General Insurance (ExamFX)

Beneficiary

The person who receives the benefits from the policy of insurance.

The 3 types of agent authority

1. expressed 2. implied 3. apparent

Hazard

A CONDITION or situation that creates or increases the probability of a loss from a peril

Peril

Are CAUSES of LOSS insured against.

Assuming insurer

Is the reinsurer. The company that is SUPPLYING to insurance to the ceding insurer.

Waiver

A voluntary act of relinquishing a legal right, claim or privilege.

What is the purpose of retention?

1. To reduce expenses & improve cash flow. 2. To increase control of claim reserving and claims settlements 3. To fund for losses that cannot be insured.

Exclusive Agent System / Captive Agents

*1 agent : 1 company *Exclusive *Commission-personal sales *Renewal -Only placed with appointing insurer

Independent Agency System / American Agency System

*1 independent Agent, represents several companies *NONexclusive *Commission-personal sales *Renewal -any company.

Guides to insurance companies' financial integrity are published regularly by various independent rating services (5)

*AM Best *Fitch *Standard & Poor's *Moody's *Weiss

In the producer & insurer relationship, it is a given that? (4)

*An agent represents the insurer, NOT insured *Any knowledge of agent is presumed knowledge of the insurer. *If agent is working within conditions of their contract, the insurer is fully responsible *When insured submits payment to agent, it's the same as submitting payment to the insurer.

Fraternal benefit society

*An organization formed to provide insurance benefits for members of an affiliated lodge, religious organization or fraternal organization with a representative form of government. *They sell only to their members. *Considered charitable institutions & NOT insurers. *NOT subject to all regulations that apply to insurers that offer coverage to the public at large.

Managerial System

*Branch manager (supervises agents) *Salaried *Agents can be employee or independent conctractors

Insurable Risk must have?

*Due to chance*-Accidental *Definite & Measured* (time, place & amount) *Statistically Predictable* (with some degree of certainty) *NOT catastrophic* *Randomly selected & Large loss exposure*

General Agency System

*General agent/entrepreneur represents 1 company *Exclusive *Compensation & commissions *Appoints subagent

Reciprocal Insurance Company or Exchange.

*Insurance resulting from an interchange of reciprocal agreements of indemnity among persons known as subscribers *Company is put into effect/administered through an ATTORNEY-IN-FACT (manages/operates the exchange) *Subscribers agree to become liable for their share of losses & expenses incurred among all subscribers.

Lloyd's Associations

*NOT an insurance company *Funded by subscriptions paid by members who participate in underwriting activities. *Provides support facilities for underwriters or groups of individuals that accept insurance risk. *A group of individuals who operate an insurance mechanism using the same principle of individual liability of insurers that Lloyd's uses. *NOT to be confused with Lloyd's of London*

Direct Response Marketing System

*No Agents *Advertises directly to consumer *consumer applies directly to company.

Mutual Company

*Owned by policyowners.& issue PARTICIPATING polices.

Stock Companies

*Owned by stockholders, who provide capital necessary to establish & operate and who share in any profits. *Officers are elected & manage company. *Traditionally issue NONPARTICIPATING policies. Policyowners do NOT share in profits/losses.

Private insurance policies can be classified in a variety of ways (5)

*Ownership *Authority to transact business *Location (domicile) *Marketing & Distribution systems *Rating (financial strength) These categories are not mutually exclusive & the same company can be described bases on where it's located, allowed to transact business, who owns it and what type of agents it appoints.

Moral Hazard

*Right vs. Wrong.* The Predisposition of the person. Refers to those applicants that may lie on an application, or in the past have submitted fraudulent claims against an insurer.

The agent is responsible for (3)

*accurately completing applications *submitting application to insurer for underwriting *Delivering the policy to the policyowner.

Some Market conduct regulations include, but to limited too (3)

*conflict of interest *A request of a gift/loan as a condition to complete business *supplying confidential information.

Four methods of handling risk?

1. Avoidance 2. Retention 3. Sharing 4. Transfer

Elements of a Legal Contract

1. Competent parties 2. Legal purpose 3. Offer/Acceptance (Agreement) 4. Consideration

Insurance Policy

A contract between a policyowner (insured)and insurance company, which agrees to pay the insured/beneficiary for a loss caused by a specific events. *insurance policies are NOT drawn up through negotiations & insured has little to say about its provisions.

Reinsurance

A contract in which one insurance company indemnifies another insurance company for part or all of its liabilities.

Certificate of Authority

A document that authorizes a company to start conducting business & specifies the kind(s) of insurance a company can transact. It is illegal for an insurance company to transact insurance without this certificate.

Homogeneous

A large number of units having the same or similar exposure to loss.

Risk Retention Group (RRG)

A liability insurance company owned by its members. *Members are exposed to similar liability risks by virtue of being in the same business or industry. *The purpose is to assume & spread all or part of the liability of its group members *A RRG may reinsure another RRG's liabiity as long as the members of the second group are engaged in the same or similar business/industry.

