TX ALL LINES ADJUSTER COURSE Flashcards
WHAT IS THE CONCEPT OF INSURANCE?
Through insurance, an individual or group can transfer to an insurance company (“insurer”) the risk of financial loss from a destructive event.
WHAT IS THE FUNDAMENTAL PURPOSE OF INSURANCE?
The fundamental purpose for insurance is to indemnify policyholders against covered losses, that is, to restore them to the same financial position they were in before the loss.
WHAT ARE THE 5 BASICS CONCEPTS OF INSURANCE?
- risk
- loss
- exposure
- peril
- hazard
WHAT DOES RISK MEAN IN THE INSURANCE WORLD?
Risk means the “chance of loss.” The uncertainty of loss is the basic reason for insurance’s existence.
Insurance companies may also use the term “risk” to refer to the insured person, property, or activity.
WHAT DOES LOSS MEAN IN THE INSURANCE WORLD?
A loss is an unwelcomed and unplanned reduction in economic value.
WHAT ARE THE 2 TYPES OF LOSSES IN THE INSURANCE WORLD?
A loss can be either direct or indirect
WHAT IS A DIRECT LOSS? GIVE AN EXAMPLE
A direct loss is the immediate result of an event caused by a covered peril. Ex: Fire
WHAT IS AN INDIRECT LOSS? GIVE AN EXAMPLE
• An indirect loss is a more remote ramification than a direct loss, but is still a result of loss from a covered peril.Ex: ADDITIONAL LIVING EXPENSES
WHAT DOES EXPOSURE MEAN IN THE INSURANCE WORLD? GIVE AN EXAMPLE
Exposure is the state of being subject to a possible loss. For example, a motorist is exposed to the risk of being involved in an auto accident that could result in damage to the car, serious injury, lawsuits, or even death.
The term “exposure” also refers to the total extent of risk an insurer faces with an insured. For example, an insurance company that sells workers compensation insurance faces increased exposure as an insured business’s workforce increases.
HOW DO INSURERS MEASURE EXPOSURE?
Insurers measure exposure by assigning exposure units to the person, property, or event for which insurance is being sought. Exposure units are influenced by the insured item’s market value and risk factors facing it.
WHAT IS A PERIL? GIVE AN EXAMPLE
A peril is the destructive event that insurance guards against. Examples include: • fire • explosion • windstorm • flood • theft • collision
DOES INSURANCE COMPANIES PROVIDE INSURANCE TO ALL TYPE OF LOSSES?
An insurance policy provides financial protection against losses caused by specified perils. These are commonly called covered perils.
WHAT IS A HAZARD?
A hazard is a condition that increases the likely occurrence of a peril or the likely severity of a loss.
WHAT ARE THE 3 TYPES OF HAZARDS?
MORAL, MORALE AND PHYSICAL
WHAT ARE MORAL HAZARDS? GIVE AN EXAMPLE
Moral hazards are the tendencies or traits of an individual that increase the chance of a loss. Ex: Alcoholism, smoking, and bad credit
WHAT ARE MORALE HAZARDS? GIVE A EXAMPLE
Morale hazards are also individual tendencies, but they arise from a state of mind, attitude, or indifference to loss. Not locking one’s car
WHAT ARE PHYSICAL HAZARDS?
Physical hazards are physical conditions that increase the chance of loss.
WHAT ARE LEGAL HAZARDS?
Legal or regulatory environment characteristics that affect an insurer’s ability to provide insurance at a premium that fairly reflects its loss exposures.
WHAT ARE FIVE WAYS TO MANAGE RISK?
- avoiding the risk
- controlling (reducing) the risk
- sharing the risk
- retaining the risk
- transferring the risk
WHAT IS RISK AVOIDANCE IN RISK MANAGEMENT? GIVE AN EXAMPLE
One way to manage a risk is simply to avoid it. For example, those who do not own a car avoid the risk of having a car being stolen or damaged.
WHAT IS RISK CONTROL IN RISK MANAGEMENT?
If risk cannot be avoided, it may be controllable through risk prevention or risk reduction measures
UNDER THE TERM RISK CONTROL, HOW IS RISK PREVENTION MEASURED? GIVE AN EXAMPLE
Risk prevention measures reduce the likelihood that a loss will occur. For example, shoveling snow off a sidewalk makes it less likely a visitor will slip and fall.
UNDER THE TERM RISK CONTROL, HOW IS RISK REDUCTION MEASURED? GIVE AN EXAMPLE
• Risk reduction measures reduce the severity of any loss that does occur. Having fire extinguishers does not keep fires from starting, but when available and used, they often limit fire damage.
WHAT IS RISK SHARING IN RISK MANAGEMENT? GIVE AN EXAMPLE
Groups share the financial burden of a loss suffered by any member of the group. EX POOLING IS A MODERN EXAMPLE OF RISK SHARING. Groups of cities or other municipalities may organize a formal arrangement by which they share one another’s losses of a common nature (e.g., flooding) through pooled resources.
WHAT IS RISK RETENTION IN RISK MANAGEMENT? GIVE AN EXAMPLE
Risk retention is simply accepting a risk and dealing with a loss using personal funds.
