACV
59
Q

What is the agreed upon value of insured property

A
  • value that is determined jointly by insured and insurer
  • typically used for art and antiques
60
Q

What is a deductible

A
  • stated amount the insured must pay before the insurer will make payments
  • are a form of retaining risk
61
Q

What are copayments

A
  • insured pays a portion of the losses incurred
  • typical is 80/20, insured is responsible for 20% of expenses about deductible
62
Q

What is Coinsurance

A
  • Homeowners policy requires the insured to cover at least a stated precentage of the property value

(Actual Coverage / Coinsurance Requirment) x Loss - Deductible

63
Q

What is the formula for coinsurance

A

80% x Replacement cost

64
Q

(Individual Loss Exposure and How to Eliminate)

Dying Too Soon

A
  • Not able to meet financial goals for family
  • Life insurance mitigates this risk
65
Q

(Individual Loss Exposure and How to Eliminate)

Living to Long

A
  • outliving the funds saved for retirement
  • Annuities can mitigate this risk
66
Q

(Individual Loss Exposure and How to Eliminate)

Disability

A
  • results in inability to work
  • Disability insurance can mitigate this risk
67
Q

What are the three ratings agencies for insurance

A
  • AM Best (A++)
  • Moody’s
  • Standard and Poor’s
68
Q

What does the national association of insurance commissioners (NAIC) do

A
  • Provides a watch list of insurance companies based upon financial ratio analysis
  • Ratios measure the financial health of insurance companies
  • No regulatory power over the insurance industry but is involved in accrediting state insurance regulatory offices
  • issues model legislation that state legislatures may or may not adopt
69
Q

Does the NAIC have regulatory power

A

no

70
Q

What are the six steps of risk management (DIEDIE)

A
  • Determine the objectives of the risk management program
  • Identify the risks to which the client is exposed to
  • Evaluate the identified risks as to probability of occurrence and potential loss
  • Determine alternatives for managing risks and select the most appropriate alternatives for each
  • Implement the program
  • Evaluate, monitor, and review
71
Q

When should risk transferring be used

A

when risk is severe but frequency is low

72
Q

When is retention or reduction appropriate

A

financial risk is low and frequency is high because it would be to expensive to insure

73
Q

What are the four underwriting policy ratings for insureds

A
  • Preferred
  • Standard
  • Rated
  • Decline
74
Q

What rating provides the lowest premium

A

Preferred

75
Q

What is Preferred rating

A
  • provides the lowest premium
  • insured exceeds the requirements for a standard rating
76
Q

What is standard rating

A
  • rating reflects an average risk for the insurance company
77
Q

What is rated rating

A
  • will require higher premiums
78
Q

What is Decline rating

A
  • insurance company will not accept the risk of issuing a policy
79
Q

What are factors effecting premiums

A
  • Health
  • Family health history
  • Risk factors
  • Credit rating
  • Driving record

Fundamentals and Insurance (10 decks)

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