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Property and Casualty / Personal Lines > Property and Casualty > Flashcards

Property and Casualty Flashcards

1
Q

Insurance

A

is a plan of spreading the risk of possible loss over a large number of people.

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2
Q

Law of Large Numbers

A
  • Mathematical principle in which the insurance is based
  • it possible to predict future losses based upon prior experience
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3
Q

Insurance Protects against

A

the uncertainty (risk) of when a financial loss might occur.

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4
Q

Speculative risk

A

is when there is a chance of gain as well as a chance of loss.

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5
Q

Example of speculative risk

A

buying a stock or gambling.

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6
Q

Pure risk

A

is when there is a chance of loss only.

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7
Q

Is all Pure risk Insurable?

A

not all pure risk is insurable

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8
Q

Insurable risk

A

is one that an insurance company is willing to accept.

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9
Q

Insurable risks must include:

A

-low probability of loss occurring.

-les than catastrophic results.

-The loss must be measurable.

-The loss must be significant.

-The loss must be accidental and unintended.

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10
Q

Probability

A

measures the chance of an event occurring.

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11
Q

What measures the uncertainty?

A

the probability

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12
Q

The law of large number stated

A

as a large number of events are included, the difference between actual and expected results becomes smaller.

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13
Q

Insurance use to determining rates

A

Probability and the law of large numbers.

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14
Q

The insurance relies on to predict futures loss experiences.

A

on the past results of a large population of similar people.

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15
Q

Spread of risk (Geographic dispersion)

A

involves spreading the company’s policies over a broad geographical area in order to avoid large losses in the event of a catastrophic event.

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16
Q

Spread of risk (Geographic dispersion) is used to?

A

to decrease loss probability.

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17
Q

How insurers attempt to prevent adverse selection?

A

by carefully underwriting each and every applicant for insurance.

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18
Q

Adverse selection occurs

A

when insureds with high risk of loss attempt to purchase insurance and are successful in obtaining insurance.

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19
Q

Adverse selection

A

removes the randomness from the probability of a loss occurring and increase the likelihood of a loss occurring from the insurance company’s perspective.

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20
Q

Retention

A

is when liability for a loss is maintained by an individual by not purchasing insurance.

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21
Q

Deductible

A

in an insurance policy is another example of retention in that an individual retains that portion of covered loss.

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22
Q

Transfer

A

is to shift the responsibility for a loss to an insurance company though the purchase of insurance.

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23
Q

Control or reduction

A

is an attempt to prevent a loss or to reduce the amount of the loss.

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24
Q

What is an example of control or reduction?

A

the construction of an earthquake resistant building to prevent loss or the installation of sprinkler system to reduce the amount of loss.

25
Q

Perils

A

are the actual cause of loss such as a fire, theft, wind, hail etc.

26
Q

Hazards

A

increase the probability of a peril occurring.

27
Q

Example of Peril and Hazard

A

bald tires on an automobile increase the chance of a wreck happening. The tires are the hazard, the wreck is the peril.

28
Q

The purpose of insurance

A

to restore the insured to the original financial position that was enjoyed before a loss but without gain.

29
Q

Principle of indemnity

A

All insurance, except life insurance, attempts to pay the insured only what has been lost.

30
Q

Property insurance

A

indemnifies (repays) a person or business with an interest in the physical integrity of tangible property for its loss or the loss of income produced by the property.

31
Q

Casualty insurance

A

provides protection to meet the unexpected costs imposed by law due to acts that have caused bodily injury or property damage to another individual.

32
Q

Casualty (liability) included

A

Automobile insurance, crime and surety bonds.

33
Q

Private or voluntary insurance

A

-The portion of the insurance industry where individuals seek coverage to meet recognized needs.

-These coverages are neither required nor made available by government.

34
Q

Example of Private or voluntary insurance

A

collision insurance in a personal automobile insurance policy.

35
Q

Social insurance

A

programs either required or made available by government.

36
Q

Examples of social insurance

A

The North Carolina Motor Vehicle Reinsurance Facility, Workers Compensation and Flood Insurance

37
Q

Reinsurance

A
  • A field of the industry where insurers sell portions of their individual contracts of insurance to other companies.

