Principles of Insurance (Lesson 1) Flashcards
(79 cards)
1
Q
What type of risk is insurance used to protect against
A
pure risk
2
Q
What does insurance involve
A
the transfer of loss and the sharing of losses with others
3
Q
What is a pure risk
A
- there is a chance of loss or no loss
4
Q
What is a speculative risk
A
- there is a chance of profit, loss, or no loss
- undertaken by entrepreneurs
- is a voluntary risk and not insurable
5
Q
What is a subjective risk
A
- differs based upon an individuals perception of risk
6
Q
What is an Objective risk
A
- does not depend on an individuals perception but is measurable and quantifiable
- measures the variation of an actual loss from expected loss
7
Q
What is the definition of a probability of Loss
A
- chance of a loss occurring
- measure of the long run frequency with which an event occurs
- Useful measure for insurers because it quantifies the expected cost of claims
8
Q
What is the definition of severity
A
- actual dollar amount of loss
- more important than the probability of a loss
9
Q
What is the definition of law of large numbers
A
- specifies that when more units are exposed to a similar loss the predictability of such a loss to the entire pool increases
- law of large numbers helps reduce objective risk
10
Q
What is a peril
A
- the actual cause of a loss
11
Q
What is a hazard
A
- a condition that increases the likelihood of a loss occurring
12
Q
What are the three types of hazards
A
- Moral
- Morale
- Physical
13
Q
What is a moral hazard
A
- a character flaw
- may lead to filing a false claim
14
Q
What is morale hazard
A
- the indifference created because a person is insured
15
Q
What is a physical hazard
A
is a tangible condition that increases the probability of a peril occurring
16
Q
What is adverse selection
A
- is 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 of insured
17
Q
How is adverse selection managed
A
- through underwriting
- denying insurance on the front end
- raising premiums on the back end
18
Q
What are the requirements for an insurable loss
A
- a large number of similar exposure units
- losses must be accidental from insureds viewpoint
- losses must be measurable and determinable so that the insurer can accurately forecast actual losses
- losses must not pose a catastrophic risk for the insurer
- Premiums must be affordable
- cannot insure moral hazards
19
Q
Insurable risks are CHAD
A
- not Catastrophic
- Homogeneous exposure
- Accidental
- measurable and Determinable
20
Q
What are elements of a valid contract
A
(A legal contract requires COALL)
- Must be legal and competent parties
- offer and acceptance
- Must be legal consideration
- contract must pertain to a lawful purpose
21
Q
Is signing an application and making the first months premium payment considered a valid contract?
A
Yes as long as the applicant is insurable. Example of a conditional acceptance by the insurer
22
Q
What is the principle of indemnity
A
- insured is only entitled to compensation to the extent of the insureds financial loss
- individual cannot profit from an insurance contract
23
Q
What is the subrogation clause
A
- insured cannot receive compensation from both the insurer and a third party for the same claim
- the insurer steps into the shoes of the insured to recoup any restitution from the 3rd party or the 3rd parties insurer
24
Q
What is the principle of insurable interest
A
- insured must have an emotional or financial hardship resulting from damage, loss, or destruction
Property liability insurance
- Insured must have insurable interest at time of policy inception and at time of loss
Life insurance
- the insured only needs an insurable interest at the time of policy inception
25
What is a void contrat
void contract was never valid and thus never came into existence
26
What is a voidable contract
a contract that is a valid contract that allows cancelation by one of the parties however the other party is bound by agreement
27
What is a warranty
- is a promise made by the insured to the insurer
- A breach of warranty is grounds for avoidance
28
What are representations
- statements made by the insured to the insurer during the application process
- must be a material misrepresentation to void an insurance contract
- EX: misrepresenting age on a life insurance contract is not material misrepresentation the insurer will simply adjust your death benefit up or down
29
What is concealment
when the insured is silent about a fact that is material to the risk
30
What does adhesion mean
- policy is basically take it or leave it
- no negotiations over terms and conditions
- any ambiguities in an insurance contract are found in favor of the insured
31
What does aleatory mean
- money exchanged may be unequal
- small premiums large benefit
32
What does unilateral mean
- only one promise is made by the insurer which is to pay in the event of a loss
- insured is not obligated to pay premiums, but if premiums are not paid there is no promise by the insurer
33
What does conditional mean
- 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
34
What is a waiver
Occurs when a party relinquishes a known right
35
What is estoppel
takes place when a party is denied assertion of a right to which they are otherwise entitled
36
What are waiver provisions
insurer may seek to avoid liability associated with a loss due to their agent offering policy changes not authorized by the company
37
What is the Parol evidence rule
- once the contract is placed in written form all previous and prior understanding may not contradict the written contract
- contract reflects the complete understanding of both parties
38
What is reformation
- contractual remedy in which the contract is revised to express the original intent of all parties
39
What is recission
- deems a contract void from inception
40
What is an agent
- legal representative of the insurer
