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Kaplan PC Certification Exam > Unit 1: Introduction to Insurance > Flashcards

Unit 1: Introduction to Insurance Flashcards

1
Q

Insurance

A

Transfer of risk from a person or a business to an insurer

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2
Q

Risk

A

Uncertainty/possibility of a loss

  • Speculative risk: chance of loss or gain; not insurable
  • Pure risk: chance of loss only; insurance companies will insure
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3
Q

Exposure

A
  • Risks for which the insurance company would be liable
  • A condition or situation that presents a possibility of loss
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4
Q

Peril

A

The cause of loss; house burns down - peril is the fire; a flood, wind, hail, collision with another car

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5
Q

Loss

A

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)
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6
Q

Hazard

A

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)
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7
Q

Methods of Handling Risk (STARR)

A

S - Sharing
T - Transfer (purchasing insurance)
A - Avoidance
R - Retention
R - Reduction (wearing a seat belt in a car)

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8
Q

Parties to an Insurance Contract

A

Contract (Policy)

  • An agreement between the insured and the insurer
  • 1st party: insured (customer)
  • 2nd party: insurer (insurance company)
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9
Q

The Law of Large Numbers

A

The larger the group, the more accurately losses can be predicted

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10
Q

Elements of Insurable Risk (CANHAM)

A

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)

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11
Q

Adverse Selection

A
  • 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
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12
Q

Reinsurance

A

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
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13
Q

Stock Insurer

A

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
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14
Q

Mutual Insurers

A
  • Owned by policyholders (customers)
  • Dividend is not guaranteed
  • Dividend is paid to policyholder
  • Dividend is not taxable; considered refund of premium
  • Issue participating policies
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15
Q

Fraternal Benefit Societies

A
  • 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
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16
Q

Reciprocal Insurers

A
  • Unincorporated
  • Members (subscribers) are assessed if a loss occurs to any member of the group
  • Managed by an attorney-in-fact
17
Q

Lloyd’s Associations

A
  • Insurance provided by individual underwriters, not companies
  • Insure unusual risks (hole-in-one contest, athlete’s arm, celebrity’s hair)
18
Q

Risk Retention Groups

A
  • 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
19
Q

Risk Purchasing Groups

A

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)

20
Q

Self-Insurers

A
  • A business that pays its own claims
  • Reserves funds to cover losses
  • Retains risk rather than transfers
21
Q

Private vs. Government Insurers

A

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)

22
Q

Domestic, Foreign, and Alien Insurers

A

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
23
Q

Authorized vs. Unauthorized Insurers

A
  • 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
24
Q

Surplus Lines Insurers

A
  • 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
25
Q

Financial Ratings of Insurers

A

Financial strength rating based on factors such as an insurers’ loss experience, reserves, investment performance, management, and operating expenses

26
Q

Agency Systems

A

Methods of marketing

  • Independent: individuals that sell the insurance products of several companies
  • Exclusive or captive: individuals that represent only one company
  • General agents or managing general agents: individuals that hire, train, and supervise other agents within a specific geographical area
  • Direct-writing companies: companies whose products are sold by employees, not independent contractors
27
Q

Direct Response

A
  • No agent/producer involved
  • Direct mail, magazines, television, internet, and radio advertisements
28
Q

Law of Agency

A

The insurance agent acts on behalf of the principal (insurance company)

29
Q

Agent/Producer Authority

A
  • Express: authorities written in agent contract
  • Implied: authorities not written in agent contract; powers necessary for the agent to conduct the business of the insurer (branding)
  • Apparent: tasks the agent does that a reasonable person would assume as authority; based on the agent’s actions and statements (agent promises flood coverage in someone’s policy and it doesn’t, company may be required to pay the claim bc of agent)
30
Q

Responsibility to Applicants/Insureds

A

Fiduciary = person in a position of financial trust

  • Promptly sends premiums to insurer
  • Has knowledge of products
  • Complies with laws and regulations
  • Does not commingle funds (illegal act of mixing personal funds with the insured’s or insurer’s funds

Kaplan PC Certification Exam (22 decks)

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