Principles of Insurance and General Insurance
Loss
the reduction, decrease, or disappearance of value of the person or property insured in a policy, caused by a named peril.
Promissory Warranty
warranty in which certain things will be done or not be done after the policy takes effect.
Reinsurance Treaty
when insurer has automatic reinsurance agreement between itself and the reinsurer in which the reinsurer is bound to accept all risks ceded to it.
Facultative Reinsurance
when reinsurance is purchased on a specific policy
Warranty
absolutely true statement upon which the validity of the insurance policy depends.
Risk Retention Group
liability insurance company owned by its members, which are exposed to similar liability risks by virtue of being in the same business or industry.
Physical Hazards
characteristics that increase the chances of the cause of loss ex. condition, medical history, blindness
Hazards
conditions or situations that increase the probability of an insured loss occurring. ex. lifestyle, existing health, and scuba diving
Legal Purpose
contract must be legal and not against public policy
Estoppel
legal process that can be used to prevent a party to a contract from re-asserting a right or privilege after that right or privilege has been waived. Legal consequence of a waiver
Unilateral Contract
only one of the parties to the contract is legally bound to do anything. Insured makes no legally binding promises; however insurer is legally bound to pay losses covered by police in force.
Ambiguities in a Contract of Adhesion
only the insurance company has the right to draw up a contract, and the insured has to adhere to the contract as issued, the courts have held that any ambiguity in the contract should be interpreted in favor of the insured.
Fraternal Benefit Society
organization formed to provide insurance benefits for members of an affiliated lodge, religious organization, or fraternal organization with a representative form of government.
Ceding Insurer
originating company that procures insurance on itself from another insurer
Mutual Companies
owned by the policy owners and issue participating policies.
Indemnity (reimbursement)
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.
Law of Large Numbers
the larger the number of people with a similar exposure to loss, the more predictable actual losses will be. Forms the bases for statistical prediction.
Premium
the money paid to the insurance company for the insurance policy
Policyowner
the person entitled to exercise the rights and privileges in the policy
Independent Agency System/American Agency System
- 1 independent agent represents several companies - nonexclusive - commissions on personal sales - business renewal with any company
Utmost Good Faith
implies that there will be no fraud, misrepresentation or concealment between the parties.
Homogeneous
large number of units having the same or similar exposure to loss
Contract
agreement between two or more parties enforceable by law.
Foreign Insurer
insurance company that is incorporated in another state
Unilateral
one-sided (only one party makes a promise)
Government Insurance Programs
Social Security, Medicare, Medicaid, Federal Crop insurance, and National Flood insurance
Purpose of Reinsurance
to protect insurers against catastrophic losses
Aleatory
unequal values
Exposure
unit of measurement used to determine rates charged for insurance coverage.
Misrepresentation
untrue statements on application and could void contract. This would alter underwriting decision of the insurance company; furthermore if found intentional is considered fraud
Waiver
voluntary act of relinquishing a legal right, claim or privilege
Managerial System
- Branch Manager (supervises agents) - Salaried - Agents can be insurer's employees or independent contractors
General Agency System
- General agent-entrepreneur represents 1 company - Exclusive - Compensation and commissions - Appoints subagents
Direct Response Marketing System
- No agents - Company advertises directly to consumers - Consumers apply directly to the company
Exclusive Agency System/Captive Agents
- one agent represents one company - exclusive - commissions on personal sales - renewals can only be placed with appointing insurer
Reinsurance
contract under which one insurance company (the reinsurer) indemnifies another insurance company for part or all of its liabilities.
Avoidance
eliminating exposure to a loss
Kinds of Warranty
- affirmative - promissory
Insured
A person covered by an insurance policy. This person may or may not be the policy owner
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
Social Insurance Program
a government program designed to provide protection against unpredictable financial distress; where private insurance is not available.
Agent/Producer
a legal representative of an insurance company
Reciprocity
a mutual interchange of rights and privileges
Applicant or proposed insured
a person applying for insurance
Professionalism
a person is engaged in an occupation requiring an advanced level of training, knowledge, or skill.
Beneficiary
a person who receives the benefits of an insurance policy
Pure Risk
a risk that presents the chance of loss but no opportunity for gain. Only type of risk that insurance companies are willing to accept.
Speculative Risk
a situation in which either profit or loss is possible. These types of risks are not insurable.
Express Authority
authority a principal intends to grant to an agent by the means of the agent's contract
Perils
causes of loss insured against in an insurance policy
Life Insurance
coverage on human lives
Risk Purchasing Group
entity which offers insurance to groups of similar businesses with similar exposures to risk.
Aleatory Contract
exchange of unequal amounts or values
Affirmative Warranty
express (written) or implied positive representation that affirms an existence of a fact at the time the policy was entered into.
