Unit 1: Introduction to Insurance Flashcards
(30 cards)
Insurance
Transfer of risk from a person or a business to an insurer
Risk
Uncertainty/possibility of a loss
- Speculative risk: chance of loss or gain; not insurable
- Pure risk: chance of loss only; insurance companies will insure
Exposure
- Risks for which the insurance company would be liable
- A condition or situation that presents a possibility of loss
Peril
The cause of loss; house burns down - peril is the fire; a flood, wind, hail, collision with another car
Loss
The unintended, unforeseen damage to property; Injury; Amount paid
- Direct: physical loss (lightning striking house)
- Indirect: consequence of physical loss (loss of rental income due to house fire)
Hazard
Anything that increases the chance that a loss will occur
- Physical hazard: the hazard can be seen
- Moral hazard: dishonesty
- Morale hazard: carelessness (leaving car unlocked)
Methods of Handling Risk (STARR)
S - Sharing
T - Transfer (purchasing insurance)
A - Avoidance
R - Retention
R - Reduction (wearing a seat belt in a car)
Parties to an Insurance Contract
Contract (Policy)
- An agreement between the insured and the insurer
- 1st party: insured (customer)
- 2nd party: insurer (insurance company)
The Law of Large Numbers
The larger the group, the more accurately losses can be predicted
Elements of Insurable Risk (CANHAM)
Calculable: premiums must be calculable based on prior loss stats in order to predict future loss
Affordable: the premium for transferring the risk should be affordable for the average consumer
Non-catastrophic: risk must be non-catastrophic for the insurance company
Homogeneous: risk must be similar in nature so the same factors affect the chance of loss
Accidental: loss must have been caused due to chance (accident)
Measurable: proof of loss must be established with numbers and dollar amounts)
Adverse Selection
- Risks that have greater than average chance of loss
- 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 to insure or refusal
Reinsurance
An insurance company’s insurance company, helps insurers spread their risk. The Cending insurer is the company reducing its risk and the Reinsurer is the company assuming the risk
- Facultative reinsurance: the reinsurer considers each risk before allowing the transfer from the ceding company
- Treaty reinsurance: the reinsurer accepts all risks of a certain type from the ceding company
Stock Insurer
A business formed as a corporation and owned by its stockholders (also known as shareholders)
- Owned by shareholders and run by a board of directors elected by stockholders
- Dividend is not guaranteed
- Dividend is paid to stockholder
- Dividend is taxable to stockholder
- Issue non-participating policies
Mutual Insurers
- Owned by policyholders (customers)
- Dividend is not guaranteed
- Dividend is paid to policyholder
- Dividend is not taxable; considered refund of premium
- Issue participating policies
Fraternal Benefit Societies
- Provides insurance and other benefits for their members like social activities and engagement in charitable and benevolent causes
- Certificate holders may be assessed additional charges if premiums are not sufficient to pay claims during a given period
Reciprocal Insurers
- Unincorporated
- Members (subscribers) are assessed if a loss occurs to any member of the group
- Managed by an attorney-in-fact
Lloyd’s Associations
- Insurance provided by individual underwriters, not companies
- Insure unusual risks (hole-in-one contest, athlete’s arm, celebrity’s hair)
Risk Retention Groups
- Liability insurance company created for policyholders from the same industry
- Can only write liability insurance coverage
- Example - a car dealers’ risk retention group in which only car dealers can be policyholders
Risk Purchasing Groups
A group of businesses from the same industry that join together to buy liability insurance from an insurance company
(not insurers themselves and are not regulated as such)
Self-Insurers
- A business that pays its own claims
- Reserves funds to cover losses
- Retains risk rather than transfers
Private vs. Government Insurers
Insurance companies may be privately owned, operated by the state, or operated by the federal government
The federal government provides insurance: War risk insurance, nuclear energy insurance, flood insurance, federal crop insurance, unemployment insurance (state level), workers’ compensation (state level)
Domestic, Foreign, and Alien Insurers
Insurance company location
- Domestic: the state where a company is incorporated
- Foreign: company is incorporated in another state or US territory
- Alien: company is incorporated in another country
Authorized vs. Unauthorized Insurers
- Certificate of authority - state license for an insurance company
- Authorized: insurance company; admitted; certificate of authority; sell, place, and service most insurance contracts
- Unauthorized: insurance company; nonadmitted; no certificate of authority; sell surplus lines insurance products
Surplus Lines Insurers
- 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
- Examples: gaming, casinos and entertainment, mining, and skyscrapers