With insurance policies, deductibles are a risk retention device. Deductibles shift small losses to the policyowner, leaving the insurance to cover more serious losses.
WHAT IS RISK TRANSFER IN RISK MANAGEMENT? GIVE AN EXAMPLE
Transferring the risk of loss to a third party—is the basis for most insurance today. . In exchange for paying a premium, an individual or business can transfer the risk of loss to an insurance company through an insurance policy.
WHAT IS A INSURABLE RISK?
ONLY PURE RISK ARE INSURABLE
ARE ALL PURE RISK INSURABLE?
NO, IN ORDER TO BE INSURABLE A RISK MUST CONFORM TO THE FOLLOWING STANDARDS AND REQUIREMENT
- A covered loss must be definite as to time, cause, and location. It must be clear that a covered loss has occurred.
- The value of the item to be insured must be measurable. Without this, it would not be possible to determine premium rates and claim amounts.
- The insured event must be accidental or outside the insured’s control. Only losses that occur due to chance are insurable.
- MUST NOT BE A CATASTROPHIC EVENT SUCH AS, WAR OR MASSIVE EARTHQUAKE
- The risk must be part of a large group of similar risks that the insurance company can use to predict future losses.
- Only pure risks (e.g., the risk of a house burning) are insurable; speculative risks are not.
Speculative risks—those that offer the chance of gain as well as loss—are not insurable. It is not insurance’s role to protect a person’s loss in situations where the result may just as easily had been a gain, such as gambling
Pure risk involves only the chance of a loss. Gain is not possible such as the possibility of loss of a home as a result of a fire
WHAT DOES ADVERSE SELECTION MEAN? GIVE AN EXAMPLE
Adverse selection means to “select against.” It is the tendency of those at greater-than-average risk of loss to seek insurance. In other words, people who are at the greatest risk of loss are also the ones most likely to do whatever is necessary to buy insurance to cover that loss.
WHAT IS A IMPORTANT FUNCTION OF THE UNDERWRITING PROCESS?
An important function of the underwriting process is to protect the insurer against adverse selection.
WHAT IS THE LAW OF LARGE NUMBERS?
Insurance is largely based on statistics, probabilities, and averages that are wrapped up in the law of large numbers.
WHY DO INSURANCE COMPANIES USE THE LAW OF LARGE NUMBERS?
The law of large numbers makes it possible for insurance company actuaries (i.e., insurance mathematicians) to predict losses among a group of similar risks, as long as there are a sufficiently large number of risks to observe.
WHAT ARE THE TWO TYPES IF PROPERTY AND CASUALTY INSURANCE?
- stock insurance companies
* mutual insurance companies
WHAT ARE OTHER TYPES OF INSURANCE?
- reciprocal insurers
- fraternal benefit societies
- Lloyd’s associations
- self-insurance groups
- captive insurance companies
- risk retention groups
- purchasing groups
- reinsurance companies
WHO OWNS STOCK INSURANCE COMPANIES?
Stock insurance companies are owned by stockholders who purchase shares of stock as an investment. If profitable, stock insurance companies may pay stock dividends to their stockholders.
WHO OWNS MUTUAL INSURANCE COMPANIES?
Mutual insurance companies are owned by their policyholders.
Mutual companies issue participating policies which distribute the company’s surplus “profit” to policyowners in the form of policy dividends.
WHAT IS A COUNTY MUTUAL INSURANCE COMPANY?
AN INSURANCE COMPANY THAT OPERATES IN A LIMITED GEOGRAPHIC AREA. EX: SELLING FARM INSURANCE IN A SMALL GEOGRAPHICAL AREA.
Many county mutuals today sell a wide array of insurance products in broader geographical regions.
WHAT IS A RECIPROCAL INSURER OR RECIPROCAL EXCHANGE?
A reciprocal insurer is an unincorporated group of members that insure each other by exchanging contracts of indemnity that obligate them to collectively pay any member’s covered loss. Reciprocal insurance is essentially a form of self-insurance that prefunds coverage of future losses through the members’ premium deposits.
WHAT IS A FRATERNAL BENEFIT SOCIETIES AND WHY WOULD THEY NEED INSURANCE?
Fraternal benefit societies are organizations of people who share a common ethnic, religious, or vocational affiliation. They may provide insurance to their members through fraternal insurers whose insureds are usually restricted to members of the society.
WHAT IS LLOYD’S ASSOCIATION OR LLOYDS OF LONDON?
One of the world’s oldest and best-known insurance organizations—is not an insurance company. A member can be either a person or a company, and each member’s liability is limited. It is a forum where brokers may find individuals who are willing to help underwrite complex, unique, and large risks.
WHAT IS A SELF INSURER?
Self-insurers are businesses that are financially able to self-fund certain risks. They set aside funds to pay claims as well as the administrative costs of running an internal insurance program.
*Sometimes smaller companies band together to form a self-insurance group through which they provide workers compensation benefits to injured employees. These are “shared-risk” pools, and members of the group are responsible for each other’s losses. If the self-insured group has a poor year, group members could be charged an assessment.
