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Life Insurance Exam Prep > Section 1 - General Insurance Concepts > Flashcards

Section 1 - General Insurance Concepts Flashcards

1
Q

Insurance

A

A contractual coverage binding the insurer to indemnify the insured against a specified loss in return for money (known as premiums). In exchange for the premium payments from the insured, the insurer agrees to pay the policyholder in case of the occurrence of a specific event (a loss). In most instances, the insured pays for part of the loss (the policy deductible), and the insurer pays the rest.

It is designed to protect the financial well-being of an individual, company, or other entity against unexpected loss.

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2
Q

Law of Large Numbers

A

The bigger the observed sample, the more accurate the predicted results. Life insurance allows an individual to transfer his or her financial risk of premature death in a defined amount to an insurance company. It is the scientifically calculated pooling growth and distribution of money to satisfy two objectives:

  1. Paying benefits to survivors of someone who dies while covered
  2. Providing distribution of benefits by lump sum or with guaranteed lifetime payments
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3
Q

Indemnification

A

This is the concept of restoring individuals to the same financial position they were at before a loss occurred. It is the central idea behind the concept of insurance.

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4
Q

Insurer

A

Another name for an insurance company.

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5
Q

Agent/Producer

A

An individual who is state-licensed to solicit and sell insurance for one or more insurance companies. He/she must be authorized by an insurer (known as a principal) to act on its behalf.

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6
Q

Applicant

A

The individual who applies for insurance

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7
Q

Insured

A

An individual who is insured or has insurance taken out on or for them for a specific interest.

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8
Q

Named Insured

A

This is the person(s) listed as an insured in the Declarations page

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9
Q

First Named Insured

A

The first insured listed and the person to whom the insurer sends correspondence such as renewal notices and policy changes

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10
Q

Additional Insured

A

An individual or entity who, other than the named insured, qualifies a an insured under the policy. This is specially the case if there is a specific interest involved, such as a mortgage or a business arrangement.

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11
Q

Policyowner

A

The person who:

  1. Applies for a policy
  2. Takes responsibility for premium payment
  3. Has the right to cash values, dividends, and policy proceeds
  4. Has the ability to change beneficiaries and other policy particulars
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12
Q

Accident

A

An undesirable, unforeseen, and unintended event that is identifiable as to time and place.

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13
Q

Occurrence

A

An event, including continuous and repeated exposure to conditions, which results in bodily injury or property damage neither expected nor intended from the standpoint of the insured.

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14
Q

Endowment

A

Cash from life insurance payable to the policyholder at policy maturity (usually at the insured’s age of 100).

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15
Q

Final Expenses

A

The financial costs related to dying: funeral and medical expenses, debts, taxes, and administrative expenses.

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16
Q

National Association of Insurance Commissioners (NAIC)

A

Group who tries to standardize insurance laws throughout the country by recommending model legislation in each commissioner’s home state. All state insurance directors or commissioners are members of the NAIC. The group has no official legislative powers.

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17
Q

Marlow’s Hierarchy of Needs

A

The five primary needs that every individual strives to satisfy (in ascending order) are:

  1. Physiological Needs
  2. Security
  3. Affiliation
  4. Esteem
  5. Self-Actualization

This hierarchy of needs is important for the insurance producer to know because customers need to have one level of need met before worrying about the next. For instance, customers usually need to have the physiological need for food and shelter met before you would approach them about buying life insurance for charitable causes.

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18
Q

Risk

A

The probability of uncertainty that a loss will occur. It may be financial or non-financial; it may be speculative or pure. In strange, the greater the chance for loss, the greater will be the premium charged to cover it.

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19
Q

Pure Risk

A

Involves the probability or possibility of loss with no chance for gain. An example would be a homeowner who wants to guard against a possible house fire. These are generally incurable.

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20
Q

Speculative Risk

A

A risk for which it is uncertain whether the final outcome will be a gain or a loss. Gambling is an example of this. These types of risks are generally NOT insurable.

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21
Q

Relationship Between Risk & Premium

A

There is a direct correlation between risk and premium. The greater the risk, either in value or in potential for a loss or claim, the greater will be the premium.

