Unit 1 - Introduction to Insurance Flashcards
What is Insurance?
transfer of risk from a person or business to an insurer
What is Risk?
uncertainty/possibility of a loss
What are the Types of risks?
Speculative risk
Pure risk
What is speculative risk?
Speculative Risk - chance of loss or gain. NOT INSURABLE
Is speculative risk insurable?
NO WAY BRO
What is pure risk?
Pure risk - chance of loss only. CAN INSURE
Is Pure risk insurable?
YES
What is Exposure?
possibility that a loss will occur
What is a Peril?
Cause of loss
What are examples of a peril?
if a house burns down, the peril is the FIRE
What is a direct loss?
Physical loss
what is an indirect loss?
consequence of the direct loss
What is a hazard?
Increases the chance of loss
What are the three types of hazards?
Physical
Moral
Morale
Physical hazard?
the hazard can be SEEN
TANGIBLE
example of physical hazard?
wet floor
Moral hazard?
dishonesty that intentionally causing a loss is acceptable
UNETHICAL
FRAUDULENT
Morale hazard?
carelessness
example of Morale hazard?
Leaving door open (careless)
Method of handling risk?
STARR!
Sharing - Risk sharing
Transfer - Insurer agrees to pay insured if there is a loss
Avoidance - eliminate risk by not engaging in a certain activity (avoids risk)
Retention - ind/business will pay for loss or portion of loss (deductible) if occurs
Reduction - lessening chance loss occurs (sprinkler system)
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
Adverse Selection?
risks that have GREATER THAN AVERAGE chance of loss
Adverse selection (notes)
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
Stock insurer is owned by?
Stockholders
Stock insurer – is a dividend guaranteed?
NO
Who is a dividend paid to?
Stockholder
Stock Insurer – Is a dividend taxable?
YES – to the STOCKHOLDER
Stock insurer – Issue participating or non-participating policies?
non-participating policies
called non-participating policies because dividends never go to policyholders in this arrangement
Mutual Insurer is owned by?
policyholders (customers)
Mutual Insurer – is a dividend guaranteed?
NO
Mutual insurer – who is the dividend paid to?
policyholder
Mutual Insurer – is the dividend taxable?
NO
It is considered a refund of the premium
Mutual Insurers issue:
participating or non-participating policies?
participating policies
participating (par) policies because the policyowners PARTICIPATE in the operating results of the company
Domestic?
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 unauthoriaed?
insurance company not required to have certificate of authority from the state
purpose of surplus lines insurers
Sometimes an individual or business will have exceptionally large or specialized risk that no authorized insurer can sell or will cover. in some cases insurance may be obtained from insurer on a surplus lines basis.
examples of Surplus Lines Insurance
gaming, casinos and entertainment, mining, and skyscrapers, etc.
Surplus lines – notes!!
Insurance sold by unauthorized/non-admitted 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
Agency?
the insurance agent acts on behalf of the principal (insurance company)
Agent authority – Express?
what the agent’s written CONTRACT with the company SAYS
Agent authority – Implied?
NOT WRITTEN; activities an agent normally does to sell insurance
Agent authority – Apparent?
activities an agent does that a reasonable person would ASSUME as authority, based on the agent’s actions and statements
Fiduciary trust notes:
promptly sends premiums to insurer
Has knowledge of products
Complies with laws and regulations
Does not commingle funds
a fiduciary is a person in a position of financial trust
Independent insurance agents?
UNLIMITED
sell products of several companies and are independent contractors
Captive agents?
represent only one company
What is commingling?
the illegal act of mixing personal funds with insured’s or insurer’s funds
Elements of Insurable Risk
CANHAM
Calculable
Affordable
Non-catastrophic
Homogeneous
Accidental
Measurable