Professionalism

A person is engaged in an occupation requiring an advanced level of training, knowledge or skill. Being professional means placing the public's interest above one's own in all situations.

Agent/Producer

A person who acts for another person or entity known as the principle with regards to contractual arrangements with third parties; a legal representative of an insurance company. *An individual licensed to sell, solicit or negotiate insurance contracts on behalf of the principal (insurer) *Has fiduciary responsibility. they can NOT commingle premiums collected with their own personal funds.

Actuary

A person who complies and analyzes statistics and uses them to calculate insurance risk and premiums

Applicant / Proposed Insured

A person who requests or seeks insurance from an insured

Indemnity

A provision in an insurance policy that states that in the event of loss, an insured or 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.

Material misrepresentation

A statement that, if discovered, would alter the underwriting decision of the insurance company. If they are intentional, they are considered fraud

Transfer

A strategy that involves the contractual shifting of a pure risk from one party to another. It relieves the insured of the financial losses these risks bring.

Exposure

A unit of measure used to determine rates charged for insurance coverage.

An insurance contract is?

Aleatory, Personal & Unilateral.

Admitted / Authorized Insurer

Allowed to conduct business in a state.

Warranties

An absolutely true statement upon which the validity of the insurance policy depends. *promises made by applicant that is made part of contract guarantee about conditions which are suppose to exist. Statement a person promises to be true.

Contract

An agreement between two or more parties enforceable by law.

Reduction

An attempt to lessen the possibility or severity of a loss. Examples; installing smoke detectors, change in lifestyle.

Foreign Insurer

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

Alien Insurer

An insurance company that is incorporated outside the USA.

Government Programs

Are funded with taxes and serve national and state social purposes.

Representations

Are statements believed to be true to the best of one's knowledge, but they are not guaranteed to be true. *The answers the insured gives to the question on the insurance application.

Financial Strength

Based on prior claims experience, investment earnings, level of reserves (amount of money kept in a separate account to cover debts to policyholders) & management.

Ambiguities in a Contract of Adhesion

Because only insurer has the right to draw up contract, the insured has to adhere to contract as issued. The courts have held that any ambiguity in the contract should be interpreted in favor of the insured.

Agent /Agency Contract

Contract between insured and agent/producer, containing EXPRESSED duties & responsibilities to the principle. If agent violates agent contract/agreement they may be held personally liable for Breach of Contract.

Law of Agency

Defines the relationship between principal & agent. The acts of the agent within scope of authority are deemed to be the acts of the insured.

Market conduct

Describes the way companies & producers should conduct their business *It is a Code of Ethics for producers.

Risk Sharing

Distribute Risk (i.e. partnerships) Dealing with risk for a group or individual or business with the same or similar exposure to loss to share the losses that occur within that group....Sharing is a method to drive down costs in order to minimize retention risk

Nonparticipating (stock) policies

Does not pay dividends to policyowners. However, taxable dividends are paid to stockholders... Policyowners do not share in profits or losses.

Conditional Contract

Each party must perform ONLY if specified events take place *insured-only makes claim if loss occurs. Insurer-only pays claim in premiums paid, there's a insured loss & claim filed. Example; insured must pay the premium & provide proof of loss in order for the insurer to cover a claim. Policy is conditional

Risk Avoidance

Eliminating exposure to a loss. Example, you don't want to die in a plain crash, so you don't fly.

Social Insurance Programs

Federal & State government provide insurance in the areas where private insurance is not available.

Major Difference between government & private insurance programs?

Government programs are funded with taxes and serve national/state social purposes, while private policies are funded by premiums.

Domestic Insurer

Insurance company that is incorporated in this state., typically the company's home office is in the state in which it is formed

Reciprocal

Insurance resulting from an interchange of reciprocal agreements of indemnity among persons known as subscribers, collectively know as a Reciprocal Insurance Company or Exchange.

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.

Adverse Selection

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.

Concealment

Intentional willfully withholding of material information, that is crucial in making a decision, in order to deceive another person, if material it could void the policy.

Utmost Good Faith

Is a principle that implies that there will be no fraud, misrepresentation or concealment between the parties.

Personal Contract

It is between the insurance company and an individual. 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 insurer's approval.

Domicile

Location of incorporation, must it must obtain a Certificate of Authority before transacting insurance within the state

Competent parties

Must be capable of entering into a contract in the eyes of the law. Generally be of legal age, mentally competent to understand contract & not under the influence of drugs/alcohol.

Reasonable Expectations

Not always practical or necessary to state every direct or indirect provision or coverage offered in a policy. If agent implies through advertising, sales lit, or statement that these provisions exist, an insured could reasonably expect coverage

nonadmitted / unauthorized

Not authorized to conduct business in a state. (except through licensed excess and surplus line brokers.)