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22
Q

Exposure

A

A measure of vulnerability to loss, usually expressed in dollars or units to which an insurance rate is applied.

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23
Q

Hazard

A

A condition that increases the chance for loss or the severity of loss. There are four types:

  1. Physical
  2. Moral
  3. Morale
  4. Legal
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24
Q

Physical Hazard

A

Created by the use, condition, or occupancy of property, such as damaged steps or worn auto tires

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25
Q

Moral Hazard

A

Created by the insured’s habits, such as dishonesty or criminal activity. It is a situation in which one party gets involved in a risky event knowing that it is protected against the risk and the other party will incur the cost.

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26
Q

Morale Hazard

A

Created by the attitudes of the insured, such as indifference. And example would be not making sure doors and windows are locked before leaving home.

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27
Q

Legal Hazard

A

Created when legal authority in a certain situation is unclear or unsettled. These can arise from changes in the law or from court rulings. An example would be a change in the building code requiring new construction to use different materials.

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28
Q

Peril

A

The cause of possible loss, or the event insured against. Example: fire, lightening, theft, etc.

Includes Life Insurance and Health Insurance.

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29
Q

Named Peril

A

Perils specifically listed in the policy

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30
Q

Open Peril/All Risk

A

Protects against all physical loss risks, except those specifically limited or excluded by the policy.

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31
Q

Loss

A

The happening of the event for which insurance pays. The unintentional decline in, or disappearance of value due to a contingency.

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32
Q

Direct Physical Loss

A

Loss in which the covered peril is the immediate or proximate cause of damage to property, such as hail damage to the roof of a house.

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33
Q

Intervening Cause

A

An event that interrupts the chain of causation by providing an independent cause of the final result

34
Q

Indirect/Consequential Loss

A

Loss in which the covered peril is not the direct cause of damage. If a restaurant suffers a fire, for instance, the fire is the direct cause of the loss. The loss of income from the business while the restaurant is closed for repairs, is an indirect loss.

35
Q

Methods of Handling Risk

A

Risk may be avoided, retained, transferred, shared, or reduced

36
Q

Risk Avoidance

A

The act of NOT engaging in the action that gives rise to the risk.

37
Q

Risk Retention

A

In this case, nothing is done about the risk; the individual will be totally responsible for paying losses. This is the most common method of handling risk.

38
Q

Risk Transfer

A

Shifting the risk from one party (the insured) to another (the insurer) for a consideration or premium.

39
Q

Risk Sharing

A

Spreading risk(s) among several entities, i.e., physicians and insurance companies

40
Q

Risk Reduction

A

Decreasing the chance of loss by removing or reducing hazards that might cause an accident to happen. Examples would be the requirement to wear safety goggles or safety railings around a dangerous area.

41
Q

Elements of Insurable Risks

A

To be considered insurable, a risk must be:

  1. Due to chance
  2. Measurable/predictable
  3. Based on a large enough pool that the law of large numbers allows for the accurate prediction of loss
  4. Selected from a diverse, randomly selected pool of insurable risks. Insurance deals with financial and pure risks. Speculative risks are generally not insurable.
42
Q

Adverse Selection

A

Defined as the tendency of poorer risks to seek or continue insurance to a greater extent than normal risks. Normal risks may seek insurance elsewhere, possibly at a lower cost. If a person becomes sick, they may be unable to get insurance elsewhere an therefore more likely to maintain their current coverage.

43
Q

Group Risk Selection

A

This is when underwriters look more closely at the specific health history of an individual policyholder than at the collective statistics of a large group. Also, exposure to claim payments is lowered per individual because the risk is spread over the group, usually resulting in a cost savings to the group

44
Q

Reinsurance

A

This group insures other insurance companies against catastrophic losses such as earthquakes. The company transferring some of their loss potential is called the “ceding” company. There are four types of treaties:

  1. Facultative
  2. Automatic
  3. Excess of Loss
  4. Proportional

(3 and 4 apply mainly to Property/Casualty, but must be known for all exams)

45
Q

Facultative Reinsurance

A

The ceding insurer offers individual risks to a reinsurer, who may choose to accept or reject the risk

46
Q

Automatic Reinsurance

A

The insurer cedes those parts of a specified class of risks in excess of the retention limits set by contract (treaty) with the reinsurer. The reinsurer must accept all risks ceded to it.

