intro to insurance

individual rates

aka specific rates, these are used when large numbers of homogeneous exposures do not exist. they involve an individual rate for each subject of insurance.

authorized (admitted) insurance company

an authorized (admitted) company is an insurer that has received a certificate of authority from a given state and thereby licensed or authorized to conduct insurance business in that state.

executory contracts

an insurance policy is an executory contract because some act prescribed in the contract remains to be performed by one of the parties (insurer). for example an insurer will not pay a claim until a specified event (insured loss) takes place.

law of large numbers

an insurer is able to assume many risks with the reasonable assurance of experiencing a certain number of losses according to the law of large numbers. this is a mathematical rule stating that as the number of exposures increases, the more the actual results will approach the results expected for the event.

class rates

apply to large groups of homogeneous loss exposures.

surplus lines company

are a common form of unauthorized carriers. when insurance cannot be supplied by authorized insurers, a surplus lines carrier (via a surplus lines broker) is utilized.

physical hazards

are tangible, such as gasoline or other volatile chemicals stored in a garage, unsafe automobile brakes, or cracked sidewalks and driveways.

perils

are the direct happenings or events that cause a loss. risk is the uncertainty we face that perils will occur and cause us to suffer losses. examples : fire, windstorm, negligence, burglary, robbery, and flood damage.

sufficiently large numbers

for a risk to be insurable, there must be a sufficient number of insureds available with a similar potential loss who desire to purchase protection. this is similar to the law of large numbers.

elements of a legal contract

four components required for a contract to be considered legal and enforceable

fraternal insurers extras

fraternal benefit orders are afforded tax exemptions. a fraternal order may assess a policyholder in case of financial difficulties.

economic loss

is the decrease or disappearance of economic value. pure loss is characterized by the actual destruction of property. losses are caused by perils that are enhanced by hazards which are the result of a risk.

premium

is the total cost of coverage for a group of exposure units.

Risk

is the uncertainty concerning financial loss, the chance of loss, or the probability of loss. Insurance protects an insured against pure risk.

parole evidence rule extra

life insurance ( written) contracts are subject to this rule. oral testimony may not generally be admitted to contradict the provisions of a life insurance contract. this rule does not become effective until a binding contract exists.

independent filings

membership in a rating organization is not always mandatory. some insurers will file rates with a particular state by themselves. this type of action will be more expensive to an insurer. insurers who wish to remain outside a rating bureau, file independently, and use rate cutting practices are known as nonbureau insurers.

other methods of managing risk

risk transfers may be accomplished by an individual purchasing an insurance contract. this may be referred to as an insurance transfer. other forms of legal contracts are available that transfer risks involving noninsurance transfers.

estoppel examples

sales person was insured under a group life insurance policy issued to his employer. the sales person had said at the out set that he was not interested in the coverage unless he could obtain 200000 in life insurance. he was advised by his employer that he was eligible for only 75000. however after some negotiations with the insurer, it was agreed that a 200000 policy would be issued, and a certificate was issued in that amount. the salesman was then accidentally killed. his beneficiary (his widow) submitted a claim, and it was found that the deceased had been eligible only for the original 75000 of life coverage. the insurance company paid 75000 and refunded the premium paid for coverage . the court would hold that all the elements of estoppel were present. there was a false representation of a material fact, a reasonable reliance, and harm resulted. the company would be required to pay additional 125,000.

indemnity

some insurance policies (casualty) stipulate that they will indemnify an insured in the event a covered loss occurs. indemnifying means placing an insured in the same financial position following a loss that existed before the loss.

consideration

something of value must be given in consideration of the coverage provided by the insurer. the insured's consideration is the premium paid and statements made in the application, the insurer's consideration is the promise to pay a valid claim.

required elements for estoppel

1 there must be a false representation of a material fact(the insurer issued the policy and stated that the insured was fully covered in the amount of 200000). 2 there is a reasonable reliance on the representation ( the insured relied on the statement that he was fully covered). 3Harm will result( to the insured because the insurer does not want to pay the entire 200000 claim).

comparison of waiver and estoppel

1 waiver is contractual in nature, whereas estoppel is tortuous in nature and rests upon false representation 2 waiver provides effect to the intention of the party waiving whereas estoppel is enforced to defeat the inequitable intent of the party estopped( generally the insurer). 3 waiver is subject to parole evidence rule and estoppel is not.

waiver reasons

1 waiver may be expressed ( written or verbal) or implied. 2 it does not apply to perils that are not covered under the policy. 3 waiver is contractual in nature

four steps of risk management

1. indentifying the possible risks present (exposure) 2. determining what action to take in order to reduce or control risk: 3. implementing specific action 4. monitoring the action taken in order to make changes as needed.

Avoidance

An individual may avoid the risk of a loss by not engaging in an activity or owning property.

Life Insurance

An insured transfers the risk of dying prematurely to the insurer by paying a premium

Health Insurance

An insured transfers the risk of falling ill or suffering injury to the insurer by paying a premium and entering into a legal contract.

