Lesson 2: Insurance Basics - a Safety Net

Question 1

Insurance

Answer 1

a contract, called a policy, in which an individual or organization receives financial protection and reimbursement of damages from the insurer or the insurance company. At a fundamental level, it provides some form of protection from any possible financial loss.

Question 2

Insurance used to hedge againsy

Answer 2

the risk of a contingent or uncertain loss

Question 3

Structure coverage

Answer 3

Structure coverage helps protect the physical structure of a home, like the walls and roof.

Question 3

Alien insurers

Answer 3

formed in another country

Question 4

Indirect loss

Answer 4

Indirect loss is an expense caused by damage or injury to covered people or property, which is beyond the scope of the covered damage. This expense is attributable to the covered loss but is not part of the covered loss itself.

Question 4

Personal Property coverage

Answer 4

Personal property covered in a typical homeowners insurance policy may include:

Indoor and outdoor furniture
Clothing
TVs
Kitchen appliances
Bikes
Rugs
Lawn care equipment
Trampolines

Question 4

Direct Loss

Answer 4

Direct loss is damage to covered real or personal property caused by a covered peril.

Question 5

Personal insurance

Answer 5

Personal insurance refers to any insurance that covers individuals or families. Example: auto, boat, or homeowners insurance. Personal lines of insurance also include damages where you are held liable.

Question 6

Commercial insurance

Answer 6

Commercial insurance refers to insurance sold to businesses and other commercial entities. Example: commercial lines of insurance typically cover property, offices, auto, inventory, and professional liability.

Question 7

Reciprocal Insurance company

Answer 7

owned by their members/subscribers. Deals only with P&C insurance, no life and health. Example USAA

Question 8

mutual company

Answer 8

insurance co owned entirely by its policyholders. Profits are retained by company or rebated to policyholders via dividend distributions or reduced premiums. NONPROFIT

Question 8

Fraternal insurance company

Answer 8

members of the org can choose to purchase a policy that is underwritten for the entire group; like group insurance cov through employers

Question 9

Lloyds of London

Answer 9

British insurance market where members ‘join hands’ as syndicates to insure and spread risks of different businesses, orgs, and individuals. Syndicates are specialized in different ty pes of risk; offers membership to wealthy individuals

Question 9

Govt insurance

Answer 9

state-created insurance meant to provide coverage for citizens. May have private partners. It can be mandatory or can act as a govt counterpart to a private insurer. Govt insurance is largest provider of insurance of coverages like social security, Medicare, Medicaid, flood, and nuclear insurance

Question 10

Stock company

Answer 10

corporation owned by its stockholders or shareholders, and objective is to make a profit for them, Policyholders don’t share in the profits or losses of the company directly

Question 11

Speculative Risk

Answer 11

Speculative risk is a category of risk that can be taken on voluntarily and will either result in a profit or loss. All speculative risks are undertaken as a result of a conscious choice: loss, gain, or stays the same. Example: Gambling would be an example of speculative risk.

Question 11

Foreign Insurers

Answer 11

Foreign carriers are formed in another state. State Farm is domestic to Illinois but foreign to all the other states.

Question 11

Domestic Insurers

Answer 11

Domestic insurers refer to companies formed under the laws of the state where they are home-based (domiciled) and charted. Example: Georgia Farm Bureau is domestic to Georgia but foreign to all other states.

Question 11

Admitted vs. Non-Admitted Companies

Answer 11

Admitted Companies are approved and authorized to conduct business in the state. These carriers are backed by a solvency fund that pays losses to the insured if the company goes out of business. Non-Admitted Companies are available when there is a hard-to-place or an unusual type of high-value risk.

Question 12

Regulation of Insurance

Answer 12

States have licensing jurisdiction. The McCarran-Ferguson Act gives states the power to regulate insurance laws. However, the federal government has the power of oversight and can intervene in instances where states do not do an adequate job.

Question 12

Two Chief Characteristics of Insurance:

Answer 12

1. Transfer of Risk from the individual to the insurance company who now has the risk.
2. Sharing In Losses among all those who have exposures. Example: Everyone who drives a high-performance vehicle may carry a similar type of insurance with a similar premium.

Example A: Youthful males typically have similar characteristics when driving a vehicle. They all pay like or similar premiums. This is an example of shareable.
Example B: In a hurricane-prone area, when a disaster occurs, 5% of houses may be damaged, while 95% are not damaged. All of the residents in the area will pay premiums that cover that peril: hurricane damage. This is sharing in losses.
Sample Premium:
A house with a replacement value of $100,000
It is insured for: $100,000
The premium is: $300

Question 13

Fair Reporting Act

Answer 13

A consumer reporting agency is often hired to obtain information (such as personal character, reputation, habits, lifestyle, and credit) when an individual applies to an insurance company. The Fair Credit Reporting Act regulates the collection of consumer credit information. It protects consumers by requiring notifications when credit inquiries are made, and by establishing provisions for removing outdated or inaccurate information on an applicant’s credit report.