47
Q

Excess of Loss Reinsurance

A

Reinsurer must pay only when losses exceed a certain maximum amount (applies mainly to property/casualty insurance)

48
Q

Proportional Reinsurance

A

Reinsurer must pay a share for every reinsured loss (applies mainly to property/casualty insurance)

49
Q

Indemnity

A

Can be thought of as pure and simple protection from a loss by being reimbursed or paid a sum to make you whole after you incurred a cost or experience a loss.

50
Q

On Behalf Of

A

Refers to someone else beside the person experiencing the Los paying for that lost or cost in your stead. It is paid for you instead of you paying for it directly. An example might be where an insurance company makes a payment to an entity that you were financially responsible to. This indemnified them on your behalf rather than you paying them directly for it yourself.

51
Q

Multi-Line Insurance Companies

A

Insurers that write more than one line of insurance

52
Q

Captive Insurance Company

A

Company whose business is primarily supplied and controlled by the one interest or group of related interests that set the company up to insure their assets and operations. In this type of situation, coverage can usually be provided at a lower cost than what which is available in the general insurance market.

Can be non-admitted, non-resident, or foreign insurer, and there are two main types:

  1. Pure Captive Companies
  2. Group Captive Companies
53
Q

Pure Captive Companies

A

Companies which are wholly controlled by one parent

54
Q

Group Captive Companies

A

Insurers owned by a number of otherwise unaffiliated firms that are in the same type of business

55
Q

Stock Companies

A

Insurers of this type are organized under the laws of the state in which they are incorporated. The stock company is owned by the SHAREHOLDERS who elect the officers and directions and share in profits through stock growth and dividends.

56
Q

Mutual Companies

A

Companies of this type have no capital stock and are owned by POLICYHOLDERS who share profits through dividends and who can attend and vote at company meetings. Mutual insurers are further divided into:

  1. Assessment Mutual Insurers
  2. Non-assessable Mutual Insurers
57
Q

Assessment Mutual Insurers

A

Share losses among group members. In a PURE assessment group, no premium is paid in advance, but losses are assessed to each member as they occur. In an ADVANCE PREMIUM assessment group, premiums are paid at the beginning of each assessment period and any claims are paid from these premiums. If there are more claims than premiums paid in, additional assessments are levied against each member. If money is left at the end of the period, the money is returned to the group members.

58
Q

Non-assessable Mutual Insurers

A

These insurers charge a fixed premium and the policyholders cannot be assessed further. Reserves and surplus are maintained to provide payment of all claims.

59
Q

Fraternal Benefit Societies

A

Membership is based on religious, ethnic, or national lines, and the societies are noted primarily for social and charitable functions. They are societies, orders, or supreme lodges with NO CAPITAL STOCK and may or may not be incorporated. They also:

  1. Are conducted solely for the benefit of members and their beneficiaries, and are not for profit
  2. Operate on a lodge system with ritualistic form of work
  3. Have a representative form of governing body
  4. Provide benefits in accordance with their charter
  5. Started offering life insurance for the benefit of their poorer members on an assessment basis but have expanded to operate the same as other insurers today, though they still offer insurance only to members and their families.
60
Q

Reciprocal Companies

A

Groups that exchange insurance to each other and their members:

  1. Appoint and empower an attorney-in-fact that legally binds members to insure each other
  2. Share in any profits through lower premiums, or in any losses by assessments.
61
Q

Lloyd’s Associations/ Syndicate Insurers

A

Not really insurance companies, this association provides a place for members to meet and transact the business of insurance individually or as groups (through a syndicate manager). Characteristics include:

  1. Assistance provided in gathering underwriting information and in handling claims and disputes among syndicate members. Members are individually and wholly liable for all risks
  2. No limitations on liability
62
Q

Risk Retention Groups

A

These groups are types of mutual companies that insure people in the same profession, business, or occupation.

