ExamFX Ch. 1

Insurance transactions

-solicitation -negotiations -sale (effectuation of a contract of insurance) -Advising an individual concerning coverage or claims

Alien Insurer

An insurance company that is incorporated outside the United States.

Market Conduct

Describes the way companies and producers conduct their business. It is a Code of Ethics for producers. Producers must adhere to certain established procedures, and failure to comply will result in penalties. Some of the market conduct regulations include: -Conflict of Interest -A request of a gift or loan as a condition to complete business -Supplying confidential information

Ceding Insurer

The originating company that procures insurance on itself from another insurer. Because it cedes, or gives, the risk to the reinsurer.) The other insurer is called the assuming insurer, or reinsurer.

Contract

An agreement between two or more parties enforceable by law. Because of unique aspects of insurance transactions, the general law of contracts had to be modified to fit the needs of insurance.

Foreign Insurer

An insurance company that is incorporated in another state or territorial possession (such as Puerto Rico, Guam, or American Samoa). Ex. A company chartered in California would be a foreign company in the state of New York.

Domestic Insurer

An insurance company that is incorporated in this state. In most cases, the company's home office is in the state which it was formed-the company's domicile. Ex. A company in PA would be considered a PA domestic company

Morale Hazards

Arise from a state of mind that causes indifference to loss, such as carelessness. Actions taken without forethought may cause physical injuries.

Implied Authority

Authority that is not expressed or written in to the contract , but which the agent is assumed to have in order to transact the business of insurance for the principle. Implied authority is incidental to and derives from express authority since not every single detail of an agent's authority can be spelled out in contract.

Life Insurance

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

Express Authority

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

insurance

transfers risk of loss from an individual or business to entity to an insurance company, spreads cause of unexpected losses to many individuals

Due to chance

A loss that is outside the insured's control

Material Misrepresentation

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

Warranty

An absolutely true statement upon which the validity of the insurance policy depends. Breach of warranties can be considered grounds for voiding the policy or a return premium. Because of such a strict definition, statements made by applications for life and health insurance policies for example are usually not considered warranties, except in cases of fraud.

Avoidance

Eliminating exposure to a loss. Ex. never riding an airplane. Effective, but seldom practical

Utmost Good Faith

Implies that there will be no fraud, misrepresentation, or concealment between the parties. As it pertains to insurance policies, both the insurer and insured must be able to rely on the other for relevant information. The insured is expected to provide accurate information on the application for insurance, and the insurer must clearly and truthfully describe policy features and benefits, and must not not conceal or mislead the insured.

Physical Hazards

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

Domestic, foreign, and alien insurers

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

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.

Types 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.

Authorized or admitted

Insurer's who meet the state's financial requirements and are approved to transact business into the state as a legal insurer.

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 and morbidity tables allows the insurer to project losses based on statistics)

Not catastrophic

Insurers need to be reasonably certain their 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 the events of this nature.

Casualty Insurance

Insures against the loss and/or damage of property resulting in 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 losses or gain. An example of a speculative risk is gambling, these risks are not insurable.

Mutual Companies

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

Stock Companies

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.

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.

Representations

Statements believed to be true to the best of one's knowledge, but they are not guaranteed to be true. For insurance purposes, representations are the answers the insured gives to the questions on the assurance application

Moral Hazards

Tendencies towards 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 the insurer.

Apparent Authority (perceived authority)

The appearance or the assumption of authority based on the actions, words, or deeds of the principle or because of circumstances the principle created. Ex, If an agent uses insurer's stationary when solicitating coverage, an applicant may believe that the agent is authorized to transact insurance on behalf of the insurer.

Law of Large Numbers

The basis of insurance is sharing risk among a large pool of people with a similar exposure to loss (a homogeneous group) . The law of Large Numbers states that the larger number of people with a similar exposure to loss, the more predictable actual losses will be. This law forms the basis for statistical prediction of loss upon which insurance rates are calculated.

Consideration

The binding force in any contract. Consideration is something of value that each party gives to each other. The consideration on the part of the insured is the payment of premium and the representations made in the application. The consideration on the part of the insurer is the promise to pay in the event of loss.

Perils

The causes of loss insured against an insurance company

Fraud

The intentional misrepresentation or intentional 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. Fraud is grounds for voiding an insurance contract.

Risk

Uncertainty or chance of loss occuring

Exposure

Unit of measurement to determine rates charged for insurance coverage. Large number of units having the same or similar exposure to loss

Misrepresentations

Untrue statements and could void the contract

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.

Reinsurance

A contract under which one insurance company (the reinsurer) identifies another insurance company for part or all of its liabilities. The purpose of reinsurance is to protect insurers against catastrophic losses.

Loss

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.

Law of Agency

Defines the relationship between the principle and the agent/producer: the acts of the agent/producer within the scope of authority are deemed to be acts of the insurer. In this relationship it is expected that: -an agent represents the insurer, not the insured -any knowledge of the agent is presumed to be knowledge of the insurer. -If the agent is working within the conditions of his/her contract, the insurer is fully responsible -When the insured submits payment to the agent, it is the same as submitting a payment to the insurer. The agent is responsible for accurately completing applications for insurance; submitting the application to the insurer for underwriting and delivering the policy to the policy owner.

Fiduciary Responsibility

A fiduciary responsibility is someone in a position trust. More specifically, it is illegal for insurance producers to commingle premiums collected from the applicants with their own personal funds.

Definite and measurable

A loss that is specific as to the cause, time, place, amount. An insurer must be able to determine how much the benefit will be and when it becomes payable.

Sharing

A method of dealing with 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.

4 Elements of a Legal Contract

1. Agreement (offer and acceptance) 2. Consideration 3. Competent parties 4. Legal Purpose

Indemnity (sometimes referred to as reimbursement)

A provision in an insurance policy that states that in the event of a loss, an insured or a 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 insured contract. The purpose of insurance is to restore, but not let an insured or beneficiary profit from the loss.

Concealment

The legal term for the intentional withholding of information of a material fact that is crucial in making a decision. In insurance, concealment is the withholding of information by the applicant that will result in an imprecise underwriting decision. Concealment may void a 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. Though the purchase of insurance will not eliminate the risk of death or illness, it relieves the insured of the financial losses these risks bring.

Competent Parties

The parties to a contract must be capable of entering into a contract in the eyes of the law. Generally, this requires that both parties be of legal age, mentally competent to understand the contract, and not under the influence of drugs or alcohol. Legal Purpose: The purpose of the contract must be legal and not against public policy.

Offer and acceptance

There must be a definite offer by one party, and the other party must accept this offer with its exact terms. In assurance, the applicant usually submits the offer when submitting the application. Acceptance takes place when an insurer's underwriter approves the application and issues a policy.

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

Risk Retention

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 claim settlements 3. To fund for losses than cannot be insured.

Reduction

Since we 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 making lifestyle changes.

Certificate of Authority

Before business insurers may transact business in a specific state, they must apply 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.

Hazards

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 chance of loss occuring