Unit 1 Flashcards
What is the definition of insurance?
Transfer of risk from a person or business to an insurer
What is speculative risk?
Chance of loss or gain; not insurable
What is pure risk?
Chance of loss only; insurance companies will insure
What does exposure refer to in insurance?
Risks for which the insurance company would be liable
What is a peril in the context of insurance?
Cause of loss, e.g., house burns down due to fire
Define direct physical loss
Loss that can be directly observed, e.g., a burnt house
What is indirect loss?
Consequence of the direct loss
What is a hazard in insurance terms?
Increases the chance of loss
What is a physical hazard?
Hazard that can be seen
Define moral hazard
Dishonesty in the insured
What is morale hazard?
Carelessness of the insured
What does the Law of Large Numbers state?
The larger the group, the more accurately future losses can be predicted
What is a domestic insurance company?
Company incorporated in the state where it operates
Define a foreign insurance company
Company incorporated in another state or U.S. territory
What is an alien insurance company?
Company incorporated in another country
What is a Certificate of Authority?
State license for an insurance company
What does it mean for an insurance company to be admitted or authorized?
Required to have a Certificate of Authority from the state
What is a non-admitted or unauthorized insurance company?
Not required to have a Certificate of Authority from the state
What are surplus lines in insurance?
Insurance sold by unauthorized insurers if on the state’s approved list
Who can surplus lines be sold to?
Certain high-risk insureds only
Can surplus lines be sold solely for a cheaper rate?
No, cannot be sold solely for a cheaper rate than licensed insurers