Question 13

Indirect Loss

Answer 13

In business insurance policies, indirect losses are often referred to as “consequential losses.” Losses not inflicted by the peril itself but constitute losses suffered as a result or consequence of the direct loss. Example: An indirect loss is the consequence of a direct loss, such as the need to stay in a hotel after your home floods.

Question 13

Avoidance

Answer 13

The technique of risk management involves taking steps to remove a hazard or engaging in an alternative activity.

Question 14

Pure risk

Answer 14

Pure risk is defined as an event/threat beyond human control that, if it occurs, has only one possible outcome: loss. There is no possibility of gain.

Question 15

Direct loss

Answer 15

A direct loss is damage to covered real or personal property caused by a covered peril. Direct loss coverage includes the cost to replace or rebuild.

Question 16

Managing risk

Answer 16

avoidance, reduction and control, retention, transfer

Question 16

Retention

Answer 16

Planned acceptance of losses by deductibles, deliberate non-insurance, and loss-sensitive plans where some, but not all, the risk is consciously retained rather than transferred.

Question 17

Reduction and control

Answer 17

Risk management technique that reduces financial losses by implementing measures that will prevent actualizing risks.

Question 18

Transfer of risk

Answer 18

Risk management and control strategy that involves the contractual shifting of a pure risk from one party to another.

Question 19

Indemnification

Answer 19

Indemnity is a contractual obligation of one party to compensate for the loss incurred by the other party due to the acts of the Indemnitor or any other party. The duty to indemnify is usually, but not always, coextensive with the contractual duty to “hold harmless” or “save harmless.” Must be shown at the time of loss. There can be more than one entity with insurable Interest. The policy must reflect the insurable interest.

Question 20

Named Peril

Answer 20

A property insurance term referring to policies that provide coverage only for loss caused by the perils specifically listed as covered. It contrasts with all risks coverage, which applies to loss from all causes not specifically listed as excluded.

Question 21

Open Perils

Answer 21

Refers to property insurance that insures against loss to covered property from all causes except those that are specifically excluded.

Question 22

Moral hazard

Answer 22

when someone has a lack of character

Question 23

Morale hazard

Answer 23

when someone has an attitude of indifference

Question 24

physical haards

Answer 24

tangible hazards that increase the possibility of loss

Question 25

legal hazard

Answer 25

rise in the chance of a loss due to legal action

Question 26

Loss Valuation

Answer 26

valuation of loss refers to the process of applying a monetary value to property loss. After a policyholder files a claim, the valuation helps insurers determine the appropriate compensation to repair or replace damaged property, within the limits of the policy.

Question 27

replacement cost

Answer 27

The replacement cost is the actual cost to replace an item or structure at its pre-loss condition. $20k to replace damaged roof, ins co pays $20k

Question 28

ACV

Answer 28

The Actual Cash Value (ACV) is not equal to replacement cost value (RCV). ACV is computed by subtracting depreciation from replacement cost. costs $24k to replace roof, but roof is 10 years old so has depreciated, so only pay $20k to replace bc that’s what it costs

Question 29

market value

Answer 29

The market value is the price an insured asset in its current state would be able to command in a competitive market setting from a willing buyer.

Question 30

stated value

Answer 30

Stated value is the amount of coverage limits that the insured wants and selects, example $250,000 on the dwelling. An agreed-upon property value at beg. of policy period

Question 31

agreed value

Answer 31

Agreed Value is the amount both an insured and the insurer agree will be paid in case of a loss, example Antiques $575,000.

Question 32

value policy

Answer 32

A valued policy is an insurance policy in which the amount payable for a claim is agreed upon when the policy is issued and is not related to the actual value of a loss.. Ex. if house destroyed, ins co pays value of policy

Question 33

apportionment

Answer 33

when more than 1 ins co covers structure

Question 34

subrogation

Answer 34

the legal right held by most insurance carriers to legally pursue a third party that caused an insurance loss to the insured. It ensures insurer’s right of recovery. (car wreck; ins co’s pay, then go after each other)

Question 35

Proximate cause

Answer 35

Proximate cause means “legal cause,” or one that the law recognizes as the primary cause of the injury. It may not be the first event that set in motion a sequence of events that led to an injury, and it may not be the very last event before the injury occurs.