- agent enters into agreements on behalf of the insurer
41
What is a general agent
- represents one insurer such as state farm or allstate
42
What is an independent agent
- represents multiple unrelated insurers
43
What is a broker
- represents the policy owner not the insurance company
44
An agents authority to legally bind the insurer arises from these three types of authority
- Express Authority
- Implied Authority
- Apparent Authority
45
What is express authority
- given through the agency or written agreement
- insurer is responsible for acts of an agent based on express authority
46
What is implied authority
- authority that the public perceives and a valid agency agreement exists
- 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 mislead
- Is based upon the agents business card, letterhead, and insurance company sign on the door
47
What is apparent authority
- apparent authority is when the insured believes that agent has authority to act on the behalf of the insurer when in fact no authority actually exists
- could be inferred based on business cards or a sign on the wall but the agency agreement actually expired
- is basically when no authority actually exists
48
What are conditions of an insurance contract
details the duties and rights of the insured and insurer
49
What are declarations of an insurance contract
includes the name of the insured, description of the property, amount of coverage, amount of premium, term of the policy, and inception/termination date
50
What are exclusions of an insurance contract
- section outlines specifically what will not be covered
51
What are riders and endorsements of an insurance contract
- are written additions to an insurance contract
- make it possible to customize an insurance contract for items that may be limited in coverage under the normal terms and conditions of a contract
- take precedence over conflicting terms in policy
52
Is regulation done for insurance at the state or federal level
State
53
What does the legislative branch do
- provides for licensing of agents and enacts laws and requirements for doing business in a particular state
54
What does the judicial branch do
- rules on constitutionality of laws passed by the legislative branch
- render decisions and interpretations regarding policy terms
55
What does the executive or state insurance commissioner do
- administers, interprets, and enforces insurance laws
- state insurance commissioner does NOT make law
56
What are the goals of state insurance regulation
- protect the insured
- maintain and promote competition
- maintain solvency of insurers
57
What is the replacement cost of insured property
- is the current cost of replacing property with new materials of like kind
58
What is the actual cash value of insured property
- essentially replacement cost less depreciation
- can impose serious financial burden on the insured
- almost all auto policies are ACV
59
What is the agreed upon value of insured property
- value that is determined jointly by insured and insurer
- typically used for art and antiques
60
What is a deductible
- stated amount the insured must pay before the insurer will make payments
- are a form of retaining risk
61
What are copayments
- insured pays a portion of the losses incurred
- typical is 80/20, insured is responsible for 20% of expenses about deductible
62
What is Coinsurance
- Homeowners policy requires the insured to cover at least a stated precentage of the property value
## Footnote
**(Actual Coverage / Coinsurance Requirment) x Loss - Deductible**
63
What is the formula for coinsurance
80% x Replacement cost
64
(Individual Loss Exposure and How to Eliminate)
Dying Too Soon
- Not able to meet financial goals for family
- Life insurance mitigates this risk
65
(Individual Loss Exposure and How to Eliminate)
Living to Long
- outliving the funds saved for retirement
- Annuities can mitigate this risk
66
(Individual Loss Exposure and How to Eliminate)
Disability
- results in inability to work
- Disability insurance can mitigate this risk
67
What are the three ratings agencies for insurance
- AM Best (A++)
- Moody's
- Standard and Poor's
68
What does the national association of insurance commissioners (NAIC) do
- Provides a watch list of insurance companies based upon financial ratio analysis
- Ratios measure the financial health of insurance companies
- No regulatory power over the insurance industry but is involved in accrediting state insurance regulatory offices
- issues model legislation that state legislatures may or may not adopt
69
Does the NAIC have regulatory power
no
70
What are the six steps of risk management (DIEDIE)
- Determine the objectives of the risk management program
- Identify the risks to which the client is exposed to
- Evaluate the identified risks as to probability of occurrence and potential loss
- Determine alternatives for managing risks and select the most appropriate alternatives for each
- Implement the program
- Evaluate, monitor, and review
71
When should risk transferring be used
when risk is severe but frequency is low
72
When is retention or reduction appropriate
financial risk is low and frequency is high because it would be to expensive to insure
73
What are the four underwriting policy ratings for insureds
- Preferred
- Standard
- Rated
- Decline
74
What rating provides the lowest premium
Preferred
75
What is Preferred rating
- provides the lowest premium
- insured exceeds the requirements for a standard rating
76
What is standard rating
- rating reflects an average risk for the insurance company
77
What is rated rating
- will require higher premiums
78
What is Decline rating
- insurance company will not accept the risk of issuing a policy
79
What are factors effecting premiums
- Health
- Family health history
- Risk factors
- Credit rating
- Driving record