63
Q

Self-Insureres

A

These insurers do not transfer their share of a loss to an insurance company, but instead establish their own pool of reserves to cover losses that may arise.

64
Q

Home Service/Debit Insurers

A

These insurers specialize in individual and industrial insurance with low face amounts–normally $1,000 or less (but the benefit can be higher). Premiums are usually collected by agents on a weekly basis at the insured’s home or place of employment. They work within a defined geographical territory and offer monthly debit life, health, and fire insurance products. Some products have premiums that are billed directly by the insurer. This market has historically been comprised of lower and lower middle income individuals and families.

65
Q

Surplus/Excess Lines Insurers

A

These types of insurers provide insurance not offered through admitted insurers.

  1. The full amount or type of insurance must not be available through admitted insurers
  2. Financial consideration cannot be a deciding factor
  3. While the insured is selling insurance in a state, if the coverage is offered by an admitted insurer, the non-admitted insurer must stop selling insurance in the state, or apply to become an admitted insurer.
66
Q

Government Insurance

A

The plans cover certain types of insurance that private insurers cannot or will not insure. Insurers in all states are required to participate in involuntary markets that provide coverage for high-risk insurance applicants who do not meet manorial underwriting standards. Some states require applicants to be assigned to individual insurers on a predetermined basis while others require that losses from these individuals be shared. Examples include:

  1. Social security
  2. Medicare
  3. Flood Insurance
  4. Federal crop and crime insurance
67
Q

State FAIR Plans

A

Provides insurance to property owners in inner city and other high-risk areas who are unable to obtain insurance through normal market channels because of property location or other situations over which they have no control. If refused or uninsurable in the normal market, the property owner applies for insurance through this state plan.

68
Q

Admitted (Authorized) Insurer

A

An insurer authorized by a state’s insurance department to transact business in that state

69
Q

Non-Admitted (Unauthorized) Insuer

A

Insurance companies that are not authorized to transact business in a state are non-admitted. They either did not seek admission to the state or failed to comply with state requirements.

70
Q

Domestic Insuer

A

Insurers that transact business in the sate where they are chartered

71
Q

Foreign Insuer

A

An insurer transacting business in a state but that is chartered under the laws of a different state or one of the U.S. Territories

72
Q

Alien Insurer

A

An insurer organized under the laws of a jurisdiction outside of the United States or is territories

73
Q

Financial Solvency Status-Independent Rating Services

A
  1. Provide information on companies such as financial strength, management caliber, and efficiency of operation
  2. Review underwriting results, management, adequacy of reserves for liabilities that are not discharged, adequacy of policyholder reserves to absorb shock losses, and soundness of investments
  3. Publish guides of their analysis of the insurance companies
  4. If properly used, they are effective in helping to avoid delinquent insurance companies. Ratings should be checked over a period of years to verify trends for the companies. A.M. Best, Standard and Poor, and Weiss Research are some of the companies that have guides available.
74
Q

Insurance Agent/Producer

A

Any individual who solicits, negotiates, puts into effect, procurers, renews, continues or binds policies of insurance.

75
Q

Exclusive/Captive Agents

A

Agents appointed by an insurer to represent the company by selling and servicing policies on its behalf, representing only one company

76
Q

Independent Agents or Brokers

A

Agents that represent several insurers and can, therefore, offer various premiums to the customer

77
Q

Nonresident Agent

A

An agent authorized to write business in a state other than the one in which he or she lives.

78
Q

Direct Writer

A

An insurer that deals directly with the insured through a salaried representative or captive/exclusive agent rather than through independent brokers.

79
Q

Direct Mail/Direct Response

A

Policies are marketed directly from the company’s home office rather than through agents. Marketing is done through direct mail, Internet, newspapers, magazines, radio, or TV.

80
Q

Principals

A

This is the capacity that the Insurance Company act is which means that the insurer empowers the agent to act as a representative of the company. Legally, the acts of the agent are considered to be the acts of the principal, the the agents’ acts extend the insurance company’s liability.

81
Q

Agency Agreement/Contract

A

The relationship between the insured and the producer is defined in the this agreement. This contract details the responsibilities of both parties.

Life Insurance Exam Prep (1 decks)

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