Unit 1 - Introduction to Insurance Flashcards
Insurance
Transfer of risk from a person or business to an insurer
Risk
Uncertainty/possibility of a loss
What are the 2 types of Risk?
- Speculative risk
- Pure risk
Speculative Risk
Chance of loss or gain, not insurable
Pure Risk
Chance of loss only; insurance companies will insure
Exposure
Possibility that a loss will occur
5 examples of Exposure
- Auto accident
- Luggage lost on a trip
- Pet bitting a mailman
- Employee hurt on job
- House fire
Peril
A cause of loss
(House burns down, peril is the fire)
Direct
physical Loss
Indirect
Consequence of the direct loss
Hazard
Increases the chance of loss
Physical Hazard
The hazard can be seen
Moral Hazard
Dishonesty
Morale Hazard
Carelessness
STARR!
The Method of handling Risk
S T A R R stands for?
S share
T transfer
A avoid
R retention
R reduction
Contract (policy)
An agreement between the insured and the insurer
1st party
Insured (customer)
2nd party
Insurer (insurance Company)
Law of large numbers
The larger the group, the more accurately future losses can be predicted
CANHAM
Elements of an Insurable risk
CANHAM stands for…
C calculated
A affordable
N non-catastrophic
H homogeneous
A accidental
M measurable
Adverse selection
Risks that have a greater-than-average chance of loss
Adverse selection examples…
• Not wanted by insurers
• Tendency for high-risk individuals to get and keep insurance
• Why insurers go through the underwriting process
• High risk = higher rate or refusal to insure
Reinsurance
An insurance company (the ceding company) paying another insurance company (reinsurer) to take some of the company’s risk
Reinsurer’s help spread…
The insurer’s risk
Facultative
The reinsurer evaluates each risk before allowing the transfer
Treaty
The reinsurer accepts the transfer according to an agreement called a treaty
Stock insurer
• Owned by stockholders
• Dividend is not guaranteed
• Dividend is paid to stockholders
• Dividend is taxable to stockholders
• issues non-participating policies
Mutual Insurer
• Owned by the policyholders (customers)
• Dividend is not guaranteed
• Dividend is paid to policyholder
• Dividend is not taxable; considered refund of premium
• Issues participating policies
Fraternal Issurer
• Provides Insurance and other benefits
• Must be a member of the society to get the benefits
Reciprocal Insurer
• Unincorporated
• Members are required to pay an assessed amount if a loss to any member of the group occurs
• Managed by an attorney-in-fact
Lloyd’s association
Insurance provided by individual underwriters, not companies
Lloyd’s association Insures unusual risks such as…
Examples:
• Hole-in-one contest
• Athlete’s arm
• Celebrity’s hair
Risk Retention Group
•Liability insurance company created for policyholders from the same industry
Example:
A car dealers risk retention group in which only car dealer’s can be policyholders
Risk purchasing Group
• A group of businesses from the same industry joining together to buy liability insurance from an insurance company
•The Risk purchasing group is not the insurance company
Self-Insurance
A business that pays its own claims
•Reserves funds to cover losses
•Retains risk rather than transfers
Federal Government provides residual market insurance
Insurance from the state of federal government
Federal government insurance ex…
•War risk insurance
•Nuclear energy insurance
•Flood insurance
•Federal crop insurance
•Unemployment insurance (at state level)
•Workers’ compensation (at state level)
Domestic
The state where a company is incorporated
Foreign
Company is incorporated in another state or U.S. territory
Alien
Company is incorporated in another country
Certificate of authority
State license for an insurance company
Admitted or Authorized
State requires the insurance company to have a certificate of authority
Nonadmitted or unauthorized
Insurance company not required to have a certificate of authority from the state
Surplus lines
•insurance sold by unauthorized/nonadmitted insurers if on the state’s approved list of surplus insurers
•can only be sold to certain high-risk insureds
•cannot be sold solely for a cheaper rate than licensed/admitted insurers
Financial strength rating
A report card of the company
Methods of Marketing
•Independent
•Exclusive or Captive
•General agents or Managing general agents
•Direct-Writting companies
Methods of marketing also known as…
Agency Systems
Direct response
No agent/producer involved
Direct response also known as…
Marketing
Examples:
•Direct Mail
•Magazines
•Television
•Internet
•Radio advertisements
Agency
The insurance agent acts on behalf of the principal
Principal
Insurance company
Agent Authority
Express, Implied, Apparent
Express
What the agent’s written contract with the company says
Implied
Not written, activities, an agent normally does to sell insurance
Apparent
Activities an agent does that a reasonable person would assume as authority, based on the agent’s actions and statements
Fiduciary Trust
•Promptly sends premiums to insurer
•Has knowledge of products
•Complies with laws and regulations
•Does not commingle funds
