Chapter 1 - General Insurance Flashcards
(89 cards)
1
Q
Define Agent/Producer
A
A legal representative of an insurance company, the classification of producer includes agents and brokers; agents are the agents of the insurer.
2
Q
Define Applicant/Proposed Insured
A
A person applying for insurance
3
Q
Define Broker
A
An insurance producer not appointed by an insurer and is deemed to represent the client.
4
Q
Defne Insured
A
The person covered by the insurance policy. This person may or may not be the policyowner.
5
Q
Define Insurer (Principal)
A
The company that issues the insurance policy.
6
Q
Define Policyowner
A
The person entitled to exercise the rights and privileges in the policy.
7
Q
Define Premium
A
The money paid to the insurance company for the insurance policy.
8
Q
Define Reciprocity/Reciprocal
A
A mutual interchange of rights and privileges.
9
Q
What is insurance?
A
A transfer of risk of loss from an individual or a business entity to an insurance company, which, in turn, spreads the costs of unexpected losses to many individuals.
10
Q
What is Risk?
A
The uncertainty or chance of a loss occurring.
11
Q
What are the two types of risk?
A
- Pure
2. Speculative
12
Q
What is Pure Risk?
A
Refers to situations that can only result in a loss or no change. There is no opportunity for financial gain. This is the only type of risk that insurance companies are willing to accept.
13
Q
What is the only type of risk that insurance companies are willing to accept?
A
Pure Risk
14
Q
What is Speculative Risk?
A
Involves the opportunity for either loss or gain. An example of speculative risk is gambling. These types of risks are not insurable.
15
Q
What are Hazards?
A
Conditions or situations that increase the probability of an insured loss occurring. Conditions such as slippery floors, or congested traffic are hazards and may increase the chance of a loss occurring.
16
Q
What are the three classifications of Hazards?
A
- Physical Hazards
- Moral Hazards
- Morale Hazards
17
Q
What are Physical Hazards?
A
Those arising from the material, structural, or operational features of the risk, apart from the persons owning or managing it.
18
Q
What are Moral Hazards?
A
Those applicants that may lie on an application for insurance, or in the past, have submitted fraudulent claims against an insurer.
19
Q
What are Morale Hazards?
A
An increase in the hazard presented by a risk, arising from the insured’s indifference to loss because of the existence of insurance. (e.g. I’m not going to bother fixing this. If it breaks my insurance will pay to replace it.)
20
Q
What are Perils?
A
The causes of loss insured against in an insurance policy.
21
Q
What peril does life insurance insure against?
A
The financial loss caused by the premature death of the insured.
22
Q
What does health insurance insure against?
A
The medical expenses and/or loss of income caused by the insured’s sickness or accidental injury.
23
Q
What does property insurance insure against?
A
The loss of physical property or the loss of its income-producing abilities.
24
Q
What does casualty insurance insure against?
A
The loss and/or damage of property and resulting liabilities.
25
Define Loss
The reduction, decrease, or disappearance of value of the person or property insured in a policy, caused by a named peril.
26
Define Exposure
A unit of measure used to determine rates charged for insurance coverage.
27
What factors are considered in life insurance in determining rates? (4)
1. The age of the insured
2. Medical History
3. Occupation
4. Sex
28
A ______ is a chance that a loss will occur; a ______ increases the probability of loss; a ______ is the cause of the loss.
A RISK is a chance that a loss will occur; a HAZARD increases the probability of loss; a PERIL is the cause of the loss.
29
What are the methods of handling risk? (5)
1. Avoidance
2. Retention
3. Sharing
4. Reduction
5. Transfer
30
What is risk avoidance?
Eliminating exposure to a loss. Effective, but seldom practical.
31
What is risk retention?
The planned assumption of risk by an insured through the use of deductibles, co-payments, or self-insurance.
32
What are three common examples of when a person is using risk retention?
- Deductibles
- Self Insurance
- Co-Payments
33
The purpose of risk retention is: (3)
1. To reduce expenses and improve cash flow;
2. To increase control of claim reserving and claims settlements; and
3. To fund for losses that cannot be insured.
34
What is risk sharing?
A method of dealing with risk for a group of individual persons or businesses with the same or similar exposure to loss to share the losses that occur within that group. A reciprocal insurance exchange is a formal risk-sharing agreement.
35
What is risk reduction?
Our attempt to lessen the possibility or severity of a loss.
36
Insurable risks involve what five characteristics?
