General Insurance

Insurance Policy

A contract between a policyowner (and/or insured) and an insurance company which agrees to pay the insured or the beneficiary for loss caused by specific events

Personal

A contract characteristic that means between the policyowner and insurance company

Conditional

A contract characteristic that means certain conditions must be met

Aleatory

A contract characteristic that means exchange of unequal amounts

Adhesion

A contract characteristic that means one party prepares the contract, and the other party must accept it as is

Unilateral

A contract characteristic that means only one of the parties to the contract is legally bound to do anything

Conditional Contract

A contract that requires that certain conditions must be met by the policyowner and the company in order for the contract to be executed, and before each party fulfills its obligations

Homogenous

A large number of units having the same or similar exposure to loss

Agent/Producer

A legal representative of an insurance company

Due to chance

A loss that is outside the insured's control

Definite and measurable

A loss that is specific as to the cause, time, place and amount. An insurer must be able to determine how much the benefit will be and when it becomes payable.

Sharing

A method of dealing with risk for a group of individual persons or businesses with the same or similar exposure to loss to share the losses that occur within that group.

Reciprocity/Reciprocal

A mutual interchange of rights and privileges

Physical hazard

A physical condition

Indemnity (sometimes referred to as reimbursement)

A provision in an insurance policy that states that in the event of loss, an insured or a beneficiary is permitted to collect only to the extent of the financial loss, and is not allowed to gain financially because of the existence of an insurance contract.

Know This

A risk is a chance that a loss will occur; a hazard increases the probability of loss; a peril is the cause of loss

Material Misrepresentation

A statement that, if discovered, would alter the underwriting decision of the insurance company

Moral hazard

A tendency toward increased risk

Exposure

A unit of measure used to determine rates charged for insurance coverage. In life insurance, all of the following factors are considered in determining rates: The age of the insured, medical history, occupation, and sex.

Contract Characteristics

Adhesion Aleatory Conditional Personal Unilateral

Elements of a Legal Contract

Agreement Consideration Competent Parties Legal Purpose

Elements of a legal contract

Agreement - offer and acceptance Consideration Competent parties Legal purpose

Warranty

An absolutely true statement upon which the validity of the insurance policy depends.

Contract

An agreement between two or more parties enforceable by law.

Legal purpose

An element of a legal contract meaning not against public policy

Competent parties

An element of a legal contract meaning of legal age, sound mental capacity, and not under the influence of drugs or alcohol

Agreement

An element of a legal contract meaning offer and acceptance

Consideration

An element of a legal contract meaning premiums and representations on the part of the insured; payment of claims on the part of the insurer

Due to chance

An element of risk that means chance of loss beyond insured's control

Large exposure

An element of risk that means insurer must be able to predict losses based on the law of large numbers

Randomly selected exposure

An element of risk that means insurer must have a fair proportion of both good and poor risks

Definite and Measurable

An element of risk that means loss must have definite time, place and amount

Predictable

An element of risk that means number of losses must be statistically predictable

Not catastrophic

An element of risk that means there must be limits that the loss can't exceed

Morale hazard

An indifference to loss

Nonadmitted/Nonauthorized Insurer

An insurance company that has not applied, or has applied and been denied, a Certificate of Authority and may not transact insurance.

Admitted/Authorized Insurer

An insurance company that has qualified and has received a Certificate of Authority from the Department of Insurance to transact insurance in the state.

Foreign Insurer

An insurance company that is incorporated in another state, the District of Columbia, or a territorial possession.

Domestic Insurer

An insurance company that is incorporated in this state. In most cases, the companys home office is in the state which it was formed.

Alien Insurer

An insurance company that is incorporated outside the United States.

Broker

An insurance producer not appointed by an insurer and is deemed to represent the client

Mutual

An insured purchased an insurance policy 5 years ago. Last year, the insured received a dividend check from the insurance company that was not taxable. This year, the insurer did not send a check. From what type of insurer did the insured purchase the policy?

Insurer

Any person or company engaged as the principal party in the business of entering into insurance contracts.

Authorized/Admitted

Approved by the Department of Insurance Has a certificate of authority

Implied Authority

Authority that is not expressed or written into the contract, but which the agent is assumed to have in order to transact the business of insurance for the principal.

