Chapter 1: Basic Principles of Insurance

Reciprocal Insurer

A Reciprocal Insurer is an unincorporated organization in which all members insure one another.

Risk Retention Group

A Risk Retention Group is a group-owned liability insurer which assumes and spreads product liability and other forms of commercial liability risks among its members.

Indemnity

Restores an insured to the approximate condition existing before loss.

Fiduciary

A person in a position of financial trust.

Reinsurer

A reinsurer is a company that provides financial protection to insurance companies. Reinsurers handle risks that are too large for insurance companies to handle on their own and make it possible for insurers to obtain more business than they would otherwise be able to.

Self-Insurer

A self-insurer establishes a self-funded plan to cover potential losses instead of transferring the risk to an insurance company.

Stock Insurance Company

A stock company is an insurance company owned and controlled by a group of stockholders (or shareholders) whose investment in the company provides the safety margin necessary in the issuance of guaranteed, fixed premium, nonparticipating policies.

Alien Insurer

An Alien Insurer in the United States is an insurer whose principal office and domiciled location is outside the country.

Admitted Insurer

An admitted or authorized insurer is an insurer who has received a certificate of authority from a state's department of insurance authorizing them to conduct insurance business in that state.

Certificate of Authority

A Certificate of Authority is a license issued to an insurer by a department of insurance (or equivalent state agency), which authorizes that company to conduct insurance business in that particular state.

Domestic Insurer

A Domestic Insurer is an insurer with its principal or home office in a state where it is authorized.

Foreign Insurer

A Foreign Insurer is an insurer with its principal office or domicile location in a state different from the state it is transacting insurance business.

Warranties

Guarantee material facts in the application

Misrepresentation

Statement that is false and voids a contract if it is material to the risk(s) insured.

Needs Analysis Approach

Takes into consideration the financial needs of the survivor(s)

Fraternal Benefit Society

Fraternal Benefit Societies are nonprofit benevolent organizations that provide insurance to its members.

Fraud

Intentional act designed to deceive

Third Party Ownership

When the owner and insured are two different parties.

Discrimination

Charging a different rate for individuals of the same class and risk based on place of residence, race, creed, or national origin.

Surplus Lines Insurance

Surplus Lines Insurance is nontraditional insurance only available from a surplus lines insurer. They offer coverage for substandard or unusual risks not available through private or commercial carriers.

Human Life Value Approach

Takes into consideration the loss of future earnings if the insured dies

Actuarial Department

The actuarial department calculates policy rates, reserves, and dividends.

Claims Department

The claims department is responsible for processing, investigating, and paying claims.

Insured

The insured is the customer receiving insurance protection under an insurance policy.

Insurer

The insurer is the insurance company.

Insurable interest

The person will suffer the financial consequences of death, illness, accident, or injury.

Insurance

The transfer of risk through the pooling or accumulation of funds.

Underwriting Department

The underwriting department is the department within an insurance company responsible for reviewing applications, approving or declining applications, and assigning risk classifications.

Aleatory

There is an unequal exchange of values (consideration).

Broker

A Broker represents themselves and the insured (i.e., the client or customer).

Captive Insurer

A Captive Insurer is an issuer established and owned by a parent firm for the purpose of insuring the parent firm's loss exposure.

Multi-line Insurer

A multi-line insurer is an insurance company or independent agent that provides a one-stop-shop for businesses or individuals seeking coverage for all their insurance needs. For example, many large insurers offer individual policies for automobile, homeowner, long-term care, life, and health insurance needs.

Non-admitted Insurer

A non-admitted or unauthorized insurer is an insurer who has not received a certificate of authority from a state's department of insurance authorizing them to conduct insurance business in that state.

Nonparticipating policy

A nonparticipating insurance policy, typically issued by stock companies, does not allow policyowners to participate in dividends or electing the board of directors.

Participating Plan

A participating plan is an insurance policy under which the policyowners share in the company's earnings through receipt of dividends and also elect the company's board of directors.

Divisible Surplus

Divisible surplus is the amount of earnings paid to policyowners as dividends after the insurance company sets aside funds required to cover reserves, operating expenses, and general business purposes.

Industrial Insurer

Industrial Insurers make up a specialized branch of the industry, primarily providing policies with small face amounts with weekly premiums. Other names for industrial insurers include home service or debit insurers.

Admitted (Authorized) Insurer

Licensed to transact insurance business in the state.

Lloyds of London

Lloyds of London is NOT an insurer, but a group of individuals and companies that underwrite unusual insurance.

Mutual Insurance Company

Mutual Insurance Companies are insurance companies characterized by having no capital stock, being owned by its policy owners, and usually issue participating insurance.

Nonadmitted (Unauthorized) Insurer

Not licensed to transact insurance business in the state

Unilateral Contract

Only one party is legally bound to perform its part of the agreement.

Private (Commercial) Insurer

Private or commercial insurance companies are companies owned by private citizens or groups that offer one or more insurance lines. Commercial insurers are NOT government-owned.

Fair Credit Reporting Act

Protects an individual's right to privacy and access to a credit report

Reinsurance

Reinsurance is the acceptance by one or more insurers, called reinsurers, of a portion of the risk underwritten by another insurer who has contracted for the entire coverage.

Statement of Good Health

Required at the time of policy delivery if the initial premium has not yet been paid.

Represenration

Statement made by the applicant that is true to the best of the applicant's knowledge