Unit 1: General Insurance Flashcards
Insurance
contract that transfers the risk of financial loss from an individual or business to an insurer
Risk
The uncertainty or chance of a loss occurring.
Speculative Risk
Chance of loss or gain
Pure Risk
only involve the possibility of experiencing a loss. Can be covered by insurance
Loss
reduction in the value of an asset
Loss Reduction
value of an asset
Exposure
risks for which the insurance company would be liable
Peril
cause of loss
Hazard
anything that increases the likelihood of loss will occur
Physical Hazard
an increase in the chance of loss that can be seen or determined. Ex: wet floor
Moral Hazard
an increase in the chance of loss that intentionally causes a loss. Ex: dishonesty
Morale Hazard
an increase in the chance of loss that is caused by carelessness. Ex: leaving door unlocked
Handling Risk acronym
STARR
Handling Risk; Sharing
two or more individuals agree to pay a portion of any loss incurred by any member in the group
Handling Risk; Transfer
Insurer agrees to pay if an individual or business has a loss. The individual or business has a cost in the form of a premium payment. This handling of risk is what happens with insurance.
Handling Risk; Avoidance
eliminating a particular risk by not engaging in a certain activity
Handling Risk; Reduction
lessening the chance that a loss will occur or lessening the extent of a loss that does occur
Handling Risk; Retention
individual will pay for the loss if it occurs
Law of Large Numbers
the larger the number of individuals that are randomly drawn from a population, the more representative the resulting group will be of the entire population
Insurable Risk; Calculable
Premiums must be calculable based upon prior loss statistics for that particular risk in order to predict future loss
Insurable Risk; Affordable
The premium for transferring the risk should be affordable for the average consumer
Insurable Risk; Non-Catastropic
Insurance cannot insure events that cause widespread losses to a large numbers of insureds at the same time.
Insurable Risk; Homogeneous
The individual risks that the insurance covers must all be similar in regard to factors that affect the chance of loss.
Insurable Risk; Accidental
Insurance is a method of handling risk-if a loss is certain to occur there is no risk
Insurable Risk; Measurable
It must be possible to estimate the loss as a dollar amount.
Insurable Risk acronym
CANHAM
Adverse Selection
The tendency of risks with higher probability of loss to purchase and maintain insurance more often than the risks who present lower probability.
Reinsurance
A form of insurance whereby one insurance company (the reinsurer) paying another insurance company (the ceding company) to take some of the company’s risk of catastrophic loss
Facultative Reinsurance
Reinsurance of individual loss exposures in which the primary insurer chooses which loss exposures to submit to the reinsurer, and the reinsurer can accept or reject any loss exposures submitted.
Treaty Reinsurance
the reinsurer accepts all risks of a certain type from the ceding company
Stock Insurers
- business formed as a public or private corporation and owned by it’s shareholders
- board of directors chosen by shareholders
- IF the company makes money, a taxable divined from the profits may be paid to the shareholders
- issues non-par policies
Mutual Insurers
- Owned by the Policyholders
- Board of directors chosen by the Policyholders
- IF the company is profitable excess premiums can be returned to its policyholders non taxable dividend
- Issues par policies
Fraternal Benefit Societies
- Provides insurance and other benefits
- Must be a member of the society to get benefits
- Policies are called certificates (which can be accessed for additional charges
- Policies are referred to as open contract
Reciprocal insurers
- unincorporated
- people are called subscribers
- Members are assessed the amount they have to pay IF a loss to any member of the group occurs
- Run by an attorney-in-fact
Lloyd’s Associations
- insurance provided by individual underwriters, not insurance companies
- may insure unusual risks
- insurance may need to be sold by surplus lines intermediaries
Self Insurers
- a business pays its own claims
- they set aside savings to cover losses in advance and may even have a claim system like an insurance company
Residual Market
Insurance from the state of federal government
Domestic Insurance Company
the state where a company is incorporated
Foreign Insurance Company
any state or US territory other than the state where it’s incorporated
Alien Insurance Company
Incorporated in any country other than the USA
Certificate of Authority
State license for an insurance company
Admitted, authorized, or approved
State requires the insurance company to have a certificate of authority
Non-admitted, unauthorized, non approved
insurance company not required to have a certificate of authority from the state (surplus)
Surplus Line Insurers
- insurance sold by unauthorized/non-admitted insurers-if on the states approved list of surplus insurers
- can only be sold to certain high risk insureds
- can’t be sold just for a cheaper rather than licensed/admitted insurance
Financial Strength Rating
a report card of the company
-each firm uses a different rating scale and has different criteria on which companies are evaluated
A++
superior
AM Best
AAA
exceptionally strong
Fitch
Standard and Poor’s
Aaa
Exceptional
Moody’s
Independent insurance agents
sales are made by agents/producers who represent more than one company
Exclusive or captive agents
Sell for one company
General Agents (GA) or Managing General Agents (MGA)
recruits other agents in a certain area who actually sell the insurance to the customer
Direct-writing companies
the company sells the insurance through salaried employees of the company
direct response
there is no producer/agent involved
agency
relationship in which one person is authorized to represent and act for another person for a corporation.
