Defining Insurance & Risk

Question 1

Insurance

Answer 1

A social device for transferring risk through an accumulation of funds

Question 2

Policy

Answer 2

Contract between the policyowner and the insurance company

Question 3

Premium

Answer 3

Method of compensation a policyowner pays to the insurer

Question 4

Speculative Risk

Answer 4

Type of risk that involves both the chance of loss and gain

Gambling

Question 5

Pure Risk

Answer 5

Type of risk that only involves the possibility of loss. Creates a financial loss so it is insurable

Question 6

Risk Avoidance

Answer 6

The act of avoiding or eluding a risk

Someone afraid of car wreck so they only walk to their destination

Question 7

Risk Reduction

Answer 7

Reducing risk

Only driving on vacant roads on sunny days

Question 8

Risk Retention

Answer 8

Retaining the possibility of loss

Driving w/o insurance

Question 9

Risk Sharing

Answer 9

Pooling the risk with a large number of people

Question 10

Risk Transfer

Answer 10

Shifting a risk to another

Basis for Insurance

Question 11

Elements of Insurable Risk

Answer 11

1. The loss must be Predictable
2. The loss must be definite, can place a price on the loss
3. The loss must be due to chance
4. The loss cannot be catastrophic, not a result of war or “Acts of God”
5. The loss exposure must be large, There must be a large number of people that can potential experience the same loss

Question 12

Stock Insurance Company

Answer 12

Considered a non-par company because the policyowners do not participate in dividends. Owned by the stock holders of the company

Question 13

Mutual Insurance Company

Answer 13

Policyowners own the company so they “Par”-ticipate in dividends that are due from overpayment of dividends.
Considered a Mutual Company

Question 14

Government Insurers

Answer 14

Rely on tax dollars to fund social Insurance programs

ie, SSI, Medicaid and Medicare, Worker’s Comp.

Question 15

Authorized Company

Answer 15

An insurer licensed to transact insurance in Michigan, admitted to do business in the state

Question 16

Unauthorized Company

Answer 16

An insurer not licensed to transact business in Michigan

Question 17

Adverse Selection

Answer 17

When the insurer has a selected a less than average risk that may result in increased claims and reduced profitability

Question 18

Underwriter

Answer 18

a person who conducts the underwriting process for the insurer to guarantee that all applicants satisfy the company’s minimum insurability and underwriting requirements

Question 19

Insurable Interest

Answer 19

a financial connection between the policy owner and the insured at the time of inception of the policy.

Mother on child
Husband on wife
Business partner on business partner or key employee

Question 20

Avocation

Answer 20

An applicants hobbies

Question 21

Medical Information Bureau

Question 22

Standard Risk

Answer 22

Average Risk

Question 23

Substandard Risk

Answer 23

Less than average risk

Question 24

Preferred Risk

Answer 24

Risk that exceeds the insurers average risk requirements, usually will pay a lower premium than standard risk

Question 25

Uninsurable

Answer 25

Cannot be insured

Question 26

Expressed Authority

Answer 26

Written Authority in the agents agreement

Question 27

Implied Authority

Answer 27

Authority assumed or implied for the agent to do their job | -an agent has the authority to collect payment for the policy

Question 28

Offer and Acceptance

Answer 28

Constitutes agreement between the parties in the insurance contract. -a policy owner gives their premium and the insurer provides a policy

Question 29

Consideration

Answer 29

Something of value that must be exchanged between the parties of the contract

Question 30

Consideration

Answer 30

Something of value that must be exchanged between the parties of the contract The insured provides the premium and the insurer provides the policy

Question 31

Competent Parties

Answer 31

Of legal age, usually 18, and mentally competent. Not under the influence of drugs or alcohol

Question 32

Personal Contract

Answer 32

Insurance Contracts are personal in nature

Question 33

Conditional Contract

Answer 33

Certain conditions or losses must be met before a claim can be paid

Question 34

Aleatory Contract

Answer 34

Equal value is not given to both parties of the contract. A one sided contract

Question 35

Contract of Adhesion

Answer 35

The contract and its provisions are prepared by one party, the insurer

Question 36

Ambiguities

Answer 36

vagueness or uncertainties in the contract will be in the favor of that party that did not create the contract, the insured individual

Question 37

Unilateral Contract

Answer 37

Only the insurer must abide by the terms of the contract

Question 38

Valued Contract

Answer 38

Pays a specified amount that is stated on the policy

Question 39

Indemnity Contract

Answer 39

Pays an equal amount equivalent to the loss, The insured is restored to the same financial condition as before the loss

Question 40

Waiver

Answer 40

Giving up of a known or legally enforceable right

Question 41

Estoppel

Answer 41

One party is prevented from asserting a right that would be to the detriment of another party

Question 42

Warranty

Answer 42

A statement that is guaranteed to be True

Question 43

Representation

Answer 43

Statement by the applicant that is believed to be true

Question 44

Concealment

Answer 44

The applicant failing to disclose a known material fact in an application Considered defrauding the insurer

Question 45

Fraud

Answer 45

- in the event of fraud the contract is null and void | - the insurer has a limited time, usually 2 years, to challenge fraudulent statements

Question 46

Entire Contract

Answer 46

Policy, a copy of the application and any policy amendments

Question 47

Free Look

Answer 47

The right to look/ review the policy for free with a return of premiums paid within a certain period of time

Question 48

Grace Period

Answer 48

Period of time that the policyowner has to pay the premium after the due date

Question 49

Other Insurer Provision

Answer 49

Allows insurer to control over insurance with other insurers, prevents over insurance

Question 50

Other Insurance in this Insurer

Answer 50

Controls over insurance from an insurer through its own policy

Question 51

Elimination Period

Answer 51

Period of days that must occur after the onset of an illness or occurrence of an accident before benefits are payable