1. Due to Chance
2. Definite and Measurable
3. Statistically predictable
4. Not Catastrophic
5. Randomly selected and large loss exposure
37
Define the insurable risk characteristic of being Due to Chance
A loss that is outside the insured's control.
38
Define the insurable risk characteristic of being Definite and Measurable
A loss that is specific as to the cause, time, place, and amount. An insurer must be able to determine how much the benefit will be and when it becomes payable.
39
Define the insurable risk characteristic of being Statistically Predictable.
Insurers must be able to estimate the average frequency and severity of future losses and set appropriate premium rates (In life insurance, the use of mortality tables and morbidity tables allows the insurer to project losses based on statistics.)
40
Define the insurable risk characteristic of being Not Catastrophic
Insurers need to be reasonably certain their losses will not exceed specific limits. That is why insurance policies usually exclude coverage for loss caused by way or nuclear events.
41
Define the insurable risk characteristic of being Randomly Selected and having a Large Loss Exposure
There must be a sufficiently large pool of the insured that represents a random selection of risks in terms of age, gender, occupation, health and economic status, and geographic location.
42
What is adverse selection?
The insuring or risks that are more prone to losses than the average risk. Poorer risks tend to seek insurance or file claims to a greater extent than better risks.
43
What are a couple of ways insurance companies protect themselves from adverse selection?
- They have the option to refuse or restrict coverage.
| - They have the option to charge them a higher rate for insurance coverage.
44
What is a homogeneous group?
A large pool of people with similar exposure to loss.
45
What does the law of large numbers state?
The larger the number of people with a similar exposure to loss, the more predictable actual losses will be.
46
As the number of people in a risk pool increases, future losses become _____ _______.
As the number of people in a risk pool increases, future losses become MORE PREDICTABLE.
47
Insurance is available from both ______ _________ and the _________.
Insurance is available from both PRIVATE COMPANIES and the GOVERNMENT.
48
What is the major difference between government and private insurance?
Government programs are funded with taxes and serve national and state social purposes, while private policies are funded by premiums.
49
Private insurance companies can be classified in what ways? (5)
- Ownership
- Authority to transact business
- Location (domicile)
- Marketing and distribution systems; or
- Rating (financial strength)
50
What are the most common type of company ownership structures for insurance companies? (3)
- Stock Companies
- Mutual Companies
- Fraternal Benefit Societies
51
What is a Stock (Insurance) Company? (3)
- These are owned by the stockholders who provide the capital necessary to establish and operate the insurance company and who share in any profits and losses.
- Officers are elected by the stockholders and manage stock insurance companies.
- Traditionally stock companies issue nonparticipating policies.
52
What is a Mutual Company? (6)
- Are owned by the policyowners
- Issue participating policies
- Policiyowners are entitled to dividends (return of excess premiums).
- Dividends are generated when the premiums and the earnings combined exceed the actual costs of providing coverage, creating a surplus.
- Dividends are nontaxable.
- Dividends are not guaranteed.
53
What is a Fraternal Benefit Society? (4)
- An organization formed to provide insurance benefits for members of an affiliated lodge, religious organization, or fraternal organization with a representative form of government.
- They sell only to their members
- They are considered charitable institutions, and not insurers.
- They are not subject to all the regulations that apply to the insurers that offer coverage to the public at large.
54
What is a nonparticipating policy? (2)
- A policy in which policyowners do not share in profits and losses.
- A nonparticipating (stock) policy does not pay dividends to policyowners; however, taxable dividends are paid to stockholders.
55
What is a nonparticipating policy? (2)
- A policy in which policyowners do not share in profits and losses.
- A nonparticipating (stock) policy does not pay dividends to policyowners; however, taxable dividends are paid to stockholders.
56
Mutual companies issue what type of policies?
Participating policies
57
What are participating policies?
-Policies where policyowners are entitled to dividends, which, in the case of mutual companies, are a return of excess premiums and are, therefore, nontaxable.
58
What is social insurance?
Insurance federal and state governments provide in the areas where private insurance is not available.
59
What are examples of government insurance programs? (5)
- Social Security
- Medicare
- Medicaid
- Federal Crop Insurance
- National Flood Insurance
60
What must an insurer do before they can transact business in a specific state?
- Apply for and be granded a license or Certificate of Authority from the state department of insurance
- Meet any financial (capital and surplus) requirements set by the state.
61
Insurers who meet a state's financial requirements and are approved to transact business in the state are considered what?
Authorized or admitted
62
What is a domicile?