agent
person authorized to act on behalf of another
principal
person on whose behalf the agent acts
3 types of agent authority
express, implied, apparent
express authority
contract authority
-what the agents written contract with the company states
implied authority
actions and observable authority
-not written but are the actions agents normally do to sell insurance
apparent authority
what the person sees type of authority
-actions 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
has an obligation to act in the best interest of the insured.
commingling
mixing personal funds with the insured’s or insurer’s funds
suitability considerations
an agent has a responsibility to make purchase recommendations that are appropriate in light of a client’s particular needs, objectives, and circumstances.
Fiduciary Trust
- promptly send premiums to insurer
- knowledge of products
- comply with laws and regulations
- no commingling
Elements of a legal contract acronym
CLOAC
Consideration, Legal Purposes, Offer, Acceptance, Competent parties
to forma a valid contract these five elements must be present
offer
proposal made by one of the potential parties to the contract
there is no offer if the applicant sends the application to the insurance company without payment of the premium
acceptance of an offer
must be unconditional and unqualified
legal contact - consideration
giving something of value
- insured gives information and money (premium) to be the insurance company
- insurance company gives a promise to pay (policy) to the insured
legal contact - legal purpose
risk transfer doesn’t violate the law
legal contact - offer (made my insured)
insured submits application and first month’s premium to insurer
legal contact - counteroffer (made by insurer)
agrees to issue policy but with higher premium or restrictions/exclusions
insured either accepts the conditions or withdraws her application
legal contact - acceptance
insurer accepts risk as presented
legal contact - competent parties
insured age is 18+ and sane
adhesion
policy written by the insurance company
if ambiguous (not clear) court will take the side of the insured
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
ONE SIDED CONTRACTS
insurance company PROMISES to pay for a covered loss
insured does NOT promise to pay the premium
personal contract
auto, homeowners insurance
not life and health insurance. However, assignment can take place with life insurance policies pledged as a security for a bank loan
cannot be assigned to someone else
Conditional contract
insured must pay the premium for coverage and file a claim if a loss occurs
indemnity
make whole
restore to the insured’s original pre-loss condition, no better, no worse
representation
believed to be true
misrepresentation
information given that is not true
however, the correct information would not affect the insurance company’s decision.
ex: Insured mistakenly gives one number of their address wrong
material misrepresentation
information given that is not true. This information DOES affect the insurer’s decision
ex: insured has a conviction for driving while intoxicated
warranty
a promise
- always made by the insurance company-if promise to pay is broken-company could be sued by the insured
- may be made by the insured-if promise is broken- insured may have no coverage
- guaranteed to be true
concealment
failure to disclose
if intentional, and the information is material (important), coverage could be voided
if not intentional, coverage cannot be voided
fraud
intentional act to cheat another and voids policy
subject to:
- a fine
- imprisonment for up to 10-15 years
- both
embezzlement included
waiver
voluntarily giving up a right
estoppel
actions reasonably relied on by one party can’t be denied by the party that accepted same previously
