General Terms Flashcards
(38 cards)
Indemnity vs Valued Contract
Indemnity contract: reimbursement of actual losses
Valued contract: bases benefits on a stated amount without regard for the value of the loss.
Medical expense insurance policies are indemnity contracts—the benefit cannot be greater than the actual loss. Life insurance policies are valued contracts that guarantee payment of a stated sum regardless of the perceived “worth” of the insured.
Errors and omissions (E&O) insurance
Liability insurance that protects producers from liability that may arise due to professional services they rendered in error or failed to render.
E&O coverage does not protect against willful misconduct. It will protect the producer who is sued because a mistake was made; it will not protect the producer who willfully engages in an unfair trade practice.
Reinsurance
The insurer looking to spread some of the risk is the ceding company. The insurer accepting the risk is the reinsurer. The ceding company pays a premium to the reinsurer for its coverage. When a reinsured loss occurs, the reinsurer pays its share of the claim to the ceding company.
The process through which insurance companies spread large risks among other insurers.
Law of Large Numbers
A mathematical principle that is the basis for predicting the odds of a loss occurring in a certain population in any given year.
*The law of large numbers does not predict who will suffer a loss, only the odds of a loss. While it’s impossible to predict with certainty if any one individual will die this year, it is possible to predict how many will die this year out of a group of 100,000 people born in a certain year.
Domestic, Foreign, and Alien Insurers
Insurers can be categorized by their state of domicile. There are three categories, known as _____, _____, and _____.
*Example: Excel Insurance Co. is chartered in Delaware, where Excel is considered a domestic company. In Illinois or any other state where Excel is admitted to sell insurance, it is a foreign company. In Canada or any other country, it is an alien company.
Contract of adhesion
A type of contract in which one party drafts the terms that must be accepted as-is by the other party.
*Insurance policies are contracts of adhesion. Because applicants for insurance have no input in the drafting of the insurance contract’s language, ambiguities in the contract are legally interpreted to the benefit of the policyowner.
Peril and Hazard
Two related general insurance terms:
- Peril is the immediate cause of a loss (and the event that is insured against).
- Hazard is any condition that increases the risk of incurring a loss.
As the immediate cause of a loss, a peril is the event that insurance protects against. A hazard increases the chance of encountering a peril.
Peril: death, disability, accidental Injury, illness
Hazard: smoking, excessive drinking, speeding
Mutual Insurance Company
A form of insurance company that is owned by policyowners. May distribute policy dividends (non-taxable) through participating policies.
*While structured in many ways like a corporation, a mutual insurance company does not issue stock and is owned by policyowners, whose evidence of ownership is the policy.
Concealment
The willful nondisclosure of material facts on an application for the purpose of obtaining insurance.
*Concealment is the deliberate withholding of material facts when applying for insurance, and is a form of fraud. Concealed facts give the insurer grounds to void the insurance contract provided it is discovered within the policy’s contestability period.
Stock Insurance Company
A form of insurance company that is owned by stockholders who may or may not also be policyowners. May distribute stock dividends (taxable).
*Like all forms of corporations, stock insurance companies may be privately held or publicly traded.
Buyer’s Guide and Policy Summary
Two related disclosure documents that are required by most states to be presented to life and health insurance applicants at some point during the buying process.
The Buyer’s Guide, given at the beginning of the buying process, explains the general features and conditions of the type of insurance being considered. The policy summary, given with the signed application, provides detailed information about the policy being purchased.
Risk Management
The natural process by which people contend with the perils faced daily, of which there are five common techniques.
1. Avoidance
2. Reduction
3. Retention
4. Sharing
5. Transfer
Selecting a higher deductible amount is essentially a risk retention technique.
Medicare
A federal insurance program that provides medical care benefits to covered workers (retirees).
Medicare has evolved over the years and now includes four parts:
A Hospital care
B Physician and lab care
C A managed care alternative to Parts A and B
D Drugs
Morbidity table
A table, compiled by health insurance company actuaries, showing the likelihood of becoming disabled or seriously ill because of sickness or accident at any age up to 100.
Morbidity rates also indicate how long a disability is expected to last.
NAIC
National Association of Insurance Commissioners (NAIC) represents the insurance department of every state, the District of Columbia, and several U.S. territories. It meets to promote uniformity through development of model insurance regulations.
While states are not required to adopt NAIC model regulations, most do adopt them in some form.
Agents vs. Brokers
Two basic types of insurance producer: an ____ represents a single insurer and a ____ sells policies from multiple insurers.
Insurance companies may use either of two types of representatives to sell their insurance products: agents (who sell only that company’s products) and brokers (independent producers who sell insurance products for a number of different companies). The term producer refers to both types.
Loss
An unplanned reduction in economic value resulting from the occurrence of a covered peril.
Direct loss: death, disability
Indirect loss: loss of income due to death or disability
A direct loss is the immediate result of an event involving an insured peril. An indirect loss is more remote but may still be considered an insured loss.
Risk Retention Group
(RRG)
A group of businesses or professional firms that self-insure their life and health insurance needs and use the services of an insurance company to manage the administrative tasks of doing so.
Risk retention groups give companies the infrastructure support needed to successfully self-insure their risks. RRGs were created through the federal Risk Retention Act of 1986. The Act requires that an RRG follow the insurance laws of the insurer’s state of domicile. It also requires that RRG members share a common business, occupational, or professional relationship.
The five basic elements of a valid contract
- Offer
- Acceptance
- Consideration
- Competent parties
- Legal purpose
An applicant makes an insurance offer, which results in a contract (policy) only if the offeree (insurer) accepts the offer (application). The applicant’s consideration is the signed application and payment of the first premium.
Insurable Risk (5 Criteria)
Not all risks are insurable. Those that meet five insurability criteria are known as an ____ risk.
To be insurable:
- Loss must be definable and measurable
- The covered peril must be accidental or outside the insured’s control.
- The risk must be shared by a large group of similar risks.
- The loss must not be catastrophic.
- The risk must not be generally excluded from coverage.
Underwriting
The process by which an insurance company assesses an application to determine if it represents an insurable risk.
If the risk is deemed insurable, the underwriter also determines the proper premium for that particular applicant using rates compiled by the company’s actuaries.
Mortality table
A table, compiled by insurance company actuaries, showing the predicted number of deaths at every age from birth to age 100 (or, increasingly, age 120).
A mortality table shows the number of deaths that can be expected out of a starting group of people at birth. Mortality rates generally decrease from age 1 to age 21, then begin to increase progressively so that by age 100 (or 120) all people in the starting group are presumed to have died.
Admitted Insurer
An insurer that has a certificate of authority in a given state is said to be an ____ insurer in that state.
A non-admitted insurer is a legitimate company that does not hold a certificate of authority in a particular state.
Surplus (excess) lines insurance
A market for insurance, using non-admitted insurers, that is not available through any admitted companies in a state.
Surplus lines brokers are authorized to look to non-admitted insurers outside of the state for coverage not available in-state. Though the insurer may not be admitted in a state, the products it sells through a surplus lines broker must be approved by the insurance department of that state. Also called excess lines insurance, surplus lines insurance is more common with property and casualty insurance than with life and health insurance.
