Principles of Insurance and General Insurance

Loss

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

Promissory Warranty

warranty in which certain things will be done or not be done after the policy takes effect.

Reinsurance Treaty

when insurer has automatic reinsurance agreement between itself and the reinsurer in which the reinsurer is bound to accept all risks ceded to it.

Facultative Reinsurance

when reinsurance is purchased on a specific policy

Warranty

absolutely true statement upon which the validity of the insurance policy depends.

Risk Retention Group

liability insurance company owned by its members, which are exposed to similar liability risks by virtue of being in the same business or industry.

Physical Hazards

characteristics that increase the chances of the cause of loss ex. condition, medical history, blindness

Hazards

conditions or situations that increase the probability of an insured loss occurring. ex. lifestyle, existing health, and scuba diving

Legal Purpose

contract must be legal and not against public policy

Estoppel

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. Legal consequence of a waiver

Unilateral Contract

only one of the parties to the contract is legally bound to do anything. Insured makes no legally binding promises; however insurer is legally bound to pay losses covered by police in force.

Ambiguities in a Contract of Adhesion

only the insurance company has the right to draw up a contract, and the insured has to adhere to the contract as issued, the courts have held that any ambiguity in the contract should be interpreted in favor of the insured.

Fraternal Benefit Society

organization formed to provide insurance benefits for members of an affiliated lodge, religious organization, or fraternal organization with a representative form of government.

Ceding Insurer

originating company that procures insurance on itself from another insurer

Mutual Companies

owned by the policy owners and issue participating policies.

Indemnity (reimbursement)

provision in an insurance policy that states that in the event of 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 insurance contract.

Law of Large Numbers

the larger the number of people with a similar exposure to loss, the more predictable actual losses will be. Forms the bases for statistical prediction.

Premium

the money paid to the insurance company for the insurance policy

Policyowner

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

Independent Agency System/American Agency System

- 1 independent agent represents several companies - nonexclusive - commissions on personal sales - business renewal with any company

Utmost Good Faith

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

Homogeneous

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

Contract

agreement between two or more parties enforceable by law.

Foreign Insurer

insurance company that is incorporated in another state

Unilateral

one-sided (only one party makes a promise)

Government Insurance Programs

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

Purpose of Reinsurance

to protect insurers against catastrophic losses

Aleatory

unequal values

Exposure

unit of measurement used to determine rates charged for insurance coverage.

Misrepresentation

untrue statements on application and could void contract. This would alter underwriting decision of the insurance company; furthermore if found intentional is considered fraud

Waiver

voluntary act of relinquishing a legal right, claim or privilege

Managerial System

- Branch Manager (supervises agents) - Salaried - Agents can be insurer's employees or independent contractors

General Agency System

- General agent-entrepreneur represents 1 company - Exclusive - Compensation and commissions - Appoints subagents

Direct Response Marketing System

- No agents - Company advertises directly to consumers - Consumers apply directly to the company

Exclusive Agency System/Captive Agents

- one agent represents one company - exclusive - commissions on personal sales - renewals can only be placed with appointing insurer

Reinsurance

contract under which one insurance company (the reinsurer) indemnifies another insurance company for part or all of its liabilities.

Avoidance

eliminating exposure to a loss

Kinds of Warranty

- affirmative - promissory

Insured

A person covered by an insurance policy. This person may or may not be the policy owner

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

Social Insurance Program

a government program designed to provide protection against unpredictable financial distress; where private insurance is not available.

Agent/Producer

a legal representative of an insurance company

Reciprocity

a mutual interchange of rights and privileges

Applicant or proposed insured

a person applying for insurance

Professionalism

a person is engaged in an occupation requiring an advanced level of training, knowledge, or skill.

Beneficiary

a person who receives the benefits of an insurance policy

Pure Risk

a risk that presents the chance of loss but no opportunity for gain. Only type of risk that insurance companies are willing to accept.

Speculative Risk

a situation in which either profit or loss is possible. These types of risks are not insurable.

Express Authority

authority a principal intends to grant to an agent by the means of the agent's contract

Perils

causes of loss insured against in an insurance policy

Life Insurance

coverage on human lives

Risk Purchasing Group

entity which offers insurance to groups of similar businesses with similar exposures to risk.

Aleatory Contract

exchange of unequal amounts or values

Affirmative Warranty

express (written) or implied positive representation that affirms an existence of a fact at the time the policy was entered into.

Types of Agent Authority

express, implied, apparent

Financial Status

financial strength based on prior claims experience, investment earnings, levels or reserves (money is separate account), and management. Guides include AM Best, Fitch, Standard and Poor's, Moody's, Weiss

Authorized/Admitted Insurers

have been granted license or certificate of authority from state department of insurance and meet financial (capital and surplus) requirements set by the state.

