Unit 1 - General Insurance Flashcards
Risk
the uncertainty that a loss will occur
Speculative Risk
Involves the chance of loss or gain
NOT INSURABLE
Example: Gambling
Pure Risk
Involves the chance of loss only
IS INSURABLE
Loss
The reduction in the value of an asset
Exposure
Risk the insurance company will be liable for
Peril
What caused the loss.
Example: If your car is damaged by driving through a hail storm the peril is Hail.
What are the three types of Hazards?
- Physical
- Moral
- Morale
What is Hazard?
A hazard is anything that increases the chance that a loss will occur. Hazards do not cause the loss, they just make them more likely.
Insurance
Insurance is a contract that transfers the risk of financial loss from an individual or business to an insurer. In return the insurer agrees to cover the individual or business for certain losses if they occur
What are the two types of Risk?
Speculative Risk and Pure Risk
How do you determine the amount of Loss?
The value of the asset is measured before and after the loss.
Calculation for Insurance Premiums
The rate multiplied by the number of exposure units.
Example: if the life insurance rate is $32 per $1,000 of death benefit, the premium for a $100,000 policy would be $32 x $100 = $3,200
What is the Peril for Life Insurance?
Death
What is the Peril for Health Insurance?
Accidents or Illness
What is a Physical Hazard?
A hazard the can be identified physically.
Example: Heart condition, wet floor
What is a Moral Hazard?
It can arise from an individual’s character. Moral hazards are habits or lifestyle of applicants that could pose additional risk for the insurer.
Example: Dishonesty, faking a loss, excessive dieting
What is a Morale Hazard?
A state of mind or careless attitude.
Example: Carelessly leaving door unlocked when not at home.
What are the Methods of Handling Risk?
STARR
Sharing
Transfer
Avoidance
Reduction
Retention
What is the Sharing Method of Handling Risk?
Two or more individuals agree to pay a portion of any loss incurred by any member in the group.
Stockholders in a corporation share the risk of profit or loss.
What is the Transfer Method of Handling Risk?
Is what happens with insurance. The insurer agrees to pay if an individual or business has a loss.
What is the Avoidance Method of Handling Risk?
Risk avoidance means eliminating a particular risk by not engaging in a certain activity.
What is the Reduction Method of Handling Risk?
Risk reduction may refer to lessening the chance that a loss will occur or to lessening the extent of a lost that does occur.
Example: Wearing a seatbelt will not stop a car accident but can lessen the injuries that occur.
What is the Retention Method of Handling Risk?
Risk retention means the individual will pay for the loss if it occurs.
Without health insurance a person will have to pay the bill if they need hospitalization.
What is the Law of Large Numbers?
The larger the group, the more accurately losses can be predicted.
What are the Elements of Insurable Risk?
CANHAM
Calculable
Affordable
Non-Catastrophic
Homogeneous
Accidental
Measurable
Elements of Insurable Risk: Calculable
Premiums must be calculable based upon prior loss statistics for that particular risk in order to predict future losses.
Elements of Insurable Risk: Affordable
The premium for transferring the risk should be affordable to for the average consumer.
Elements of Insurable Risk: Non-Catastrophic
Insurance cannot insure events that cause widespread losses to large numbers of insureds at the same time.
Elements of Insurable Risk: Homogeneous
The individual risks that the insurer covers must all be similar, or homogeneous, in regard to factors that affect the chance of loss.
Elements of Insurable Risk: Accidental
Insurance is a method of handling risk, if a loss is certain to occur, there is no risk.
Elements of Insurable 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.
What is Adverse Selection?
Adverse selection is the tendency for higher-risk individuals to get and keep insurance more than individuals who represent an average level of risk.
What is Reinsurance?
The insurance company wants to reduce the amount of risk they are liable for
What is Facultative Reinsurance?
Do they want to take the risk or not
The reinsurer considers each risk before allowing the transfer to be completed by the ceding company.
What is Treaty Reinsurance?
Company takes all of the risk for a certain criteria
The reinsurer accepts all risks of a certain type from the ceding company.
What are the 3 Insurance Company classifications?
- Home State (Domestic) - They have to follow the rules of the state they are in
- Another State (Foreign) - In another state or US Territory
- Another Country (Alien) - In another country
What is the sole purpose of a Risk Retention Group?