Unilateral Contract

Only one of the parties to the contract is legally bound to do anything. Insured makes no legally binding promises. The insurer is legally bound to pay losses covered by a policy in force.

Speculative risk

Opportunity for either a loss or a gain. Gambling is an example. It is a risk that is not insurable.

Risk Retention

Planned assumption of risk through the use of deductibles, co-payments or self-insurance. Keeping or retaining the loss.

Private Programs

Policies that are funded by premiums.

Participating Policies

Policyowners are entitled to dividends, which are return of excess premiums & therefore NONTAXABLE. Dividends are generated when premiums and the earning combined exceed the actual cost of providing coverage, creating a surplus. Dividends are not a guarantee.

Contract of Adhesion

Prepared by one of the parties (insurer) and accepted or rejected by the other party (insured). *There is no negotiation & insured has little to say about its provisions. *Take-it or Leave-it. Insurance policy is a contract of adhesion.

Type of Risk

Pure risk and speculative risk. Only pure risk is insurable.

Legal Purpose

Purpose of the contract must be legal and not against public policy.

Pure Risk

Refers to a situation that can only result in a loss or no loss. No opportunity for financial gain. They only type of risk insurance companies are will to accept.

Morale Hazard

Relates to a persons *ATTITUDE.* Refers to the increase in the hazard arising from the insured's indifference to loss because of the existence of insurance. (ex. not going to fix it, if it breaks my insurance will pay to replace it) smoking in bed

Basis of Insurace

Sharing risk among a large pool of people with a similar exposure to loss (a homogeneous group).

Goverment Insurance Programs include;

Social Security, Medicare, Medicaid, Federal Crop insurance & National Flood insurance

Fiduciary

Someone in a position of trust.

Consideration

Something of value that each party gives to the other. *Insured is the payment for premiums & representation made in application. Insurer is the promise to pay in the event of a loss.

Law of Large Numbers

States that the larger the number of people with a similar exposure to loss, the more predictable actual losses will be. This law forms the basis for statistical perdition of loss upon which insurance rates are calculated.

Apparent Authority / 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. Exists where a principals actions could result in a third party (as a reasonable person) believing the agent had authority even where it may not be expressed or implied.

Expressed Authority

The authority a principal intends to grant to an agent by means of the agent's contract. *It is the authority that is written in the contract*

Implied Authority

The authority that is *not expressed or written into the contract but which the agent is assumed to have in order to transact the business* -This authority is incidental to and derives from express authority since not every single detail of an agent's authority can be spelled out in the written agreement. Example; collect & remit payments

Insurer

The company who issues a policy of insurnace

Premiums

The money paid to the insurance company for the policy of insurance.

Ceding Insurer

The originating company that procures insurance ON ITSELF from another insurer.... (because if cedes or gives that risk to the reinsurer).

Policyowner

The person who is entitled to exercise the rights & privileges in the policy and who may or may not be the insured.

Physical hazard

The physical condition of the item being insured, which can create or increase the chance of loss. Arise from material, structural or operational features of the risk, apart from the persons owning or managing it.

Loss

The reduction, decrease or disappearance of value of the person or property insured in a policy, caused by a named peril.

Risk

The uncertainty or chance of a loss occurring. OR.... Uncertainty as to the outcome of an event when two or more possibilities exist.

Aleatory Contract

There is an exchange of unequal amounts or values. *The premium paid is small in relation to the amount that will be paid by the insurer in the event of loss.

Offer & Acceptance

There must be a definite offer by one party, and the other party must accept this offer in its exact terms. *offer-submitting application & acceptance when insurer's underwriter approves application.

Conditions

These are specific provisions, rules of conduct, duties, and obligations which the insured must comply with in order for coverage to incept, or must remain in compliance with in order to keep coverage in effect. If policy conditions are not met, the insurer can deny the claim. The section of the insurance policy that indicates the GENERAL RULES or procedures that the insurer and insured AGREE TO FOLLOW under the terms of the policy.

Purpose of Reinsurance

To protect insurance companies against catastrophic losses.

Insurance

Transfers 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.

Misrepresentations

Untrue statements on the application and could void the contract. *False statement of fact.

Reinsurance Treaty

When an insurer has an automatic AGREEMENT between itself & the reinsurer in which the reinsurer is BOUND to ACCEPT all risks ceded to it. Treaties are usually negotiated for a year or longer.

Facultative Reinsurance

When reinsurance is purchased on a specific policy

Self-Insurance

When the insured accepts the responsibility for the loss before the insurance company pays.

Estoppel

a 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. Is a legal consequence of a waiver.

An insurance policy is?

contract of Adhesion & A Conditional contract

Intentional misrepresentation

if intentional, they are considered fraud.

Fraud

intentional misrepresentation or 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. It is grounds for voiding an insurance contract. *knowingly made, relied upon by others, results in harm to another party

Reciprocal Insurance exchange

is a formal risk-sharing agreement.