Domicile

insurance companies are classified according to the location of incorporation. (domestic, foreign, and alien insurers)

Domestic Insurer

insurance company that is incorporated in this state

Alien Insurer

insurance company that is incorporated outside the United States.

Reciprocal

insurance resulting from an interchange of reciprocal agreements of indemnity among persons known as subscribers.

Adverse Selection

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

Fraud

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.

Insurance

is a contract in which one party (insurance company) agrees to indemnify the insured party against loss, damage or liability arising from an unknown event. Is the transfer of risk of loss

Concealment

legal term for the intentional withholding of information of a material fact that is crucial in making a decision.

Transfer (Risk Transfer)

management and control strategy that involves the contractual shifting of a pure risk from one party to another

Code of Ethics

market conduct describes the way companies and producers should conduct their business. Regulations include - conflict of interest - request of a gift or loan as a condition to complete business - supplying confidential info

Competent Parties

must be capable of entering into a contract in the eyes of the law. Requires both parties be of legal age, mentally competent to understand the contract, and not under the influence of substances.

Lloyd's Associations

not and insurance company but provides support facilities for underwriters or groups of individuals that accept insurance risk

Adhesion

only one party (insurer) prepares a contract, and the other party (insured) accept it as is

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.

Retention (Risk Retention)

planned assumption of risk by an insured through the use of deductibles, co-payments, or self-insurance. Purpose is 1) reduce expenses and improve cash flow 2) increase control of claim reserving and claims settlements 3) fund for losses that cannot be insured

Contract of Adhesion

prepared by one of the parties (insurer) and accepted or rejected by the other party (insured)

The law of agency

relationship between the principal (insurer) and the agent/producer; whom acts within scope of authority - agent must represent the insurer, not the insured - knowledge of the agent is presumed to be knowledge of the insurer - agent is working within conditions of their contract, insurer is fully responsible - when the insured submits payment to agent, it is the same as submitting payment to the insurer Agent is responsible for accurately completing applications for insurance, submitting application to insurer for underwriting, and delivering policy to policyowner

Conditional Contract

requires certain conditions must be met by the policyowner and company in order for the contract to be executed before each party fulfills its obligations. Ex. premium must be paid and proof of loss must be provided in order for insurer to cover claim

Binder

temporary agreement issued by an agent or insurer providing temporary coverage until a policy can be issued

Moral Hazards

tendencies towards increased risk. Involve evaluating the character and reputation of the proposed insured. Refer to those applicants who may lie on an application for insurance, or in the past, have submitted fraudulent claims against an insurer.

Death Benefit

the amount paid upon the death of the insured in a life insurance policy

Apparent 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.

Insurer (principal)

the company who issues an insurance policy

Risk

the uncertainty or chance of a loss occurring.

Reduction (Risk Reduction)

Attempt to lessen the possibility or severity of a loss. Ex. Installing smoke detectors, health checkups, lifestyle changes

Types of Marketing Arrangements

1) independent agency system/american agency system 2) exclusive agency system/captive agents 3) general agency system 4) managerial system 5) direct response marketing system

Classification of Private Insurance

1) ownership 2) authority to transact business 3) marketing and distribution systems 4) location (domicile) 5) rating (financial strength)

Types of ownership

1) stock companies 2) mutual companies 3) fraternal benefit society 4) Lloyd's associations 5) risk retention group 6) risk purchasing group 7) reciprocal

Offer & Acceptance

1) submitted application 2) takes place when an insurer's underwriter approves the application and issues a policy

Elements of a Legal Contract

1. Agreement - offer and acceptance 2. Consideration 3. Competent parties 4. Legal purpose

Elements of Insurable Risk

1. Due to chance 2. Definite and measurable 3. Statistically and predictable 4. Not catastrophic 5. Randomly selected and large loss exposure

Personal Contract

agreement between an insurance company and an individual that states that insurance policies cover the individual's insurable interest. The 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 the insurer's approval. MUST HAVE WRITTEN NOTIFICATION

Implied Authority

authority that is not expressed or written into the contract, but which the agent is assumed to have in order to transact the business of insurance for the principal.

Fidiciary Responsibility

someone in a position of trust, obligated to treat applicants and insureds in an ethical manner

Consideration

something of value that each party gives to the other. Is the payment of premium and the representations made in the application; promise to pay in the event of loss.

Morale Hazards

state or mind that causes indifference to loss, such as carelessness. ex. texting while driving

Representaions

statements believed to be true to the best of one's knowledge, but are not guaranteed to be true