Pure Risk

Involves the chance for loss only.

rate

Is the pric per unit of exposure

alien insurance company

a company incorporated or organized outside the united states but licensed in a given state is an alien insurer in that state. for instance if continental reinsurance company of London , England, incorporated in another country (England), is licensed to conduct the business of insurance in Texas, it is considered an alien insurer in Texas.

insurance as a legal contract

a contract is an agreement between two or more competent parties under the terms of which each promises to perform in a manner specified for a consideration ( promise or payment). insurance policies are contracts and are held to the same legal standards as other contracts.

fraternal insurers

a fraternal benefit society is a special type of insurer providing insurance benefits, particularly life insurance, for its members. the operations of the fraternal are closely related to and controlled by the bylaws of a large or nonprofit social organization ( knights of Columbus).

reciprocal extra

a reciprocal exchange is not in the legal sense a mutual insurer because the individual subscribers assume their liability as individuals, not as a responsibility of the group as a whole. reciprocals are managed by an attorney in fact.

adverse selection

adverse selection is the tendency of persons whose exposure to loss is higher than average to purchase or continue insurance to a greater extent than those whose exposure is less than average. if an insurance company did not control adverse selection , it would go out of business. ex an individual with a terminal illness has a greater desire to purchase insurance than a healthy individual.

Speculative Risk

cannot be insured because it involves the chance for loss or gain. i.e. betting on a horse race is a speculative risk.

risk retention group

composed of members who are engaged in similar businesses or activities. the group's primary activity consists of assuming and spreading all, or any portion, of the liability exposure of its members. the group may provide only liability insurance.

utmost good faith

contracts must be entered into in good faith. when a party does not enter into an agreement in good faith, the one party may void the contract. each party must rely on the fact that information supplied by the other party is true.

sharing

distributes risk among a number of persons.

moral hazards

hazards that derive from the mental attitudes of individuals. involves dishonest acts(deliberate to receive claims), carelessness(apathy), or irresponsibility actives(driving while intoxicated). distinction is made between moral hazards (dishonest acts) and morale hazards (carelessness or indifference).

personal contract

in a strict legal sense, life insurance contracts are not considered to be personal contracts. legally, a personal contract requires some sort of personal performance on the part of the contracting parties( or concerns some kind of personal property). a life insurance owner does not have any personal performance requirements, the duty to pay premiums, for example , can be fulfilled by another and , in fact, the policyowner can even assign ownership of the contract to another. however this legal concept is not to be confused with the fact that life insurance policies cover and protect persons, not property.

unilateral contract

in an insurance contract only the insured promises to perform. there fore under unilateral contracts, a promise is made by only one party.

conditional contract

insurance contracts are considered conditional in that the obligation of the company to pay a claim depends upon certain acts, such as the payment of premiums and providing proof of loss.

insurance contract and the courts

insurance contracts are legal documents, and their performance will be upheld in courts. because of their adhesion characteristics, any ambiguities that arise will be ruled in favor of a policyowner by the courts.

fortuitous and catastrophic

insurers do not desire to cover individuals who may all suffer losses at the same time because the insurer would suffer catastrophic losses. insurers wish to spread the risk in order to combat against this.

domestic insurance company

is a company incorporated in , domiciled in , and organized under the laws of a given state and having its home office located in that state. for instance, the abc insurance company of Boston is a domestic company in the state of Massachusetts because it is incorporated in and has its principal office in Massachusetts.

hazard

is a contition hat increases the chance of a loss occurring. hazard may trigger a loss or may lead to the occurrence of a peril.

reciprocal exchange

is a type of cooperative insurance. under this form of insurance, each policy owner is insured by all of the others. each insured is also an insurer, as contracts are exchanged on a reciprocal basis.

rating bureaus

is an organization owned by member insurance companies. purpose of a rating bureau is to accumulate and analyze statistical data to develop rates, calculate rates for lines of insurance, and file rates with state regulatory authorities for approval.

purchasing group

is composed of members whose business or activities are similar and has as its purpose the purchase of insurance on a group basis to cover the members' similar exposures.

Retention

is considered to be the most common method of handling risk.

foreign insurance company

is incorporated or organized under the laws of one state but is licensed and permitted to conduct the business of insurance in another state. for instance all state insurance company of oakbrook, Illinois is licensed to solicit the business of insurance in Wisconsin. therefore , in Wisconsin, allstate insurance company is viewed as a foreign company.

unauthorized (nonadmited) insurance company

is one that has not received a certificate of authority from a state and is therefore not licensed or authorized to transact insurance business in that state.

mutual insurance company

is owned by its policyholders who share in the company's profits in the form of dividends. some mutual companies issue assessable policies and others issue nonassessable policies.

indirect loss

is removed from the cause of direct loss but is related to it. it is also known as consequential loss. example manufacturing plant suffers a direct fire loss. the indirect loss would be the loss of profit experienced by the business because it would have to cease operating because of the fire damage. the extent or amount of an indirect loss as far as dollar value is concerned.

competent parties

most parties to a contract are considered competent except for insane persons, those under the influence of drugs or alcohol, persons under duress or forced to enter into a contract, enemy aliens, and minors. however, minors who contract for food, clothing , shelter , and other necessities are considered competent.

offer and acceptance(agreement)

one party must make an offer( applicant submits application and premium), and the other party accepts it , rejects it, or makes a counteroffer( the insurer).

