Basic Insurance Concepts and Principles

Insurable interest may exist between the policyowner and the insured when

- policyowners own life - life of a family member - life of a business partner, key employee or someone who has financial obligation to policyowner

Homogeneous

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

Sharing

A method of dealing with risk for a group of individual persons or businesses with the same or similar exposure to loss who share the losses that occur within that group.

Insured

A person covered by an insurance policy

Agent/Producer

A person who acts for another person or entity with regard to contractual arrangements with third parties; a legal representative of an insurance company.

Applicant / Proposed Insured

A person who requests or seeks insurance from an insurer.

Legal Hazard

A set of legal or regulatory conditions that affect insurers ability to collect premiums that are commensurate with the exposure to loss that insurer must bear

Exposure

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

Reduction

Actions such as installing smoke detectors, having annual physical, making changes to our lifestyle

Morale Hazard

Arise file the state of mind that causes indifference to loss (carelessness)

Peril

Cause of loss

Hazards

Conditions or situations that increase the probability or an insured loss occurring

Avoidance

Eliminating exposure to a loss

Insurable Interest

Facing the possibility of losing money or something of value in the event of a loss. Must exist at the time of application

As the number of people on a risk pool increases

Future losses become more predictable

Indemnity

In the event of loss, an insured or beneficiary is permitted to collect only the extent of financial loss, and is not allowed to recover more than their loss.

Important risks

Include those exposures in which the losses enojad lead to major changes in the persons desired lifestyle or profession

Unimportant risks

Include those exposures in which the possible losses could be met out of current assets or current income without imposing undue financial strain or lifestyle changes

Hazard

Increases the chance of loss

Speculative risk

Involved the opportunity for either LOSS or GAIN. Ex gambling (not Insurable)

Risk

Is a chance that a loss will occur

Ideally insurable risks

Loss - must be an accident - must be statistically predictable - cannot be catastrophic - exposure to be insured must involve large homogenous exposure units - the insurance must not be mandatory

Retention

Planned assumption of risk by an insured through the use of deductibles, co-payments, or self-insurance.

Two types of risk

Pure and Speculative

Pure risk

Situations that can only result in LOSS or NO CHANGE. No financial gain (only type that insurance companies will accept)

Moral Hazard

Tendencies towards increased risk. Evaluating the character and reputation of the proposed insured. (Fraud)

Perils

The causes of loss insured against in an insurance policy

Law of large numbers

The larger the number of people with a similar exposure to loss, the more predictable actual losses will be. (Statistical predictions)

Premium

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

Insurance

The transfer of risk. Insureds losses are transferred over to the insurer.

Risk

The uncertainty or chance of a loss occurring.

Transfer

Transfer risk so that the loss is borne by another party. (Purchasing insurance coverage)

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

Agency Contract

a contract that is held between an insurer and an agent/producer, containing the expressed authority given to the agent/producer, and the duties and responsibilities to the principal.

Life insurance

a coverage upon a person's life, and granting, purchasing or disposing of annuities

Physical Hazard

a physical condition that increases the frequency or severity of loss (pass medical history)

Critical risks

include all exposures to loss in which the possible losses are of a magnitude that would result in bankruptcy

Adverse selection

insuring of risks that are more prone to losses than the average risk

Beneficiary

one who receives benefits from policy

Death benefit

the amount paid when a claim is issued against a policy of insurance

Insurer (principal)

the company who issues an insurance policy

Policyowner

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