Unit 1 General Insurance Flashcards
Insurance
a contract that transfers the risk of financial loss from an individual or business to an insurer
Risk
the uncertainty about whether a loss will occur
2 types of risk
speculative and pure
speculative risk
a possibility of a loss or gain. not insurable
pure risk
only the possibility or experiencing a loss. insurable
loss
a reduction in the value of an asset
total amount of loss
value before loss - value after loss
exposure
risks for which the insurance company would be liable
peril
cause of loss. examples include accidents, sickness, lightning, fire, etc.
hazard
anything that increases the chance a loss will occur. does not cause a loss, but makes them more likely to occur
3 types of hazards
-physical hazard
-moral hazard
-morale hazard
physical hazard
a type of hazard with physically identifiable factors that increase the chance of loss (heart condition, wet floor)
moral hazard
a type of hazard due to an individual’s character (dishonesty, thief)
morale hazard
a type of hazard due to a state of mind or careless attitude (leaving the door unlocked)
STARR
methods of handling risk
-Sharing
-Transfer
-Avoidance
-Retention
-Reduction
Sharing (STARR)
a method for handling risk in which 2+ individuals agree to pay a portion of any loss incurred by any member in the group
Transfer (STARR)
a method for handling risk which occurs with insurance. The insurer agrees to pay if an individual or business has a loss and the cost is in the form of a premium payment
Avoidance (STARR)
a method for handling risk which eliminates a particular risk by not engaging in a certain activity
Reduction (STARR)
a method for handling risk which lessens the chance a loss will occur or lessening the extent of a loss (wearing seatbelts)
Retention (STARR)
a method for handling risk in which the individual will pay for the loss if it occurs
law of large numbers
the larger the group, the more accurate losses can be predicted
CANHAM
elements of insurable risk
-Calculable
-Affordable
-Non-Catastrophic
-Homogeneous
-Accidental
-Measurable
Calculable (CANHAM)
a characteristic of insurable risk. states that premiums must be determined based on prior statistics for that particular risk to predict future losses
Affordable (CANHAM)
a characteristic of insurable risk. states the premium for transferring risk should have costs achievable for the average customer
Non-Catastrophic (CANHAM)
a characteristic of insurable risk. states insurance cannot insure events that cause wide-spread losses to large numbers
Homogeneous (CANHAM)
a characteristic of insurable risk. states the individual risks that the insurer covers must all be similar in regard to factors that affect the chance of loss
Accidental (CANHAM)
a characteristic of insurable risk. states insurance must be a method of handling risk. if loss is certain to occur, there is no risk
Measurable (CANHAM)
a characteristic of insurable risk. states it must be possible to estimate the loss as a dollar amount
adverse selection
the tendency for higher-risk individuals to get and keep insurance more than individuals at an average level of risk
risks that have a greater than average chance of loss
underwriting
the process of insurers making an extensive evaluation of information related to a particular risk
reinsurance
an insurance company (the ceding company) paying another insurance company (reinsurer) to take some of the company’s risk of catastrophic loss
2 types of reinsurance
-facultative
-treaty
facultative reinsurance
the reinsurer evaluates each risk before allowing the transfer
treaty reinsurance
the reinsurer accepts the transfer according to an agreement (called a treaty)
6 types of insurers
-stock insurers
-mutual insurers
-fraternal benefit societies
-reciprocal insurers
-Lloyd’s associations
-self-insurance
stock insurers
a type of insurer that is owned by stockholders/ shareholders.