A Risk Retention group is formed to provide only liability insurance to its policy holders.
The policyholders must be in the same industry, and they may operate in multiple states.
The state where the group is headquartered issues the laws, rules and regulations.
Certificate of Authority
The license an insurer needs to sell insurance in a state.
An insurer that issues participating policies is
A mutual insurer
Mutual insurers have participating policies because the policyowners participate in the operating results of the company.
Direct response marketing is
conducted through ads in the mail, in magazines, and on the internet
There are no agents or producers in direct response marketing. Policies are sold directly the the public, and marketing is done through the mail or by advertisements in newspapers and magazines, on the radio, on television, and on the internet.
Stock Insurance Company vs Mutual Insurance Company
- Stock Insurance Company
- Owned by: Investors, called stockholders
- Dividends are given to Stockholders
- Mutual Insurance Company
- Owned by: Policyholders
- Dividends are given to Policyholders, not outside investors
Unilateral
A unilateral contract in insurance refers to the insurer’s legal obligations.
Adhesion
indicates that the contract was drafted by one party (the insurer) and must be accepted or rejected by a second party (applicant), who cannot bargain with respect to its terms.
Conditional
refers to the fact that the insurer’s promise to pay benefits is conditioned on the occurence of a loss.
Aleatory
indicateds that the values received by each party may be unequal.
In legal terms the voluntary relinquishment of a known right is called
Waiver
Statements made by an applicant in completing a life insurance application are considered to be
representations
What are the different channgels insurance is distributed through?
- Direct response
- Direct writing
- Independent agencies
- Exclusive agencies
A licensed independent life or health insurance producer may represent
1 or more authorized insurers
Social Insurance
Social insurance is provided by or required by a governmental entity, either federal or state. As such, Social Security, including Medicare and Medicaid, and state insurance programs, such as Worker’s Comp, are included.
Reciprocal Exchange
A type of cooperative insurance. Under this form of insurance, each policyowner is insured by all of the others. Each insured is also an insurer, because contracts are exchanged on a reciprocal basis. A reciprocal is managed by an attorney in fact.
Express Authority
A written contract or agreement between an agent and the insurer that is explicit about responsibilities, rights, and powers is known as express authority.
Participating policies
Participating policies are issued by both stock and mutual companies. They are called participating because they are eligible for dividends, thus enabling policyowners to share in the earnings of the company. For this reason, the premium costs is generally higher for participating policies than for nonparticipating policies.
What are the 7 characteristics of Insurance Contracts?
- Adhesion
- Aleatory
- Utmost Good Faith, Reasonable Expectation
- Unilateral
- Personal
- Conditional
- Indemnity
An individual who recruits agents to sell insurance within a certain geographical area is
a general agent
A general agent is responsible for hiring, training, and supervising agents to sell insurance in a certain location.
Implied Authority
is authority that while not specifically granted to an agent, can be assumed to have been granted as necessary to perform the agent’s routine responsibilities.
Apparent authority
is authority that the public can logically assume an agent will possess, whether or not she has actually received such authority from the insurer.
Apparent authority is from the client’s perspective.
Surplus Lines Insurer
When a risk is either too large or too specialized for an authorized insurer to underwrite, coverage can be obtained from a surplus lines insurer who is nonadmitted or does not have a certificate of authority from the state.
Risk Retention Group
A risk retention group is a corporation or other limited liability association that assumes and spreads the liability exposure for any of its group members. All members of a risk retention group have an ownership interest in the group and must be in a business that expose them to similar liabilities.
A distinctive feature of Fraternal Life Insurance?
Some policies are referred to as open policies
Certificate holders might be assessed additional charges if premiums are not sufficient to pay claims during a given period. Policies with this feature are called open contracts. Stock and mutual insurers do not assess their policowners.
The 4 elements of any legal contract
- Competent parties
- Legal purpose
- Agreement
- Consideration
Indemnification
to return an individual to the financial condition he/she had prior to loss.
Fundamental rule of agency law states
that information known to the agent is also known by the principal, as long as the agency relationship exists. Information known to the principal hoever is not presumed to be known to the agent.