-This activity helps with the spread of risk and/or improves cash position by lowering reserve requirements for these contracts.

38
Q

Capital Stock Companies

A
  • Proprietary companies that are in business to make a profit for their stockholders.
  • These companies are owned by the stockholders who retain management responsibility through the election of a Board of Directors.
  • Profits are paid to the stockholders in the form of a commercial stock dividend that is fully taxable to the stockholder.
39
Q

Mutual Insurance Companies

A
  • owned by policyholders; each policyholder “owns” a part of the company proportionate to their share
  • elects a board of directors who appoint officers
  • surplus returned to policyholders in the form of non-taxable policy dividend
40
Q

Reciprocal (Assessment) Companies

A

-Non incorporated associations of individuals or businesses called (subscribers), engage in cooperative insurance programs.

-Each policyholder is insured by all others, & each insures the others.

-

The company is managed by an attorney-in-fact who can assess the policyholders for additional premiums if underwriting losses have been too high.

41
Q

Domestic Companies

A

are those companies organized in this state.

42
Q

Foreign companies

A

are organized in another state.

43
Q

Alien companies

A

are organized in another country.

44
Q

The independent Agency System

A

-is a system in which an agent may represent more than one insurance company in the marketing of property and liability insurance products.

  • independent agents own the business and they retain all rights to the accounts they have placed with a company.
45
Q

Direct Writers

A

-use captive or exclusive agents or employees in the sale of property and liability insurance products, that is, the agents or employees can only represent that particular insurance company.

-the agents or employees may be compensated by salary, commission or both.

-the insurance company retains ownership rights to the accounts that the agent or employee has established.

46
Q

Agents

A

-are representatives of the insurer. agents must be licensed with the state to legally conduct insurance transactions.

-agents receive their authority to operate on behalf of the company by the agency contract and by an appointment.

-the state requires that all licensed agents have an appointment from accompany before any transaction may be conducted.

  • in the field of property, casualty and personal lines insurance, agents may be given “binding” authority.
47
Q

Brokers

A

-are representatives of the insured.

they “shop the market” on behalf of their clients and obtain the coverage that best fills the client’s needs.

-Brokers obtain this coverage through a licensed agent of the company issuing the policy.

-in order to obtain a broker’s license, the individual must have a valid agent’s license and post a bond of not less than 15, 000 in favor of the state of North Carolina.

48
Q

A binding premium receipt (binder)

A

-is temporary evidence that insurance is in effect without condition.

-the coverage will stay in effect until terminated by either the company or the policyholder.

  • binder may be written or oral.

-Oral binders must be replaced by a written binder as soon as possible.

-the binder provides coverage until the policy arrives.

49
Q

A fiduciary relationship

A

-develops when an individual places trust in someone else to perform certain duties or actions.

-this is particularly true in the insurance business when an agent accepts money from the client to purchase or pay for a policy.

50
Q

An agent can be liable for a contract when

A

-the agent has breached their authority

-the agent represents an incompetent principal.

-the agent commits a civil tort or crime.

51
Q

An agent duty to the principal includes

A

-loyalty

-obedience

-use of reasonable care

-accurate accounting

-communication of information help by the agent to the company.

52
Q

Underwriting

A

-the quality control department of the insurance company.

-they select those applications that the company wishes to insure using standards established by the company.

53
Q

How to determine loss ratios?

A

are determined by dividing the losses (claims) of the company by the premiums collected.

54
Q

What determine loss ratios in conjunction with expenses?

A

determine whether a company has had an underwriting loss or profit.

55
Q

What elements make a contract legally binding?

A
  • Offer and acceptance (agreement)

-Consideration

-Legal object

-Competent parties

56
Q

Offer and acceptance (agreement)

A

-the offer is made by the proposed insured.

-the acceptance occurs when the policy is issued.

57
Q

Consideration

A

-this is the exchange of something of value by both parties.

-the applicant submits premium in exchange for the company’s promise to pay if a particular peril occurs.

-information provided by the applicant is legally considered to be a part of the consideration.

58
Q

Legal object

A

Contracts must fulfill a legal purpose in order to be enforced.

Property and Casualty / Personal Lines (1 decks)

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