Unit 1: Introduction to Insurance

Question 1

Insurance

Answer 1

Is a contract that Transfers the RISK of financial loss from an individual or business (INSURED) to an insurance company (INSURER).

Question 2

Risk

Answer 2

Uncertainty, the possibility of loss.

Risk is not the loss itself but the uncertainty of loss.

Question 3

Peril

Answer 3

Is the cause of a loss. House burns down – The peril is the fire.

Question 4

Hazard

Answer 4

Is anything that increases the chance that a loss will occur.

Question 5

What are the two types of risk?

Answer 5

Speculative and Pure

Question 6

Speculative risk

Answer 6

chance of loss or gain: Not Insurable

Question 7

Pure risk

Answer 7

Chance of loss only; Insurance companies will insure.

Question 8

Exposure

Answer 8

Risks for which the insurance company would be liable.

A condition or situation that presents a possibility of loss

https://www.insuranceopedia.com/definition/72/exposure

Example: Auto accident, Luggage lost on a trip, pet biting a mailman, employee hurt on the job

Question 9

How do Insurance companies determine premium rates?

Answer 9

Evaluate a risk and rate an exposure. The higher the exposure to risk, the higher the premium.

Question 10

Loss

Answer 10

(1) The unintended, unforeseen damage to property (2) Injury (3) Amount Paid

Question 11

Direct Vs. Indirect Loss

Answer 11

Direct - Physical loss.

Indirect- Consequence of physical loss.

Question 12

What are the three types of hazards?

Answer 12

Physical, Moral and Morale

Question 13

Physical hazard

Answer 13

The hazard that can be seen

Question 14

Moral hazard

Answer 14

Dishonesty that intentionally causing a loss is acceptable

Question 15

Morale hazard

Answer 15

Carelessness

Question 16

Identify the types of hazard

Answer 16

Physical: wet floor - Moral: Dishonesty - Morale: Leaving the door open.

Question 17

Handling Risk: STARR

Answer 17

Sharing, Transfer. Avoidance. Retention. Reduction

Question 18

Contract (Policy)

Answer 18

An agreement between the 1st party (the customer or insured) and the 2nd party (the insurance agency or insurer)

Question 19

Parties to a contract

Answer 19

Insured (customer) Insurer (Insurance Company)

Question 20

Law of large numbers

Answer 20

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

Question 21

Insurable Risk: CANHAM

Answer 21

Caculable - Affordable - Non-catastrophic - Homogeneous - Accidental - Measurable

Question 22

Adverse Selection

Answer 22

• Risks that have a greater than average chance of loss
• Not wanted by Insurers
• High risk = higher rate to insure or refusal to do so.

Question 23

Underwriting

Answer 23

refers to the process where insurance companies evaluate risk and issue insurance policies based on their calculations

Question 24

Reinsurance

Answer 24

Insurance for insurers. helps insurers spread the risk

Question 25

Stock Insurer

Answer 25

``` Owned by stockholders Dividend is not guaranteed Dividend is paid to the stockholder Dividend is taxable to stockholder Issue non-participating policies ```

Question 26

Mutual Insurers

Answer 26

``` Policyholders - Policyowners Owned by policyholders Dividend is not guaranteed Dividend is not taxable: considered refund of premium Issue participating policies ```

Question 27

Fraternal Benefit Societies

Answer 27

Benefit of members. provides insurance and other benefits

Question 28

Reciprocal Insurer

Answer 28

Subscribers. Unincorporated Members are assessed (each pay an equal amount to pay the claim) if a loss occurs to any member of the group

Question 29

Lloyd's Associations

Answer 29

Insurance provided by individual UNDERWRITERS, not companies. Insure unusual risks like an athlete's arm, or celebrity's hair.

Question 30

Risk Retention Groups

Answer 30

Liability Insurance for policyholders from the same industry. Example- a car dealer's risk retention group in which only car dealers can be policyholders.

Question 31

Risk Purchasing Groups

Answer 31

NOT THE INSURANCE COMPANY! it's a group of businesses from the same industry that join together to buy liability insurance from an insurance company

Question 32

Self-Insurers

Answer 32

Retention. A business that pays its own claims Reserves funds to cover losses Retains risk rather than transfers

Question 33

Types of Government Insurance

Answer 33

``` War risk insurance Nuclear energy insurance Flood insurance Unemployment insurance (at state level) Workers' compensation ( at state level) ```

Question 34

Insurer location: Domestic, Foreign vs Alien

Answer 34

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.

Question 35

Authorized vs Unauthorized Insurers

Answer 35

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.

Question 36

Surplus Line Insurers

Answer 36

Insurance sold by unauthorized insurers Can only be sold to certain high-risk insureds Can not be sold solely(only) for a cheaper rate than licensed insurers

Question 37

Financial Ratings of Insurers

Answer 37

A report card of the company based on: | loss experience, reserves, investment performance, management, and operating expenses.

Question 38

Insurance Marketing through Agency Systems: 4 types of agents

Answer 38

Independent (sell the products of several companies) Captive/exclusive (represent only one company) General Agents (hire, train and supervise other agents) and earn commissions on the business produced by the agents they manage. Direct-writing companies: products (ins policies) sold by employees not independent contractors. this type of producer may be compensated by a salary, commission or both.

Question 39

Insurance Marketing through Direct Response

Answer 39

No agent/producer involved. Direct mail, magazines, television, internet and radio advertisements.

Question 40

Law of agency

Answer 40

RELATIONSHIP | The insurance agent/producer acts on behalf of the principal (insurance company)

Question 41

Agent / Producer Authority

Answer 41

express (authorities written in agent contract), implied (authorities not written in agent contract but tasks agent must perform, implied that agent has this authority) apparent. (tasks the agent does that a reasonable person would assume as authority, based on the agent's actions and statements)

Question 42

Fiduciary

Answer 42

is a person in a position of financial trust | Fiduciary = Trust

Question 43

Commingling

Answer 43

is the illegal act of mixing personal funds with the insured's or insurer's funds

Question 44

Agent's Responsibility to Applicants/Insureds

Answer 44

``` Fiduciary = Trust Promptly sends premiums to the insurer Has knowledge of products Complies with laws and regulations Does not commingle funds ```