Chapter 2 - General Insurance

Question 0

Risk Management

Answer 0

Managing risks rather than just paying premiums to an insurance company.
Right premium for right risk

Question 1

What is insurance?

Answer 1

Insurance protects people and businesses against certain losses by transferring the risk from individuals to a group.

Question 2

Risk

Answer 2

The chance of financial loss, or the uncertainty of loss

Question 3

The 2 types of risk

Answer 3

Pure risk

Speculative risk

Question 4

Pure risk

Answer 4

Exists when only the chance of loss is present without the potential for a financial gain.
Only pure risk is insurable

Question 5

Speculative risk

Answer 5

When a chance is taken that may result in a financial gain such as gambling or the stock market.

Question 6

Hazard

Answer 6

Any condition that increases the chance of loss or increases the frequency or severity of loss

Question 7

Exposure

Answer 7

The possibility of a loss caused by surroundings

Question 8

Peril

Answer 8

The event that causes a loss such as a fire, lightning or windstorm

Question 9

Loss

Answer 9

The reduction in the value of an asset and the financial consequences of a reduction in value of an asset.

Question 10

What are the 2 types of losses?

Answer 10

Direct

Indirect

Question 11

Direct Loss

Answer 11

A loss incurred as a direct result of a peril

An example is a house destroyed by a fire, the house would be a direct loss

Question 12

Indirect loss

Answer 12

Any loss that is a consequence of a direct loss.
Consequential loss
Example is after a house is destroyed in a fire, the owner will have additional expenses such as hotel and eating at restaurants while house is being repaired.

Question 13

Methods of Handling Risk

Answer 13

STARR
Sharing - sharing exposure to a loss with another person or organization
Transfer - transferring financial impact of a loss to another party (insurance)
Avoidance - eliminating the risk
Retention - absorbing all or part of risk involved with a particular exposure
Reduction - reducing the severity of losses that do occur

Question 14

Elements of Insurable Risks

Answer 14

Independence
Definiteness
Calculability
Accidental

Question 15

What element of insurable risk is uninsurable?

Answer 15

A loss must be a random event over which the insured has no control.
Intentional losses are excluded.

Question 16

Law of Large Numbers

Answer 16

The greater the numbers, the more accurate the statistics will be that permit an insurer to predict frequency and severity of losses and calculate a premium to spread the cost of risk among all policyholders.

Question 17

Reinsurance

Answer 17

Safety net
Insurance on insurance
Allows an insurance company to sell part of the risk they have assumed from a policyholder and thereby write more insurance and protect the company from any large losses it would not be able to handle on its own.

Question 18

Stock Companies

Answer 18

Insurance companies owned by stockholders.
Charge non-assessable fixed premiums.
If company creates a profit, they may pay stockholders through dividends.

Question 19

Mutual Companies

Answer 19

Insurance company owned by the policyholders.
Can pay dividends to policyholders when it makes a profit.
Can assess policyholders to obtain additional funds to keep company solvent.

Question 20

What types of insurances companies are non-admitted and have no rate regulations?

Answer 20

County Mutual Companies
Farm Mutual Companies
Reciprocal Exchanges
Risk Retention Groups
Purchasing Groups
Lloyds Plan

Question 21

Self-Insurers

Answer 21

Some companies choose to self-insure rather than pay premium to an insurance company.
They take risk on themselves.

Question 22

Private vs Government Insurers

Answer 22

Most insurance is through private insurers
Some insurance can only be purchased through the federal government because private insurers do not want to take on higher risks. Flood insurance is an example of government insurers.

Question 23

Authorized Insurer

Answer 23

Admitted company
Meets minimum requirements of financial strength and licensing.
Has a certificate of authority.

Question 24

Unauthorized Insurers

Answer 24

Not regulated Non-admitted Surplus lines

Question 25

Domestic Insurer

Answer 25

Organized under the laws of a particular state where it is housed or domiciled. GEICO is based in DC, therefore in DC it is considered a domestic insurer

Question 26

Foreign Insurer

Answer 26

Organized under laws of some other state within the United States

Question 27

Alien Insurer

Answer 27

Organized under the laws of a county other than the United States.

Question 28

Responsibilities to Insurer

Answer 28

An agent has a fiduciary responsibility which requires a higher degree of care.

Question 29

What may you be held liable for?

Answer 29

``` Making mistakes Failure to follow company instructions Failure to disclose information Delay in forwarding information Exceeding the express or implied authority given by a company. ```

Question 30

What items can an agent be reprimanded for in not taking care of the insured?

Answer 30

``` Misrepresenting insurance coverage Failure to procure insurance Procurement of inadequate coverage Failure to inform insured of renewal Failure to investigate an insurer's financial solvency ```

Question 31

Law of Agency

Answer 31

Agents or producers represent an insurance company or insurer and usually hold a contract with that company. Independent - usually represents several insurance companies on a commission basis

Question 32

Express Authority

Answer 32

Derived from a written or oral contract between the agent and the insurance company. Describes rights and responsibilities. Issuing of binder

Question 33

Implied Authority

Answer 33

Arises out of an agent's express authority. This authority is what the agent assumes based on what he/she has been told. Advertising for the purpose of selling policies or collecting premiums.

Question 34

4 Elements of a Legal Contract

Answer 34

Consideration - both parties must assume some sort of responsibility Legal Purpose - cannot be used for illegal or immoral purpose Agreement - offer and acceptance. When an applicant for insurance submits an application, this is an offer. The insurance company has the right to either accept or deny the offer which is binding on both parties. Competent Parties - the incompetence of either party can void coverage.

Question 35

Is a binder true acceptance.

Answer 35

A binder is not true acceptance.

Question 36

Contract of Adhesion

Answer 36

A term descriptive of a standard form printed contract prepared by one party on a take it or leave it basis. Ambiguous language is always found in favor of the insured.

Question 37

Aleatory Contract

Answer 37

Equal value is not paid by each party. The premium paid does not equal the recovery amount in the event of a loss.

Question 38

Personal Contract

Answer 38

The insurer and the policyholder both consider the credit, conduct and character of the other.

Question 39

Unilateral Contract

Answer 39

A contract in which only one party makes an enforceable promise. The insured pays a premium to the insurance company based on the insurance company's promise to lay in the event of a loss.

Question 40

Conditional Contract

Answer 40

In the event of loss, both parties must still perform certain acts to make the contract legally enforceable.

Question 41

Indemnity

Answer 41

Basis of most insurance contracts. Placing insured back at the same financial position prior to the loss. It's unjust for the insured to make a profit from insurance. It's unfair for the insurer not to restore the insured to same financial position they were at prior to loss.

Question 42

Utmost Good Faith

Answer 42

Regardless of circumstances, each party in contract will assume the other is acting truthfully or in utmost good faith.

Question 43

Representations

Answer 43

Statements made by applicant to the insurance company during the process of obtaining a policy. Allow insurance company to evaluate risk. If representation is untrue, this becomes a misrepresentation.

Question 44

Concealment

Answer 44

Failure to disclose a known truth. Hiding truth can have same consequences as lying. Omission

Question 45

Fraud

Answer 45

An intentional perversion of the truth for the purpose of inducing an insurance company to accept an application or pay a claim. Misrepresentation or concealment.

Question 46

Warranties

Answer 46

Stipulations in the insurance contract that if breeched, may void the contract. Absolute rules.

Question 47

Waiver and Estoppel

Answer 47

Waiver is the relinquishment of a known right. Estoppel is the result of that waiver. For example if we waive a recorded statement, we cannot later ask for a recorded statement.