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