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Description
Flashcards by Macy Fenderson, updated more than 1 year ago
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Created by Macy Fenderson
over 6 years ago
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| Question | Answer |
| Insurance | Transfer of risk from a person or a business to an insurer |
| Risk | Uncertainty, possibility of loss |
| What are the two types of risk? | Speculative and Pure |
| Speculative Risk | Chance of loss or gain; not insurable (example: gambling or investments) |
| Pure Risk | Chance of loss only; insurance companies will insure (example: car accident) |
| Exposure | Potential for accidents and other losses (example: the more a person drives, the more exposure they have to accidents AKA higher exposure means higher premium) |
| Peril | The cause of loss (example: house burns down, peril is the fire) |
| Loss | can be defined as (1) The unintended, unforeseen damage to property, (2) injury, or (3) amount paid |
| What are the two different types of losses? | Direct and Indirect |
| Direct Loss | A physical loss. Loss to property with no intervening cause |
| Indirect Loss | Consequence of physical loss. (Example: loss of rental income due to a house fire, which causes a loss of profits for the landlord. The indirect loss is always the outcome of the direct loss.) |
| Hazard | Anything that increases the chance a loss will occur |
| What are the 3 different types of hazards? | Physical, Moral, Morale |
| Physical Hazard | The hazard can be seen (example: wet floor sign) |
| Moral Hazard | Someone who increases their exposure to risk. Dishonesty is a moral hazard. Someone who has been given the idea causing a loss is acceptable is dishonest. (Example: someone who fakes losses) |
| Morale Hazard | A manner of carelessness, a change in behavior (example: the insured leaving their car unlocked and running while quickly going inside a store) |
| What is the acronym called that is used for handling risks? | STARR (Sharing, Transfer, Avoidance, Retention, Reduction) |
| Risk Sharing | Two or more individuals or businesses agree to pay a portion of any loss incurred by any member of the group. (Example: Stockholders in a corporation share the risk) |
| Risk Transfer | Risk transfer is what happens with insurance. (Example: The insurance company agrees to pay if an insured customer has a loss and the customer no longer bears the risk. The customer pays a premium that is much smaller in contrast to the large and uncertain loss) |
| Risk Avoidance | Risk avoidance means eliminating a particular risk by not engaging in a certain activity. (Example: not driving a vehicle to avoid automobile risks) |
| Risk Retention | Risk retentions means the individual or business will pay for the loss if it occurs or a deductible. (Example: If you don’t have car insurance to pay for the damages you cause to another person in an accident, you have retained that risk.) |
| Risk Reduction | Risk reduction refers to lessening the chance that a loss will occur or the extent of a loss. (Example: sprinkler systems) |
| Insurance Contract | A policy held between two members, the insurer and the insured. It is an agreement between the customer and the insurance company. |
| The Law of Large Numbers | The larger the group, the more accurately losses can be predicted. |
| What is the acronym for pure insurable risk characteristics? | CANHAM, this is used so measure risk insurability. (Calculable, Affordable, Non-Catastrophic, Homogeneous, Accidental, Measurable |
| Actuary | A person who computes premium rates according to probabilities based on statistical records. |
| Calculable (CANHAM) | Premiums must be calculable based upon prior loss statistics for that particular risk in order to predict future losses |
| Affordable (CANHAM) | The premium for transferring the risk should be affordable for the average consumer |
| Non-Catastrophic (CANHAM) | The risk must be non-catastrophic for the insurance company. National or area disasters have coverage limitations in insurance policies. The peril of war is excluded in most policies |
| Homogeneous (CANHAM) | The risk must be similar in nature so the same factors affect the chance of the loss. (Example: if it were predicted a wooden house would suffer a forest fire, you wouldn’t include brick houses in the probability) |
| Accidental (CANHAM) | The loss must have been caused due to chance (accident) |
| Measurable (CANHAM) | A definite (time and place) and measurable loss means that proof of loss must be established with numbers and dollar amounts, not just casual references |
| Adverse Selection | -Risks that have a 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 |
| What is the difference between a ceding insurer and a reinsurer? | The company reducing its risk is called the ceding insurer. The company assuming the risk is caller the reinsurer |
| Facultative Reinsurance | 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 | -Owned by stockholders -Dividend is not guaranteed -Dividend is paid to stockholder -Dividend is taxable to stockholder -Issue non-participating policies |
| Dividend | A distribution to a policyholder of a portion of the premium not needed by the company to pay claims or to meet expenses |
| Mutual Insurer | -Owned by policyholders (customers) -Dividend is not guaranteed -Dividend is paid to policy holder -Dividend is not taxable; considered a refund of premium -Issue participating policies |
| Fraternal Benefit Societies | Must be a member to receive insurance or other benefits. These organizations are typically based on common religion or ethic group. Fraternal policies are called certificates, and members who have insurance are called certificate holders |
| Open Contracts | Certificate holders may receive additional charges if premiums are insufficient to cover claims during a given period |
| Reciprocal Insurers | -Unincorporated -Members 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. They insure unusual risks. (Examples: celebrity’s hair, athlete’s arm, hole-in-one contest) |
| Risk Retention Groups | Liability insurance company created for policyholders from the same industry. (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 |
| Self-Insurers | A business that pays its own claims. Reserves funds to cover losses. Retains risk rather than transfers |
| Private Vs. Government Insurers | The federal government provides insurance in the instance of war, floods, unemployment, workers’ comp, etc. |
| Domestic Insurer | the state where a company is incorporated. An insurer’s home state is also called its state of domicile |
| Foreign Insurer | company is incorporated in another state or U.S. territory |
| Alien Insurer | company is incorporated in another country |