-has a board of directors chosen by the stockholders/ shareholders
-if the company makes money, a taxable dividend from the profits may be paid to the stockholders/ shareholders
-issues non-par policies
mutual insurers
a type of insurer that is owned by the policyholders (customers)
-board of directors chosen by the policyholders
-if the company is profitable, excess premiums can be returned to its policyholders-nontaxable dividend
-issues participating (par) policies
fraternal benefit societies
a type of insurer that provides insurance and other benefits
-must be a member of the society to get the benefits
-policies are called certificates
-assessable (open contract) meaning may need to pay additional charges if premiums are not sufficient
reciprocal insurers
a type of insurer that is unincorporated
-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
a type of insurer that provides insurance from individual underwriters, not insurance companies. may insure unusual risks
self-insurers
a type of insurer where a business pays its own claims
residual market
insurance from the state or federal government
domestic insurer
the state in which the insurer was formed is also the state in which it does business
foreign insurer
the insurer does business in a different state than in which it was formed
alien insurer
the insurer does business in a different country than in which it was formed (outside of US and it’s territories)
certificate of authority
state license for an insurance company
surplus lines
exceptionally large or specialized risk insurance that may be obtained from an unauthorized/ non-admitted insurer
financial strength rating
a report card of the company. most insurance companies use AM Best
4 types of agents
-independent
-exclusive or captive
-general or managing general
-direct-writing companies
independent insurance agent
type of agent. sales are made by agent/ producer who represent more than one company. they own the renewals of the policies they sell
exclusive or captive agent
type of agent that sells insurance for one company. the insurance company owns the renewals of the policies sold on their behalf
general agents (GA) or managing general agents (MGA)
type of agent who recruits other agents in a certain area who actually sell the insurance to the customer. they do not sell insurance
direct-writing companies
type of agent that uses direct response marketing. the company sells the insurance through salaried employees of the company
direct response marketing
no producer/ agent involved. policies are sold directly to the public by the insurer by using advertisements
agency
the insurance agent acts on behalf of the principal (insurance company)
law of agency
contacts made by the agent are considered to be contracts of the principal
3 types of agent authority
-express
-implied
-apparent
express agent authority
what the agents written contract with the company says
implied agent authority
not written, but the things agents normally do to sell insurance (taking applications)
apparent agent authority
things the agent does that a reasonable person would assume as authority, based on the agents’ actions and statements (wearing branded clothing)
fiduciary
a person in position of financial trust. must have knowledge of products and comply with laws and regulations
commingling
mixing personal funds with the insured’s or insurer’s funds
suitability considerations
the responsibility of an agent to make appropriate purchase recommendations
CLOAC
elements of a legal contract
-consideration
-legal purpose
-offer
-acceptance (offer and acceptance can be combined to agreement)
-competent parties (age 18+)
adhesion
a characteristic of an insurance contract. the policy is written by the insurance company and if something is ambiguous (not clear) a court will take the side of the insured
aletory
a characteristic of an insurance contract. meaning not of equal value. a small premium for a large amount of coverage
utmost good faith
a characteristic of an insurance contract. the insured and insurance company have a reasonable expectation to expect honesty
unilateral
a characteristic of an insured contact. the contract is one-sided because only one party is legally bound to perform under the contract
-insurance company promises to pay for a covered loss
-insured does not promise to pay the premium
personal
a characteristic of an insured contract. the contact between the insurance company and the insured and cannot be changed to someone else
conditional
a characteristic of an insured contract. the insured must pay the premium for coverage and file a claim if a loss occurs
indemnity
restore to the insured’s original pre-loss condition, no better or worse
representation
a statement that is believed to be true
misrepresentation
information given that is not true- however, the correct information would not affect the insurance company’s decision. example- providing an incorrect middle initial
material misrepresentation
information given that is not true and does affect the insurer’s decision. example- stating a clean driving history, when you have tickets
warranty
promise - a statement that is guaranteed to be true. if this is broken, the contract is void
concealment
failure to disclose known facts. if intentional, coverage can be voided
fraud
intentional act designed to deceive and induce another party. voids the policy
fraud/ false statements
may include a fine and/ or imprisonment (10-15 years). includes embezzelment
waiver
intentional voluntary giving up of a known right
estoppel
legal doctrine that prevents a party from denying an action if it had been accepted previously (late payments)
