Property and Casualty Flashcards
Insurance
is a plan of spreading the risk of possible loss over a large number of people.
Law of Large Numbers
- Mathematical principle in which the insurance is based
- it possible to predict future losses based upon prior experience
Insurance Protects against
the uncertainty (risk) of when a financial loss might occur.
Speculative risk
is when there is a chance of gain as well as a chance of loss.
Example of speculative risk
buying a stock or gambling.
Pure risk
is when there is a chance of loss only.
Is all Pure risk Insurable?
not all pure risk is insurable
Insurable risk
is one that an insurance company is willing to accept.
Insurable risks must include:
-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.
Probability
measures the chance of an event occurring.
What measures the uncertainty?
the probability
The law of large number stated
as a large number of events are included, the difference between actual and expected results becomes smaller.
Insurance use to determining rates
Probability and the law of large numbers.
The insurance relies on to predict futures loss experiences.
on the past results of a large population of similar people.
Spread of risk (Geographic dispersion)
involves spreading the company’s policies over a broad geographical area in order to avoid large losses in the event of a catastrophic event.
Spread of risk (Geographic dispersion) is used to?
to decrease loss probability.
How insurers attempt to prevent adverse selection?
by carefully underwriting each and every applicant for insurance.
Adverse selection occurs
when insureds with high risk of loss attempt to purchase insurance and are successful in obtaining insurance.
Adverse selection
removes the randomness from the probability of a loss occurring and increase the likelihood of a loss occurring from the insurance company’s perspective.
Retention
is when liability for a loss is maintained by an individual by not purchasing insurance.
Deductible
in an insurance policy is another example of retention in that an individual retains that portion of covered loss.
Transfer
is to shift the responsibility for a loss to an insurance company though the purchase of insurance.
Control or reduction
is an attempt to prevent a loss or to reduce the amount of the loss.
What is an example of control or reduction?
the construction of an earthquake resistant building to prevent loss or the installation of sprinkler system to reduce the amount of loss.
Perils
are the actual cause of loss such as a fire, theft, wind, hail etc.
Hazards
increase the probability of a peril occurring.
Example of Peril and Hazard
bald tires on an automobile increase the chance of a wreck happening. The tires are the hazard, the wreck is the peril.
The purpose of insurance
to restore the insured to the original financial position that was enjoyed before a loss but without gain.
Principle of indemnity
All insurance, except life insurance, attempts to pay the insured only what has been lost.
Property insurance
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.
Casualty insurance
provides protection to meet the unexpected costs imposed by law due to acts that have caused bodily injury or property damage to another individual.
Casualty (liability) included
Automobile insurance, crime and surety bonds.
Private or voluntary insurance
-The portion of the insurance industry where individuals seek coverage to meet recognized needs.
-These coverages are neither required nor made available by government.
Example of Private or voluntary insurance
collision insurance in a personal automobile insurance policy.
Social insurance
programs either required or made available by government.
Examples of social insurance
The North Carolina Motor Vehicle Reinsurance Facility, Workers Compensation and Flood Insurance
Reinsurance
- 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.
Capital Stock Companies
- 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.
Mutual Insurance Companies
- 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
Reciprocal (Assessment) Companies
-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.
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The company is managed by an attorney-in-fact who can assess the policyholders for additional premiums if underwriting losses have been too high.
Domestic Companies
are those companies organized in this state.
Foreign companies
are organized in another state.
Alien companies
are organized in another country.
The independent Agency System
-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.
Direct Writers
-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.
Agents
-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.
Brokers
-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.
A binding premium receipt (binder)
-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.
A fiduciary relationship
-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.
An agent can be liable for a contract when
-the agent has breached their authority
-the agent represents an incompetent principal.
-the agent commits a civil tort or crime.
An agent duty to the principal includes
-loyalty
-obedience
-use of reasonable care
-accurate accounting
-communication of information help by the agent to the company.
Underwriting
-the quality control department of the insurance company.
-they select those applications that the company wishes to insure using standards established by the company.
How to determine loss ratios?
are determined by dividing the losses (claims) of the company by the premiums collected.
What determine loss ratios in conjunction with expenses?
determine whether a company has had an underwriting loss or profit.
What elements make a contract legally binding?
- Offer and acceptance (agreement)
-Consideration
-Legal object
-Competent parties
Offer and acceptance (agreement)
-the offer is made by the proposed insured.
-the acceptance occurs when the policy is issued.
Consideration
-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.
Legal object
Contracts must fulfill a legal purpose in order to be enforced.
