unit 1

insures unusual risk

-hole-in-one contest -athletes arm -celebrities hair

surplus lines

-insurance sold by unauthorized/nonadmitted insurers if on the states approved list of surplus insurers -can only be sold to certain high-risk insured -cannot be sold solely for cheaper rate than licensed/admitted insurers

Risk retention group

-liability insurance company created for policy holders from the same industry -ex: a car dealers' risk retention group in which only car dealers can be policy holders

stock insurer

-owned by "stockholders" -dividend (money) is not guaranteed -dividend (money) is paid to stockholder -dividend (money) is taxable to stockholders -issues non-participating policies

reciprocal insurer

-unicorporated -members are required to pay an assessed amount if a loss to any member of the group occurs -managed by an attorney-in-fact

the federal government can provide insurance for

-war risk insurance -nuclear energy liability insurance -flood insurance; and -federal crop insurance -unemployment insurance -workers compensation

elements of an insurable risk:

CANHAM calculable affordable non-catastrophic homogeneous accidental measurable

Risk is the

POSSIBILITY that a loss will occur.

sometimes an individual or business has an exceptionally large or specialized risk that no authorized insurer can or will cover. In this case, the individual or business may call

a surplus lines insurance company

the cause of a loss is called a

peril

the 'Law of Large Numbers' is the principle that makes insurance possible. the larger the group,

the more accurately losses can be predicted. It is impossible to guess specifically who will suffer a loss in the future, but thanks to the law of large numbers, insurance companies can be fairly certain how many losses will occur in the group as a whole

Pure risks only involve

the possibility of experiencing a loss, NOT a gain. the change of being in a car accident is a pure risk. Pure risks can be covered by insurance.

a person who drives his car to and from sales calls all day will have a higher exposure risk than someone who works remote and makes calls over the telephone. The higher the exposure to risk, the higher

the premium

agency is a relationship in which one person is authorized to represent and act for another person or a corporation. In insurance, the insurance agent acts on behalf of

the principal

fiduciary=

trust

mutual insurer-owned by the

"policy holders" aka customers -dividend is not guaranteed -dividend is paid to stockholder -dividend is taxable to stockholders -issues non-participating policies

lighting striking a house and an automobile hitting a tree are examples of what kind of loss?

Direct loss

There are two types of loss

Direct loss and Indirect loss

what type of advertising doesn't involve an agent and is conducted through the mail, by advertisements in newspapers and magazines, on television and radio, or through the internet?

Direct response

an insurer is referred to as foreign if

In another state or U.S. territory

Affordable

The premium for transferring the risk should be affordable for the average consumer

a stock insurer is

a business formed as a corporation and owned by its stockholders (aka shareholders)

what individual represents only one insurance company?

a captive agent

Indirect loss is

a consequential loss as the result from a direct loss

a person in a position of financial trust is called

a fiduciary

risk purchasing group

a group of business from the same industry joining together to buy liability insurance from an insurance company -the risk purchasing group is not the insurance company

a fiduciary is

a person in a position of financial trust.

fiduciary trust

a person in a position of financial trust. -promptly sends premiums to insurer -has knowledge of products -complies with laws and regulations -does not commingle funds

Direct loss is

a physical loss to property with no intervening cause.

agency is

a relationship in which one person is authorized to represent and act for another person, or for a corporation.

Morale hazards are

a state of mind or careless attitude. an unconscious change in a person's actions or behaviors.

an agent must use suitability (appropriate) considerations. Suitable recommendations can only be made if

an agent obtains information about an applicant's needs, objectives, and circumstances, and then gives thought to how a products features and benefits will address the applicant's situation.

risk retention group is

an insurer formed for the sole purpose of providing liability insurance for its policy holders.

A hazard is

anything that increases the chance that a loss will occur

direct-writing companies

are companies whose products are sold by employees, not independent contractors. This type of producer may be compensated by a salary, commission, or both. The insurance company owns the renewals of the policies sold on their behalf.

captive agents

are individuals that represent only one company. captive agents are independent contractors, not employees of the insurer. The insurance company owns the renewals of the policies sold on their behalf.

independent insurance agents

are individuals that sell the insurance products of several companies and are independent contractors, not employees of the insurers. Independent agents own the renewals of the policies they sell.

Moral hazards

arise from an individual's character.

express authority is the

authority made explicit in a producer's written agency agreement with the insurer. ex: if the producer is given express authority to write a $500,000 life insurance policy, he cannot write a $1,000,000 policy

agent authority- apparent=

authority that OTHERS believe the agent has. -tasks the agent does that a reasonable person would assume as authority, based on the agent's actions and statements.