Personal Contract

Between the insurance company and an individual.

Hazards

Conditions or situations that increase the probability of an insured loss occurring.

Hazards

Conditions that increase the probability of loss occurring 3 types: Physical, moral, and moral

Some of the market conduct regulations include, but are not limited to, the following:

Conflict of interest A request of a gift or loan as a condition to complete business Supplying confidential information

Legal Purpose

Contract must be legal and not against public policy

Law of Agency

Defines the relationship between the principal and the producer: the acts of the agent within the scope of authority are deemed to be the acts of the insurer

Market Conduct

Describes the way companies and producers should conduct their business. It is a Code of Ethics for producers.

Domicile

Domestic Foreign Alien

Elements of Insurance Risk

Due to chance Definite and measurable Predictable Not catastrophic Large exposure Randomly selected exposure

Elements of Insurable Risks

Due to chance Definite and measurable Statistically predictable Not catastrophic Randomly selected and large loss exposure

Reasonably Expect Coverage

If an agent implies through advertising, sales literature, or statements that these provisions exist, an insured could _______ _______ _______

Material misrepresentations

If intention, breach of warranties, concealment, fraud - all can void the contract

Utmost Good Faith

Implies that there will be no fraud, misrepresentation or concealment between the parties. As it pertains to insurance policies, both the insurer and insured must be able to rely on the other for relevant information. The insured is expected to provide accurate information on the application for insurance, and the insurer must clearly and truthfully describe the policy feature and benefits, and must not conceal or mislead the insured.

Offer and acceptance

In insurance, the applicant usually makes the offer when submitting the application. Acceptance takes place when an insurer's underwriter approves the application and issues a policy.

Domestic

Incorporated in this state

Physical Hazards

Individual characteristics that increase the chances of the cause of loss.

Pure Risk

Insurable because it involves a chance of loss only

Statistically predictable

Insurers must be able to estimate the average frequency and severity of future losses and set appropriate premium rates. (In life and health insurance, the use of mortality tables and morbidity tables allows for the development of rates that would be necessary to cover losses from event of this nature.

Statistically predictable

Insurers need to be reasonably certain their losses will not exceed specific limits. That is why insurance policies usually exclude coverage for loss caused by war or nuclear events: There is no statistical data that allows for the development of rates that would be necessary to cover losses from events of this nature.

Speculative Risk

Involves the opportunity for either loss or gain. And example of this type of risk is gambling. These types of risks are not insurable.

Indemnity

Main principle of insurance, meaning that the insured cannot recover more than their loss; the purpose of insurance is to restore the insured to the same position as before the loss

Unauthorized/Nonadmitted

No certificate of authority Cannot transact business in this state

Fraternal Benefit Society

Not for profit organization Not an insurer Formed to provide insurance benefits for members of an affiliated lodge, religious organization, or fraternal organization

Speculative

Not insurable because it involves a chance of gain

Implied

Not specifically stated in the contract, but is assumed necessary to conduct insurance business

Avoidance

One of the methods of dealing with risk, which means elimination exposure to a loss

Unilateral Contract

Only one of the parties is legally bound to do anything. The insured makes no legally binding

Mutual

Owned by policyowners (policyholders) Issue participating policies (par) Pay dividends to policyowners which are a refund of excess premiums

Stock

Owned by stockholders Issue nonparticipating policies (nonpar)

Mutual companies

Owned by the policyowners and issue participating policies

Stock companies

Owned by the stockholders who provide the capital necessary to establish and operate the insurance company and who share in any profits or losses

Private insurance companies can be classified in a variety of ways:

Ownership Authority to transact business Location (domicile) Marketing and distribution systems; or Rating (financial strength)

Utmost Good Faith

Parties rely on each other for information

Express

Powers specifically stated in the contract

Contract of Adhesion

Prepared by one of the parties (insurer) and accepted or rejected by the other party (insured)

Pure Risk

Refers to situations that can only result in a loss or no change. There is no opportunity for financial gain. This risk is the only type of risk that insurance companies are willing to accept.