| Certificate of Authority | state license for an insurance company |
| Authorized Vs. Unauthorized Insurers | Authorized Insurer - admitted insurance company. Certified. Able to sell, place, and service most insurance contracts. Unauthorized Insurer - non admitted insurance company. Not certified. Sell surplus lines of insurance products |
| Surplus Line Insurers | -Insurance sold by unauthorized insurers, if found on state approved list -Only sold to certain high-risk insureds (Example: casinos, mines, etc.) -Cannot be sold solely for a cheaper rate than admitted insurers |
| Financial Strength Rating | A report cart of the company. There are several rating agencies that evaluate factors such as insurer’s loss experience, reserves, investment performance, management, etc. |
| What are the four different types of agents? | -Independent -Exclusive or Captive -General agents or managing general agents -Direct-writing companies |
| Independent insurance agents | individuals that sell the insurance products of several companies and are independent contractors, not employees of the insurer(s) |
| Captive (exclusive) agents | individuals that represent only one company. Captive agents are independent contractors, not employees of the insurer. The insurance company owns the renewals of the policies sold on their behalf |
| General agents (GAs) or managing general agents (MGAs) | individuals that hire, train, and supervise other agents within a specific geographical area. GAs and MGAs earn overriding commissions (overrides) on the business produced by the agents they manage |
| Direct-writing companies | companies whose products are sold by employees, not independent contractors. This type of producer may be compensated by a salary, commission, or both. The insurance company owns the renewals of the policies sold on their behalf |
| Direct Response | -No agent/producer involved -Direct mail, tv ads, magazine ads, internet ads, radio ads, etc. |
| Agency | The insurance agent acts on behalf of the principal (the insurance company) |
| Agent | A person authorized to act on behalf of a corporation or insurance company |
| Principal | Aka the insurance company. In insurance, the insurer is the principal and the sales representative or producer is the agent |
| What are the three different types of agent/producer authority? | Express, Implied, Apparent |
| Express authority | authorities written in the agent's contract |
| Implied authority | authorities not written in agent contract but tasks agent must perform; implied that agent has this authority |
| Apparent authority | tasks the agent does that a reasonable person would assume as authority, based on the agent's actions and statements |
| Fiduicary | -responsibility to promptly send premiums to the insurer -a person in position of financial trust -has knowledge of products -complies with laws and regulations -does not commingle funds |
| What is the acronym used to define the elements of a legal contract? How many elements? What are they? | 5. CLOAC. Consideration, Legal Purpose, Offer, Acceptance, Competent Parties |
| Consideration (CLOAC) | Money. An exchange of value made on application |
| Legal Purpose (CLOAC) | Risk transfer doesn't violate the law |
| Offer and Acceptance (CLOAC) | Offer made by insured, submits application for first month premium, insure accepts or denies the risk. |
| Counteroffer | Made by insurer. Agrees to issue policy but with high premium or restrictions. Insurer either accepts or declines. |
| Component Parties (CLOAC) | -sober -18 or older -sane |
| Adhesion | -glue, policy written by the insurance company -insured has no input -if not clear, court takes the side of insured |
| Aletory | -Unequal value -Pay small premium and have a large claim, or pay premiums for many years without a claim |
| Utmost Good Faith and Reasonable Expectation | The insured and the insurance company have the right to expect honesty from each other |
| Unilateral | -Insured may cancel the contract at anytime -Insurer must pay covered losses |
| Personal Contracts | -Insurance policies -Contract between the insurance company and the insured -Cannot be changed to someone else |
| Conditional | Insured must pay the premium for coverage and file a claim if a loss occurs |
| Indemnity | -Indemnification means paying for the loss, expecting no gain. -No more! No less! |
| Representations | A representation is believed to be true; statements on applications |
| Misrepresentations | Misrepresentations means information has been provided that is not true, however cannot affect the insurance company’s decision |
| Material Misrepresentations | information given that is not true and DOES affect the insurer’s decision |
| Warranties | -Form of a promise; Made by the insurance company -Breach of warranty may result in a voided claim |
| Concealement | -The failure to disclose known facts;Hiding information -If intentional and information is material, coverage can be voided -If NOT intentional, coverage can NOT be voided |
| Fraud | intentional act to cheat another |
| Waiver | voluntarily giving up a right |
| Estoppel | once a waiver has been created, it cannot be changed |
| Casualty Insurance | -takes care of "the other guy" -never covers the insured (me) -liability insurance |
| Property insurance | -Real property = buildings -Stuff/Personal property = television -Cover property insurance -First party losses |
| What are the different party losses? | First person - me (the insured) Second person - my insurer Third person - the "other guy" |
| What is the acronym used to describe the seven parts of the property and casualty policy structure? | DICEE. (Declarations, Insuring agreements, Conditions, Endorsements, Exclusions) |
| Declarations | who, what, when, where, and how much? |
| Insuring agreements | promise to pay and perils covered |
| Conditions | rules for the policy |
| Endorsements | changes to the original policy |
| Exclusions | items not covered |
| Additional/supplementary coverage | Payment for additional expenses not normally covered |
| Insureds | by definition |
| Named insured | listed on the declarations |
| First-named insureds | listed first on the declarations |
| Additional insureds | Added by endorsements. Not listed by name. |
| Policy Period | when the policy begins and ends aka time frame |
| Policy Territory | where a loss must occur, area of coverage typically within the US |
| What is the beginning date of a policy referred to as? | Inception |
| What is the end date of a policy referred to as? | Expiration |
| Cancellation | When the insured stops coverage before the expiration date |
| Unearned premium | premiums paid months in advance that are returned when an insured cancels policy before expiration date |
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