General Insurance Flashcards
A legal representative of an insurance company
an insurance producer not appointed by an insurer and is deemed to represent the client
Insurance policy - a contract between a policyowner (and/or insured and an insurance company which agrees to pay the insured or the beneficiary for loss caused
hv specific events
the person covered by the insurance policy. This person may or may not be the policyowner
the company who issues an insurance policy
Policyowner - the person entitled to exercise the rights and privileges in the policy
- the money paid to the insurance company for the insurance policy
Reciprocity/Reciprocal - a mutual interchange of rights and privileges
is 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. If there were no insurance mechanism, the cost of a loss would have to be borne solely by
the individual who suffered the loss.
is the uncertainty or chance of a loss occurring. The two types of risks are pure and speculative, only one of which is insurable.
Types of risk
Peril and speculative
risk refers to situations that can only result in a loss or no change. There is no opportunity for financial gain. Pure risk is the
only type of risk that insurance companies are willing to accept.
Perils are the causes of loss insured against in an insurance policy.
Speculative risk involves the opportunity for either loss or gain. An example of speculative risk is gambling. These types of risks
are not insurable.
Hazards are 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. Hazards are classified as physical hazards, moral
hazards; or morale hazards.
• Physical hazards are those arising from the material, structural, or operational features of the risk, apart from the persons owning
or managing it.
Moral hazards refer to those applicants that may lie on an application for insurance, or in the past, have submitted fraudulent
claims against an insurer.
Morale hazard refers to 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.)
Loss is defined as the reduction, decrease, or disappearance of value of the person or property insured in a policy, caused by a named
peril. Insurance provides a means to transfer loss.
Exposure is a unit of measure used to determine rates charged for insurance coverage. In life insurance, all of the following factors are considered in determining rates: • The age of the insured; Medical history; Occupation; and • SAy A large number
A large number of units having the same or similar exposure to loss is known as homogeneous. The basis of insurance is sharing risk
among the members of a large homogeneous group with similar exposure to loss.
Methods of Handling Risk
Avoidance Retention Sharing Reduction Transfer
One of the methods of dealing with risk is avoidance, which means eliminating exposure to a loss. For example, if a person wanted to
avoid the risk of being killed in an airplane crash, he/she might choose never to fly in an airplane. Risk avoidance is effective, but
Risk retention is the planned assumption of risk by an insured through the use of deductibles, co-payments, or self-insurance. It is
also known as self-insurance when the insured accepts the responsibility for the loss before the insurance company pays. The
purpose of retention is
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.
Sharing is 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 arrangement.
Since we usually cannot avoid risk entirely, we often attempt to lessen the possibility or severity of a loss. Reduction would include
actions such as installing smoke detectors in our homes, having an annual physical to detect health problems early, or perhaps mak
a change in our lifestyles.
The most effective way to handle risk is to transfer it so that the loss is borne by another party. Insurance is the most common
method of transferring risk from an individual or group to an insurance company. Though the purchasing of insurance will not
eliminate the risk of death or illness, it relieves the insured of the financial losses these risks bring.
There are several ways to transfer risk, such as hold harmless agreements and other contractual agreements, but the safest and most
common method is to purchase insurance coverage.