Transfer

one party transferring the chance of loss to another party is also a popular form of risk handling. the purchase of insurance is a form of risk transfer.

stock insurance company

owned by the holders of the company's capital stock. the main motivation of this type of company is to achieve profits. policyholders of a stock company are not entitled to dividends or liable for any assessments which may be necessary.

contracts of adhesion extras

policy owners are protected by the courts with regard to insurance contracts where ambiguities arise. in these cases, the courts will usually rule in favor of party not involved in the development of the contract. Under the doctrine of reasonable expectations , courts interpret an insurance policy to mean what a reasonable policy holder would expect it to mean even though policy provisions may deny those expectations.

parole evidence rule

prevents the introduction into evidence of oral agreements made before the execution of a written agreement. according to this rule, when parties place their contract in writing, all previous oral agreements merge into the written contract

private vs government insurers

private or commercial insurance companies are in the business to make a profit. varius plans offered by these companies include individual policies, group policies, industrial policies, and blanket policies. government programs generally provide social insurance plans on a state or federal level. state plans involve programs such as workers' compensation and compulsory cash sickness plans. federal plans include federal crime insurance, fair plans, fdic , socials security, Medicare, and Medicaid. the purpose of government insurance is similar to that of private insurance where it helps to provide economic security against specific perils for the well being of large groups of persons in our society.

rating bureaus extras

rating bureaus may also develop policy forms and endorsements. insurers are usually subscribers to , or actual members of a rating bureau. the advantages of rating bureaus involve lower costs and expenses to insurers, standardizing policy forms and endorsements, and aiding small insurers who do not have sufficient rate making data.

measuring risk

risk is measured according to the statistics of past losses. measurement of the degree of risk determines whether a risk from a given peril is insurable.

reduction

risk may be handled better if it is reduced. reduction may be accomplished through loss prevention and loss control. an example of control is where an insured installs a sprinkler system in a commercial building. if a fire breaks out, the sprinklers are designed to reduce or control the fire damage.

direct loss

the loss from an insured peril must be a direct physical loss to the property insured. the property must be damage or destroyed by the peril or perils insured against without any intervening cause. auto colliding with a tree, lightning strike a house or windstorm damaging a roof's shingles are examples of direct physical losses.

calculation of probability

the potential loss incurred must be calculable in order to be insured. an individual's loss of life is calculable utilizing the human life value or needs approach ( both of which are reviewed in a later unit).

economic feasibility

the premium charged for the coverage provided must be affordable to the insured. if the risk was so tremendous that the only way it could be covered would be to charge an extremely high premium, it would not be economically feasible for the insured.

definite and measureable

the risk of loss must be definite and measurable in both time and place such as a death. the loss must also be such that it is difficult to falsify.

manual rates

these rates are listed in a manual or rate book

reciprocals

these types of insurers combine some characteristics of a mutual insurer(owned by its policy holders) and a Lloyd's association (individuals assume the risks).

estoppel

this doctrine is utilized to protect an innocent injured party (insured). it is a doctrine that an insured may use in certain situations when an insurer attempts to deny a claim.

waiver

this involves the intentional or voluntary relinquishment( or abandonment) of a known right in an insurance contract. insurers have the right to deny coverage for various reasons.

aleatory contracts

this is a contract based on uncertain events in the future where the value given up by one party does not equal that given up by another party to the contract. for example , a life insurance policy has an aleatory feature because the premium paid for it does not equal the amount paid by the company if a loss(death) occurs.

contracts of adhesion

this is a contract in which one party (INSURER) creates the contract terms and the other party (INSURER) must adhere or comply with them. no bargaining or negotiating of the contract's terms or conditions is permitted. a contract of adhesion is sometimes referred to as one sided contract

legal object or purpose

to be valid , a contract cannot be against public policy. for example, a contract to purchase stolen goods is not legal because its purpose is not valid

elements of insurance risks

various types of risks are deemed to be insurable while other are not insurable. risks or exposures that meet certain criteria may be insurable. if a risk does not meet certain requirements, then it is considered by an insurer to be insurable and other means must be utilized to manage potential loss it holds.

insurable interest

with life insurance, an insurable interest must exist at the time of application: insurable interest may be based on a business relationship( a partner insuring another partner) or on a relationship of love and affection( husband and wife). with property / casualty insurance, insurable interest is established when the insured would suffer a financial loss if the property insured were destroyed or damaged ( such as a homeowner) and must exist at the same time of loss.