Morale Hazards

Similar to moral hazards, excepts that they arise from a state of mind that causes indifference to loss, such as carelessness

Fiduciary

Someone in a position of trust.

Respresentations

Statements believed to be true to the best of one's knowledge, but they are not guaranteed to be true. In insurance terms, these are the answers the insured gives to the questions on the insurance application.

The most common types of ownership:

Stock companies Mutual companies

Moral Hazards

Tendencies towards increased risk.

Apparent

The appearance of a relationship between the agent and principal based on words or actions

Apparent Authority (also known as perceived authority)

The appearance or the assumption of authority based on the actions, words, or deeds of the principal or because of circumstances the principal created.

Express Authority

The authority a principal intents to grant to an agent by means of the agent's contract.

Consideration

The binding force in any contract. Is something of value that each party gives to the other. On the part of the insured, it's the payment of premium and the representations made in the application. On the part of the insurer it's the promise to pay in the event of loss.

Perils

The causes of loss insured against in an insurance policy

Insurer (principal)

The company who issues an insurance policy

Reasonable Expect

The insured can _______________________ coverage based on the agent's words and actions

Fraud

The intentional misrepresentation or intentional concealment of a material fact used to induce another party to make or refrain from making a contract, or to deceive or cheat a party

Law of large numbers

The larger the number of people with a similar exposure to loss, the more predictable actual losses will be

Concealment

The legal term for the intentional withholding of information of a material fact that is crucial in making a decision. In insurance, this is when the applicant withholds info that will result in an imprecise underwriting decision. May void a policy.

Domicile

The location where an insurer is incorporated, not necessarily where the insurer conducts business

Premium

The money paid to the insurance company for the insurance policy

Transfer

The most effective way to handle risk so that the loss is borne by another party.

Competent Parties

The parties to a contract must be capable of entering into a contract in the eyes of the law. Generally, this requires that both parties be of legal age, mentally competent to understand the contract, and not under the influence of drugs or alcohol.

Insured

The person covered by the insurance policy

Policyowner

The person entitled to exercise the rights and privileges in the policy

Risk Retention

The planned assumption of risk by an insured through the use of deductibles, co-payments, or self-insurance.

Conditional

The proposed insured makes the premium payment on a new insurance policy. If the insured should die, the insurer will pay the death benefit to the beneficiary if the policy is approved. This is an example of what kind of contract?

Loss

The reduction, decrease, or disappearance of value of the person or property insured in a policy, caused by a named peril. Insurance provides a means to transfer this.

Insurance

The transfer of risk of loss

Risk

The uncertainty or chance of a loss occurring

Aleatory

There is an exchange of unequal amounts or values

Randomly selected and large loss exposure

There must be a sufficiently large pool of the insured that represents a random selection of risks in terms of age, gender, occupation, health and economic status, and geographic location

Randomly selected and large loss exposure

There must be a sufficiently large pool of the insured that represents a random selection of risks in terms of age, gender, occupation, health and economic status, and geographic location.

Purpose of Risk Retention

To reduce expenses and improve cash flow To increase control of claim reserving and claims settlements To fund for losses that cannot be insured

Insurance

Transfers the risk of loss from an individual to an insurer Based on the principle of indemnity Based on the spreading of risk (risk pooling) and the law of large numbers

Risk

Uncertainty regarding financial loss 2 Types: Pure & Speculative Methods of handing: Avoidance, retention, sharing, reduction, transfer

Misrepresentations

Untrue statements on the insurance application

Waiver

Voluntary act of relinquishing a legal right; estoppel - consequence of a waiver

Fiduciary Responsibility

When an agent handles the funds of the insured and the insurer

Consideration

When an insured makes truthful statements on the application for insurance and pays the required premium, it is known as what?

Reduction

Would include actions such as installing smoke detectors in our homes, having an annual physical to detect health problems early, or perhaps making a change in our lifestyles.

Applicant or proposed insured

a person applying for insurance

Beneficiary

a person who receives the benefits of an insurance policy

Ambiguitues

in the contract are always resolved in favor of the insured

alien

incorporated in another country

foreign

incorporated in another state of territory

Examples of Risk Retention

self insurance, deductibles, copayments