Types of Agent Authority
express, implied, apparent
Financial Status
financial strength based on prior claims experience, investment earnings, levels or reserves (money is separate account), and management. Guides include AM Best, Fitch, Standard and Poor's, Moody's, Weiss
Authorized/Admitted Insurers
have been granted license or certificate of authority from state department of insurance and meet financial (capital and surplus) requirements set by the state.
Domicile
insurance companies are classified according to the location of incorporation. (domestic, foreign, and alien insurers)
Domestic Insurer
insurance company that is incorporated in this state
Alien Insurer
insurance company that is incorporated outside the United States.
Reciprocal
insurance resulting from an interchange of reciprocal agreements of indemnity among persons known as subscribers.
Adverse Selection
insuring of risks that are more prone to losses than the average risk
Fraud
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.
Insurance
is a contract in which one party (insurance company) agrees to indemnify the insured party against loss, damage or liability arising from an unknown event. Is the transfer of risk of loss
Concealment
legal term for the intentional withholding of information of a material fact that is crucial in making a decision.
Transfer (Risk Transfer)
management and control strategy that involves the contractual shifting of a pure risk from one party to another
Code of Ethics
market conduct describes the way companies and producers should conduct their business. Regulations include - conflict of interest - request of a gift or loan as a condition to complete business - supplying confidential info
Competent Parties
must be capable of entering into a contract in the eyes of the law. Requires both parties be of legal age, mentally competent to understand the contract, and not under the influence of substances.
Lloyd's Associations
not and insurance company but provides support facilities for underwriters or groups of individuals that accept insurance risk
Adhesion
only one party (insurer) prepares a contract, and the other party (insured) accept it as is
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.
Retention (Risk Retention)
planned assumption of risk by an insured through the use of deductibles, co-payments, or self-insurance. Purpose is 1) reduce expenses and improve cash flow 2) increase control of claim reserving and claims settlements 3) fund for losses that cannot be insured
Contract of Adhesion
prepared by one of the parties (insurer) and accepted or rejected by the other party (insured)
The law of agency
relationship between the principal (insurer) and the agent/producer; whom acts within scope of authority - agent must represent the insurer, not the insured - knowledge of the agent is presumed to be knowledge of the insurer - agent is working within conditions of their contract, insurer is fully responsible - when the insured submits payment to agent, it is the same as submitting payment to the insurer Agent is responsible for accurately completing applications for insurance, submitting application to insurer for underwriting, and delivering policy to policyowner
Conditional Contract
requires certain conditions must be met by the policyowner and company in order for the contract to be executed before each party fulfills its obligations. Ex. premium must be paid and proof of loss must be provided in order for insurer to cover claim
Binder
temporary agreement issued by an agent or insurer providing temporary coverage until a policy can be issued
Moral Hazards
tendencies towards increased risk. Involve evaluating the character and reputation of the proposed insured. Refer to those applicants who may lie on an application for insurance, or in the past, have submitted fraudulent claims against an insurer.
Death Benefit
the amount paid upon the death of the insured in a life insurance policy
Apparent 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.
Insurer (principal)
the company who issues an insurance policy
Risk
the uncertainty or chance of a loss occurring.
Reduction (Risk Reduction)
Attempt to lessen the possibility or severity of a loss. Ex. Installing smoke detectors, health checkups, lifestyle changes
Types of Marketing Arrangements
1) independent agency system/american agency system 2) exclusive agency system/captive agents 3) general agency system 4) managerial system 5) direct response marketing system
Classification of Private Insurance
1) ownership 2) authority to transact business 3) marketing and distribution systems 4) location (domicile) 5) rating (financial strength)
Types of ownership
1) stock companies 2) mutual companies 3) fraternal benefit society 4) Lloyd's associations 5) risk retention group 6) risk purchasing group 7) reciprocal
Offer & Acceptance
1) submitted application 2) takes place when an insurer's underwriter approves the application and issues a policy
Elements of a Legal Contract
1. Agreement - offer and acceptance 2. Consideration 3. Competent parties 4. Legal purpose
Elements of Insurable Risk
1. Due to chance 2. Definite and measurable 3. Statistically and predictable 4. Not catastrophic 5. Randomly selected and large loss exposure
Personal Contract
agreement between an insurance company and an individual that states that insurance policies cover the individual's insurable interest. The insured cannot be changed to someone else without the written consent of the insurer nor can the owner transfer the contract to another person without the insurer's approval. MUST HAVE WRITTEN NOTIFICATION
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.
Fidiciary Responsibility
someone in a position of trust, obligated to treat applicants and insureds in an ethical manner
Consideration
something of value that each party gives to the other. Is the payment of premium and the representations made in the application; promise to pay in the event of loss.
Morale Hazards
state or mind that causes indifference to loss, such as carelessness. ex. texting while driving
Representaions
statements believed to be true to the best of one's knowledge, but are not guaranteed to be true