WHAT IS A CAPTIVE INSURANCE COMPANY? WHAT ARE THE TWO TYPES OF CAPTIVE INSURANCE COMPANIES?
A captive insurance company is an insurance company designed to cover the risks of the “parent” organization(s) that own it:
- Single-owner captives (or single-parent captives) are owned by a single company for which they provide insurance.
- Association captives (also known as group-owned captives) are owned by and cover the risks of a group of organizations.
UNDER THE CAPTIVE INSURANCE COMPANIES, WHAT IS A RISK RETENTION GROUP AND WHAT ACT WAS IT CREATED UNDER?
RISK RETENTION GROUP WAS CREATED THROUGH THE FEDERAL RISK RETENTION ACT OF 1981 (AMENDED IN 1986), RISK RETENTION GROUPS (RRGs) are a form of captive insurance company that provide their members—who are both the insureds and owners of the RRG—with coverage for all types of liability risks except workers compensation.
UNDER THE FEDERAL RISK RETENTION ACT OF 1981 (AMENDED IN 1986), WHAT DID THIS ACT AUTHORIZE?
The federal Risk Retention Act also authorizes the formation of PURCHASING GROUPS As with RRGs, members of a purchasing group must have similar businesses or activities, and one purpose of the group must be the purchase of liability insurance on a group basis.
WHAT IS AN REINSURANCE COMPANY?
A INSURERS THAT SHARES THE RISK WITH OTHER INSURERS TO MINIMIZE THE RISK. USUALLY, A FORMAL AGREEMENT IN WHICH BOTH THE RISK AND THE PREMIUM ARE SHARED WITH ONE OR MORE REINSURANCE COMPANY.
WHAT IS A CEDING COMPANY OR CEDENT?
INSURER SEEKING TO TRANSFER SOME OF ITS RISK
WHAT IS A REINSURING COMPANY?
THE INSURER ACCEPTING SOME OF THE RISK BEING TRANSFERRED
*The ceding company pays a premium to the reinsurer for its share of coverage.
IN A CEDING AND REINSURING RELATIONSHIP, WHAT HAPPENS IN A EVENT OF A LOSS?
When a reinsured loss occurs, the reinsurer pays the ceding company for its share of the claim.When a reinsured loss occurs, the reinsurer pays the ceding company for its share of the claim. The policyowner may never be aware of this arrangement; claims are paid entirely by the ceding company that issued the policy.
WHAT ARE 5 OTHER WAYS AN INSURER CAN BE CLASSIFIED?
- commercial versus government insurers
- admitted versus nonadmitted insurers
- domestic, foreign, and alien insurers
- financial strength
- distribution systems
WHAT IS AN “COMMERCIAL VS. GOVERNMENT INSURERS”?
The commercial insurance companies discussed so far in this lesson are not the only source of insurance protection in the United States. Several notable state and federal government programs are important sources of insurance protection.
Federal government insurance programs include:
• Social Security Insurance (formally known as Old-Age, Survivors and Disability Insurance, or OASDI)
• Medicare (formally known as Supplemental Medical Insurance, or SMI)
• the National Flood Insurance Program (NFIP)
• crop insurance
• the Federal Deposit Insurance Corporation (FDIC)
State government insurance programs include:
• workers compensation
• unemployment insurance
• state-run medical insurance plans
WHAT IS “ADMITTED VS. NONADMITTED INSURER”?
An admitted insurer is a company licensed to do business in the state or country in which it writes applications.
A nonadmitted insurer is an insurance company that is not licensed to do business in a certain state but is authorized to sell surplus lines insurance there.
WHAT IS AN UNAUTHORIZED INSURER?
An unauthorized insurer is any organization that presents its products as “insurance” although neither it nor its products have been approved by any department of insurance in the jurisdiction(s) where it operates. In short, unauthorized insurance is fake insurance.
WHAT IS A DOMESTIC INSURER?
An insurer is a domestic company in the state where it is domiciled (i.e., headquartered).
WHAT IS A FOREIGN INSURERS?
An insurer is a foreign company in every state outside of its state of domicile.
WHAT IS AN ALIEN INSURER?
A company that is domiciled outside the United States is an alien company in every U.S. state where it is admitted.
WHY IS FINANCIAL STRENGTH IMPORTANT?
An insurance company’s financial strength and ability to pay claims is important to the insurance-buying public and to the state insurance regulators that license and certify it.
WHAT IS A DISTRIBUTION SYSTEM?
Insurance companies can be classified by the type of distribution system(s) they use to sell their products. In the property and casualty insurance field, the most common distribution systems are:
• the independent agency system
• the exclusive agency system
• direct marketing (also called direct response)
• insurance brokers
WHAT IS AN INDEPENDENT AGENCY SYSTEM?
In the independent agency system, insurers use independent agents who sell insurance on a commission or fee basis for one or more insurance companies. An independent agent retains ownership, use, and control of policy records.
WHAT IS A DIRECT MARKETING SYSTEM OR DIRECT RESPONSE MARKETING?
Insurers using a direct marketing system sell insurance directly to consumers through their employees (who must be licensed as producers in the states where their customers reside). Consumer solicitations are made through mass media and social media promotions that invite consumers to contact the insurer directly.
