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Insurance License Exam > Unit 1: Introduction to Insurance > Flashcards

Unit 1: Introduction to Insurance Flashcards

Make sure to memorize key terms

1
Q

Insurance

A

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

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2
Q

Risk

A

Uncertainty, the possibility of loss.

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

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3
Q

Peril

A

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

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4
Q

Hazard

A

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

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5
Q

What are the two types of risk?

A

Speculative and Pure

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6
Q

Speculative risk

A

chance of loss or gain: Not Insurable

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7
Q

Pure risk

A

Chance of loss only; Insurance companies will insure.

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8
Q

Exposure

A

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

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9
Q

How do Insurance companies determine premium rates?

A

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

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10
Q

Loss

A

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

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11
Q

Direct Vs. Indirect Loss

A

Direct - Physical loss.

Indirect- Consequence of physical loss.

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12
Q

What are the three types of hazards?

A

Physical, Moral and Morale

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13
Q

Physical hazard

A

The hazard that can be seen

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14
Q

Moral hazard

A

Dishonesty that intentionally causing a loss is acceptable

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15
Q

Morale hazard

A

Carelessness

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16
Q

Identify the types of hazard

A

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

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17
Q

Handling Risk: STARR

A

Sharing, Transfer. Avoidance. Retention. Reduction

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18
Q

Contract (Policy)

A

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

19
Q

Parties to a contract

A

Insured (customer) Insurer (Insurance Company)

20
Q

Law of large numbers

A

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

21
Q

Insurable Risk: CANHAM

A

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

22
Q

Adverse Selection

A
  • 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.
23
Q

Underwriting

A

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

24
Q

Reinsurance

A

Insurance for insurers. helps insurers spread the risk

25
Q

Stock Insurer

A 
Owned by stockholders
Dividend is not guaranteed
Dividend is paid to the stockholder
Dividend is taxable to stockholder
Issue non-participating policies
26
Q

Mutual Insurers

A 
Policyholders - Policyowners
Owned by policyholders
Dividend is not guaranteed
Dividend is not taxable: considered refund of premium
Issue participating policies
27
Q

Fraternal Benefit Societies

A

Benefit of members. provides insurance and other benefits

28
Q

Reciprocal Insurer

A

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

29
Q

Lloyd’s Associations

A

Insurance provided by individual UNDERWRITERS, not companies.

Insure unusual risks like an athlete’s arm, or celebrity’s hair.

30
Q

Risk Retention Groups

A

Liability Insurance for policyholders from the same industry.

Example- a car dealer’s risk retention group in which only car dealers can be policyholders.

31
Q

Risk Purchasing Groups

A

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

32
Q

Self-Insurers

A

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

33
Q

Types of Government Insurance

A 
War risk insurance
Nuclear energy insurance
Flood insurance
Unemployment insurance (at state level)
Workers' compensation ( at state level)
34
Q

Insurer location: Domestic, Foreign vs Alien

A

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.

35
Q

Authorized vs Unauthorized Insurers

A

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.

36
Q

Surplus Line Insurers

A

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

37
Q

Financial Ratings of Insurers

A

A report card of the company based on:

loss experience, reserves, investment performance, management, and operating expenses.

38
Q

Insurance Marketing through Agency Systems: 4 types of agents

A

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.

39
Q

Insurance Marketing through Direct Response

A

No agent/producer involved.

Direct mail, magazines, television, internet and radio advertisements.

40
Q

Law of agency

A

RELATIONSHIP

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

41
Q

Agent / Producer Authority

A

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)

42
Q

Fiduciary

A

is a person in a position of financial trust

Fiduciary = Trust

43
Q

Commingling

A

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

44
Q

Agent’s Responsibility to Applicants/Insureds

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

Insurance License Exam (4 decks)

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