Insurance

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 will becomes payable

Due to chance

A loss that is outside the insured's control.

Insurance companies: Authority

Admitted/ authorized Nonadmitted/ nonauthorized

Alien insurer

An insurance company that is incorporated outside the United States.

Domestic, Foreign and Alien Insurers

Insurance companies are classified according to the location of incorporation. Regardless of where an insurance company is incorporated, it must obtain a certificate of authority before transacting insurance within the state.

Classification of insurers

Insurance is available from both private companies and the government. The major difference between government and private insurance is that the government programs are funded with taxes and serve national and state social purposes, while private policies are funded by premiums.

Insured

The person covered by the insurance policy. this person may or may not be the policy owner

Insurance transfers

The risk of loss from an individual or business entity to an insurance company, which in turn spreads the costs of unexpected losses to many individuals. If there were no insurance mechanism, the cost of a loss would have to be borne solely by the individual who suffered the loss.

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.

Reciprocity/ Reciprocal

a mutual interchange of rights and privileges

Insurable risks

1. due to chance 2. definite and measurable 3. statistically predictable 4. not catastrophic 5. Randomly selected and large loss exposure

Private insurance companies can be classified in these variety of ways

1. ownership 2. authority to transact business 3. location(domicile) 4. Marketing and distribution systems 5. Rating (financial strength)

Insurance policy

a contract between a policy owner and /or insured and an insurance company which agrees to pay the insured or the beneficiary for loss caused by specific events

Agent

a legal representative of an insurance company; the classification of producer usually includes agents and brokers; agents are the agents of the insurer

applicant or proposed insured

a person applying for insurance

broker

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

Hazards

are conditions or situations that increase the probability of an insured loss occurring. Hazards are classified as physical hazards, moral hazards, or morale hazards. Conditions such as lifestyle and existing health, or activities such as scuba diving, are hazards and may increase the change of a loss occurring.

Physical Hazards

are individual characteristics that increase the changes of the cause of loss. Physical hazards exist because of a physical condition, past medical history, or a condition at birth, such as blindness.

Mutual companies

are owned by the policyowners and issues participating policies. With participating policies, policy owners are entitled to dividends which in the case of mutual companies are a return of excess premiums, are a return of excess premiums and are therefore nontaxable. Dividends are generated when the premiums and the earnings combined exceed the actual costs of providing coverage, creating a surplus. Dividends are not guaranteed.

Stock companies (Type of ownership)

are owned by the stockholders who provide the capital necessary to establish and operate the insurance company and who share in any profits or losses. Officers are elected by the stockholders and manage stock insurance companies. Traditionally, stock companies issue nonparticipating policies, in which policy owners do not share in profits or losses. a nonparticipating stock policy does not pay dividends to policyowners; however, taxable dividends are paid to stockholders.

Morale Hazards

are similar to moral hazards, except that they arise from a state of mind that causes indifference to loss, such as carelessness. Actions taken without forethought may cause physical injuries.

Moral Hazards

are tendencies toward increased risk. Moral hazards involve evaluating the character and reputation of the proposed insured. Moral hazards refer to those applicants who may lie on an application for insurance, or in the past, have submitted fraudulent claims against an insurer.

Perils

are the causes of loss insured against in an insurance policy.

admitted vs non-admitted insurers

before insurers may transact business in a specific state, they must apply for and be granted a license or certificate of authority from the state department of insurance and meet any financial capital and surplus requirements set by the state. insurerers who meet the state's financial requirements and are approved to transact business in the state are considered authorized or admitted into the state as a legal insurer. Those insurers who have not been approved to do business in the state are considered unauthorized or non-admitted. Most states have laws that prohibit unauthorized insurers from conducting business in the state, except through licensed excess and surplus lines brokers.

Insurance companies: domicile

domestic foreign alien

Adverse selection

insurance companies strive to protect themselves from adverse selection, the insuring of risks that are more prone to losses than the average risk. Poorer risks tend to seek insurance or file claims to a greater extent than better risks. To protect themselves from adverse selection, insurance companies have an option to refuse or restrict coverage for bad risks, or charge them a higher rate for insurance coverage.

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 insurer to project losses based on statistics.)

Not catastrophic

insurers need to be reasonably certain there 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.

life insurance

insures against the financial loss caused by the premature death of the insured;

casualty insurance

insures against the loss and or damage of property and resulting liabilities

Property insurance

insures against the loss of physical property or the loss of its income-producing abilities

Health Insurance

insures against the medical expenses and or loss of income caused by the insured's sickness or accidental injury

Speculative risk

involves the opportunity for either loss or gain. An example of speculative risk is gambling. these types or risks are not insurable.

Insurance concept

is a contract in which one party (the insurance company ) agrees to indemnify (make whole) the insured party against loss, damage or liability arising from an unknown event. In life insurance, the policy protects survivors from losses suffered after an insured's death.

Reinsurance

is a contract under which one insurance company (the reinsurer) indemnifies another insurance company for part or all of its liabilities. The purpose of reinsurance is to protect insurers against catastrophic losses. The originating company that procures insurance on itself from another insurer is called the ceding insurer (because it cedes, or gives, the risk to the reinsurer.) the other insurer is called the assuming insurer, or reinsurer. When reinsurance is purchased on a specific policy, it is classified as facultative reinsurance. When an insurer has an automatic reinsurance agreement between itself and the reinsurer in which the reinsurer is bound to accept all risks ceded to it, it is classified as a reinsurance treaty. Treaties are usually negotiated for a period of a year or longer.

Sharing

is 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. A reciprocal insurance exchange is a formal risk-sharing arrangement.

Exposure

is a unit of measurement used to determine rates charged for insurance coverage. A large number of units having the same or similar exposure to loss are referred to as homogeneous. The basis of insurance is sharing risk between a large homogeneous group with similar exposure to loss.

Foreign insurer

is an insurance company that is incorporated in another state or territorial possession.

Domestic insurer

is an insurance company that is incorporated in this state. in most cases, the company's home office is in the state in which it was formed- the company's domicile. for instance, a company chartered in Pennsylvania would be considered a Pennsylvania domestic company

loss

is defined as 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 loss

Risk retention

is the planned assumption of risk by an insured through the use of deductibles, co-payments, or self-insurance. it is also known as self-insurance when the insured accepts the responsibility for the loss before the insurance company pays. the purpose of retention is 1. to reduce expenses and improve cash flow 2. to increase control of claim reserving and claims settlements 3. to fund for losses that cannot be insured

Risk

is the uncertainty or chance of a loss occurring. The two types of risks are pure and speculative, only one of which is insurable

Elements of insurable risks

not all risks are insurable. as noted earlier, insuers will insure only pure risks, or those that involve only the chance of loss with no chance of gain. Furthermore, even pure risks must have certain characteristics in order to be insurable. insurable risks involve the following characteristics.

Avoidance

one of the methods of dealing with risk is avoidance, which means eliminating exposure to a loss.

Pure risk

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

Reduction

since we usually cannot avoid risk entirely, we often attempt to lessen the possibility or severity of a loss. 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.

Insurance companies: ownership

stock mutual

Insurer (principal)

the company who issues an insurance policy

Premium

the money paid to the insurance company for the insurance policy

Transfer

the most effective way to handle risk is to transfer it so that the loss is borne by another party. Insurance is the most common method of transferring risk from an individual or group to an insurance company. Though the purchasing of insurance will not eliminate the risk of death or illness. it relieves the insured of the financial losses these risks bring. There are several ways to transfer risk, such as hold harmless agreements and other contractual agreements, but the safest and most common method is to purchase insurance coverage.

Policyowner

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