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CFP - INSURANCE > Principles of Insurance (L1) > Flashcards

Principles of Insurance (L1) Flashcards

1
Q

Insurance

A
  • Used as protection against financial loss
  • Only used to protect against “Pure Risk”
  • Pure Risks simply create either a financial loss or no loss
    ○ EXAMPLE: House fires, auto accidents, and personal illness
  • Involves the transfer of loss and the sharing of losses with others.
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2
Q

Pure Risk

A
  • Chance of Loss or NO Loss
    ○ Death
    ○ Auto accident
    ○ House fire
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3
Q

Speculative Risk

A

○ Chance of Profit, Loss, or No Loss

○ Generally undertaken by ENTREPENUERS

○ Generally VOLUNTARY Risk and NOT MEASURABLE

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4
Q

Subjective Risk

A

Differs based upon an Individuals perception of risk

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5
Q

Objective Risk

A

○ Does NOT depend on an individual’s perception, but is measurable and quantifiable

○ Measures the variation of an actual loss from expected loss

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6
Q

Understanding Risk

A
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7
Q

Perils

A

○ Actual cause of a loss

○ Fire, wind, tornado, earthquakes, burglary, and collision

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8
Q

Hazard

A
  • A condition that increases the likelihood of a loss occurring
  • 3 TYPES of hazards
    ○ Moral
    ○ Morale
    ○ Physical
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9
Q

Moral Hazard

A

Character Flaw (leads to filing a false claim)

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10
Q

Morale Hazard

A

The indifference created because a person is insured

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11
Q

Physical Hazard

A

A tangible condition that increases the probability of a peril occurring

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12
Q

Adverse Selection

A
  • The tendency of persons with higher-than-average risks to purchase or renew insurance policies
  • Premiums are dependent upon a balance between favorable and unfavorable risks in the pool
  • Managed through:
    ○ Underwriting
    ○ Denying insurance on the front end
    ○ Raising premiums on the back end
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13
Q

Insurable Losses

A
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14
Q

Legal Principles of All Contracts

A

Elements of a Valid Contract (COALL)

○ One party must make an offer and the other party must accept that offer
§ “in-force” = policy is delivered and first premium is paid

○ There must be legal competency of all parties involved in a contract
§ 18 years or older

○ There must be legal consideration. Consider is whatever is being exchanged (money, services, or property)

○ The contract must pertain to a lawful purpose

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15
Q

Legal Principles of Insurance Contracts

A

The Principal of Indemnity

Subrogation Clause

The Principle of Insurable Interest

Void contract

Voidable Contract

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16
Q

The Principal of Indemnity

A

○ Insured in only entitled to compensation to the extent of the insured’s financial loss

○ Insured CANNOT make a profit from an insurance contract

17
Q

Subrogation Clause

A

○ Insured CANNOT receive compensation from both the insurer and a third party for the same claim.

○ Insurer “steps into the shoes” of the insured to recoup any restitution from the 3rd party or 3rd party’s insurer

18
Q

The Principle of Insurable Interest

A
  • Insured must have ab emotional or financial hardship resulting from damage, loss, or destruction
  • Property and Liability Insurance
    ○ The insured must have insurable interest at time of policy
    INCEPTION and at TIME OF LOSS
  • Life Insurance
    ○ The insured only needs an insurance interest at the time of
    policy inception
  • Life insurance policies are consider long-term investments
19
Q

Void vs Voidable

A
  • Void contract
    ○ Was never valid and thus never came into existence
    ○ It is NOT enforceable contract since it lacks one of the four
    elements of COALL
  • Voidable Contract
    ○ A valid contract that allows cancellation by one of the parties
    however the other party is bound by agreement
20
Q

Principal of Utmost Good Faith

A
21
Q

Distinguishing Characteristics of Insurance Contracts

A

Adhesion

Aleatory

Unilateral

Conditional

22
Q

Adhesion

A
  • “take it or leave it” insurance policy.
    ○ There are no negotiations over terms and conditions
  • Any ambiguities in an insurance contract are found in favor of the insured
23
Q

Aleatory

A
  • The money exchanged may be UNEQUAL.
    ○ Small Premiums but the insured may receive a Large Benefit
24
Q

Unilateral

A
  • Only 1 promise is made by the insurer which is to pay in the event of a loss.
  • Insured is NOT obligated to pay premiums
    ○ If premiums are NOT paid, then there is no promise by the
    insurer
25
Q

Conditional

A

○ The insured must abide by the terms and conditions of the insurance contract.

○ If the terms and conditions are NOT followed, the insurer may not pay a claim

26
Q

Contract Rights and Provisions

A
27
Q

Contracts: Dispute Remedy

A
28
Q

Law of Agency

A
  • Agent
    ○ A legal representative of the insurer
  • General Agent
    ○ Represent ONE insurer
  • Independent Agent
    ○ Represents multiple, unrelated insurers
  • Broker
    ○ Represents the policy owner, NOT the insurance company
29
Q

Express Authority

A

○ Given through agency or written agreement

○ Insurer is responsible for acts of an agent based on express authority

30
Q

Implied Authority

A

○ Authority that the public perceives, and a valid agency agreement exists

○ The actual delivering of an insurance contract and accepting a premium is an example of implied authority

○ Insurer is still responsible even if a client is misled

31
Q

Apparent Authority

A

○ When the insured believes that agent has authority to act on behalf of the insurer when in fact, no authority actually exists.

○ Apparent Authority could be inferred based on business cards or a sign on the wall, but the agency agreement actually expired

○ If an agent represents that insured can pay premium late, but is wrong, then the insurer is still responsible

32
Q

Insurance Industry Regulations

A
33
Q

Valuation of Insurance Losses

A
34
Q

Important Features on Insurance Contracts

A
35
Q

Individual Loss Exposure and Insurance Contracts

A
  • Perils that can REDUCE/ELIMINATE the ability to earn
    ○ Dying too soon
    ○ Living to long
    ○ Disability
  • Perils that can Destroy/Deplete Existing Assets
    ○ Damage to Property
    ○ Legal Liability for injuries inflicted upon others
36
Q

National Association of Insurance Commission (NAIC)

A
37
Q

6 steps of Risk Management

A
38
Q

Risk Management Guidelines

A
  • Avoidance for the most serious type of risks
  • Risk transfer is using insurance where the financial risk is severe, but her frequency is low
  • Retention or reduction is appropriate where the financial risk is low, and frequency is high because it would be too expensive to insure.
39
Q

General Insurance UNDERWRITING

A

CFP - INSURANCE (4 decks)

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