The location where an insurer is incorporated, not necessarily where the insurer conducts business.
63
What is a domestic insurer?
An insurance company that is incorporated in this state. In most cases, the company's home office is in the state in which it was formed - the company's domicile.
64
What is a foreign insurer?
An insurance company that is incorporated in another state, the District of Columbia, or a territorial possession (American Samoa, Guam, The Northern Mariana Islands, Puerto Rico, and the US Virgin Islands)
65
What is an alien insurer?
An insurance company that is incorporated outside of the United States.
66
The financial strength of an insurance company is based on what? (4)
- Prior claims experience
- Investment earnings
- Level of reserves
- Management
67
Name the independent insurance rating services. (5)
- AM Best
- Fitch
- Standard and Poor's
- Moody's
- Weiss
68
What are the types of marketing arrangements? (5)
1. Independent Agency System/American Agency System
2. Exclusive Agency System/Captive Agents
3. General Agency System
4. Managerial System
5. Direct Response Marketing System
69
What are the characteristics of the Independent Agency System/American Agency System? (4)
- 1 independent agent represents several companies
- Nonexclusive
- Commissions on personal sales
- Business renewal with any company
70
What are the characteristics of the Exclusive Agency System/Captive Agents? (4)
- 1 agent represents 1 company
- Exclusive
- Commissions on personal sales
- Renewals can only be placed with the appointing insurer.
71
What are the characteristics of the General Agency System? (4)
- General agent-entrepreneur represents 1 company
- Exclusive
- Compensation and commissions
- Appoints subagents
72
What are the characteristics of the Managerial System (3)
- Branch Manager (supervises agents)
- Salaried
- Agents can be the insurer's employees or independent contractors
73
What are the characteristics of the Direct Response Marketing System? (3)
- No Agents
- Company advertises directly to consumers
- Consumers apply directly to the company
74
What is reinsurance?
A contract under which one insurance company (the reinsurer) indemnified another insurance company for part or all of its liabilities.
75
What is the purpose of reinsurance?
To protect insurers against catastrophic losses.
76
What are the two parties of reinsurance called?
Ceding Insurer - The originating company that procures insurance on itself from another insurer.
Assuming Insurer - The insurer insuring the originating company.
77
When reinsurance is purchased on a specific policy, it is classified as what?
A Facultative Reinsurance
78
When an insurer has an automatic reinsurance agreement between itself and the reinsurer in which the reinsurer is bound to accept all risks ceded to it, it is classified as what?
A Reinsurance Treaty
79
What type of insurance company will never be admitted or authorized in any state but can still sell insure anywhere?
Excess or surplus lines broker. A company that insures things that other companies find too catastrophic to insure. (Oil Spill, singer's vocal cords, etc)
80
What are the three types of agent authority?
1. Express
2. Implied
3. Apparent
81
What is express authority?
Authority written in the contract
82
What is implied authority?
The authority that is not written into the contract, but is assumed to have in order to transact the business. It is incidental and derives from express authority since not every single detail of an agent's authority can be spelled out in a written contract.
Ex. If the agency does not specifically authorize the agent to collect premiums and remit them to the insurer, but the agent routinely does so in the process of solicitation and delivery of policies, the agent has the implied authority to collect and remit premiums.
83
What is apparent authority?
Authority based on the principal's actions or words. (Using insurer's stationary when soliciting coverage)
84
What are the elements of a legal contract? (4)
1. Agreement (proposed insured completes application). Acceptance (Insurance company issues the policy)
2. Consideration. The insurer's consideration is cash paid out in form of a claim. Insured - cash paid in premium and their answers on the application.
3. Competent Parties - everyone that enters into the contract is of legal age, is mentally competent, and not under the influence of drugs or alcohol.
4. Legal Purpose - Has to apply to actions that are legal.
85
Define aleatory
Unequal exchange of value.
86
Define adhesion
When a contract is offered intact to one party by another under circumstances requiring the second party to accept or reject the contract in total without having the opportunity to bargain over the wording.
87
What does it mean that all insurance policies are unilateral?
It means there is a one-sided promise. The company is obligated, you can cancel at any time.
88
What is the difference between a warranty and representation in a contract?
Warranties
-Absolutely true statements
-Breach of warranties can void the policy
Representations
-Statements that are true to the best of the applicant's knowledge
-Not guaranteed to be true.
89
What is a material fact?
A fact that would lead to a different underwriting decision had the insurer known about it.
