unit 1 General Insurance Flashcards
Insurance is a contract that transfers
the risk of financial loss from an individual or business to an insurer.
Risk is uncertainty about whether
a loss will occur
Speculative Risks–loss or gain can occur–like gambling
not insurable
Pure risk-only loss can occur–like car accident
loss is insurable
Loss
reduction in the value of an asset
Exposure
risks for which the insurance company would be liable
Calculation for insurance premiums
rate multiplied by number of exposure units
peril
cause of loss–death simply what caused the loss
hazard
anything that increases the chance that loss will occur
hazards do not cause the loss
it is something that becomes dangerous and can make a loss more likely to happen
three types of hazard
physical moral and morale
example of physical hazard
heart condition
example of moral hazard
dishonesty because it increases the chance that an individual might lie on an insurance application or fake a loss
morale hazard
the insured carelessly leaving the doors and windows unlocked when not at home
STARR–Methods of handling risk
Sharing Transfer Avoidance Retention Reduction
Sharing
Stockholders in a corporation share the risk of profit or loss
Transfer
what happens with insurance
Avoidance
not engaging in certain activity (like not driving to avoid accident)
Reduction
wearing seatbelts–lessening chance that loss will occur or lessening extent of a loss that does occur
Retention
individual will pay if loss occurs
CANHAM
Calculable Affordable Non-catastrophic Homogeneous Accidental Measurable
Calculable
Premiums must be calculable based upon prior loss statistics for that particular risk in order to predict future losses
Affordable
The premium for transferring the risk should be affordable for the average consumer
Non-catastrophic
Insurance cannot insure events that cause widespread losses to large numbers of insureds at the same time. Ex. Peril of war is excluded
Homogeneous
The individual risks that the insurer covers must all be similar or homogeneous in regard to factores that affect the chance of loss
Accidental
Insurance is a method of handling risk if a loss is certain to occur there is no risk
Measurable
It must be possible to estimate the loss as a dollar amount. Insurance covers the financial loss of unexpected death or medical bills from sickness
Adverse selection
the tendencey for higher risk individuals to get and keep insurance more than individual s who represent an average level of risk Risks that have a greater than average chance of loss
To avoid adverse selection insurers make an extensive evaluation of information related to a particular risk
underwriting
Reinsurance
insurance for insurers
Facultative
the reinsurer evaluates each risk before allowing the transfer
Treaty
the reinsurer accepts the transfer according to an aggrement called a treaty
Stock insurer
owned by stockholders, if the company makes money, a taxable dividend from the profits may be paid to the stockholders/shareholders
Mutual Insurer
owned by its policyholders, if the company is profitable excess premiums can be returned to its policy holders nontaxable dividend
Fraternal Insurer
Provides insurance and other benefits
Must be a member of the society to get the benefits
Risk Retention Group
Liability insurance company created for policyholders from the same industry . Example care dealers RRG–only car dealers can be policy holders
Lloyds Association
Insurance provided by individual underwriters, not insurance companies
Self-insurance
retaining rather than transferring risk
Residual Market
Insurance from the state or federal government
state of domicile
insurers home state
Domestic
the state where a company is incorporated
Foreign
any state or US territory other than the state where incorporated
Alien
incorporated in any country other than USA
Surplus Lines
Insurance sold by unauthorized/non-admitted insurers–if on the states approved list of surplus insurers
Surplus Lines
Can only be sold to certain high risk insureds
Surplus Lines Insurers
Cant be sold just for a cheaper rate than licensed/admitted insurers
States require companies to have a license to sell insurance in the state. The license is called
a certificate of authority
Independent agents
sales are made by agents/producers who represent more than one company
Exclusive or captive agents
sell for one company
General agent/managing general agent
recruits other agents in a certain area who actually sell the insurance to the customer
Direct writing
the company sells the insurance through salaried employees of the company
Direct Response
no agent/producer involved
Agency
Insurance agent acts on behalf of the principal (insurance company)
Express
what the agents written contract with the company states
Implied
not written but are the actions agents normally do to sell insurance
apparent action
the agent does that a reasonable person would assume as authority, based on the agents actions and statements
fiduciary
a person in a position of financial trust
Fiduciary-Trust
Promptly send premiums to insurer
Knowledge of products
Comply with laws and regulations
no commingling
Independent insurance agents
sell the insurance products of several companys and work for themselves or other agents
exclusive or captive agents
represent one company
general agents
hire train and supervise other agents within a specific geographical area
direct writing companies
pay salaries to employees
CLOAC
Consideration Legal Purpose Offer Acceptance Competent Parties
Consideration
giving something of value
Legal purpose
Risk transfer doesnt violate the law
Offer
Made by insured
Counter offer
Agrees toe issure policy but with higher premiums or restrictions/exclusion
Insured either accepts the conditions or withdraws her application
Acceptance
insurer accepts risk ad presented
Competent
insured age 18 and sane
Aleatory
not equal value–small premium for a large amount of coverage
Utmost good faith
the insured and insurance company have a right to expect honesty from each other
Unilateral
only ONE promise made
Insurance company
Promises to pay for a covered loss
Waiver
the intentional and voluntary giving up of a known right
Estoppel
a legal doctrine that prevents a party from denying an action if it had been accepted previously