The indirect loss is always __________ of the direct loss

consequential (resulting)

under the law of agency, contracts made by the agent are considered to be

contracts of the principal.

with a mutual insurer, funds that remain after paying claims and operating costs may be distributed to the policy owners as

dividends. dividends are considered a refund of overpaid premium and are not taxable.

risk 'Avoidance' means

eliminating a particular risk by not engaging in a certain activity ex: an individual who does not drive avoids risk of injuring someone in an automobile collision are being held liable for those damages.

The more a person drives, the more ______ she has to accidents and other potential problems

exposure

The potential for accidents and other losses is called

exposure

the authority made explicit in a producer's written agency agreement with the insurer is known as

express authority

an alien insurer is an insurer

formed under the laws of any country other than the U.S. and its territories .

Speculative risks

have a possibility of a loss and also the possibility of a gain.

Carl hands out a business card with his company's logo to all new prospects that he meets at a golf outing. This is an example of

implied authority

loss of rental income due to house fire, which causes a loss of profits for the landlord is an example of what kind of loss?

indirect

Lloyd's association- insurance provided by

individual underwriters, not companies

General agents or managing general agents

individuals that hire, train, and supervise other agents within a specific geographical area. GAs and MGAs earn overriding commissions on the business produced by the agents they manage.

1st party

insured (customer)

2nd party

insurer (insurance company)

apparent authority

is authority that others believe the agent has. ex: if an agent sends an insured an email stating that the insured's policy covers flooding but in reality, the policy excludes flooding from the coverage, the company may be required to pay the claim because of the actions of the agent.

implied authority

is not written in the agency contract, but it is assumed to be granted to an agent in accordance with general business practices. ex: an agent's contract may not say in writing that the agent has the right to print business cards with the insurance logo on them, but this authority is implied by allowing the agent to act on the insurer's behalf.

risk 'reduction' refers to

lessening the chance that a loss will occur, or lessening the extent of a loss if it occurs. If a business installs a sprinkler system in its building, this will help reduce or eliminate the damage caused by a fire.

An agent must use 'suitability considerations' to

make purchase recommendations that are appropriate, or suitable, in light of a client's particular needs, objectives, and circumstances.

dishonesty is a _______ hazard because it may increase the change that an individual lies on an insurance application or fake a loss

moral

carelessly leaving the doors and windows unlocked when not at home is an example of a _______ hazard

morale

agent authority-implied=

not written in the agency contract, but assumed to be granted to an agent in accordance with general business practices. -a contract may not say in writing that the agent has the right to print business cards with the insurer's logo on them, but this authority is implied by allowing the agent to act on the insurer's behalf.

risk purchasing groups are formed for the purpose of

obtaining liability insurance for its members.

mutual companies are referred to as

participating companies because they sell participating policies

mutual policies are referred to as

participating policies because the policy owners participate in the operating results of the company.

physical hazard

physically identifiable factors that increase the chance of loss. ex: if the tires on a car are slick with little or no tread, the possibility of a car accident increases.

exposure

possibility that a loss will occur

underwriting is how insurance companies determine

premium rates and decide whether or not they will offer insurance.

Calculable

premiums must be calculable based upon prior loss statistics for that particular risk in order to predict future losses.

fraternal insurer

provides insurance and other benefits must be a member of the society to get the benefits

insurance companies often purchase insurance to cover their own exposure to loss. this is called

reinsurance

self-insured is a means of

retaining, rather than transferring risk. the business may set aside funds to cover losses in advance and may even have a claims system like an insurance company.

Jeff lives in a good neighborhood across the street from the fire station, he decides to cancel his fire insurance policy. this is an example of which risk management method?

retention

Insurance is designed to cover losses that involve

risk

reinsurance is like insurance for insurers. It transfers

risk from one insurer to another insurer. it helps insurers spread their risk

Gambling and investing are example of

speculative risks; you could win money or you could lose money. Insurance companies will not insure you to go to Las Vegas to gamble in case you lose money.

a mutual insurer does not have

stock or stockholders. it is owned by its policyholders (customers).

members of reciprocal groups are known as

subscribers. each subscriber has an account through which premiums are paid and earned interest is tracked.

sometimes an individual or business will have a large risk that no authorized insurer can or will cover. in such cases, insurance may be obtained from an unauthorized/nonadmitted insurer on a

surplus lines basis.

fraternal benefit societies exist for

the benefit of their members and offer insurance as one of the benefits of members. Fraternals also provide social activities and usually engage in charitable and benevolent causes. Organizations are typically based on a common religion or ethnic group and provide many services, including insurance, to their members.

in Lloyd's association members are individually liable and responsible for

the contracts of insurance into which they enter.

Suzanne leaves her door unlocked. One afternoon a thief entered her apartment and stole all of her jewelry. what was the hazard?

the door being unlocked

if a house burns down, what is the peril?

the fire

commingling is

the illegal act of mixing personal funds with the insured's or insurer's funds.

risk 'retention' means

the individual or business will pay for the loss if it occurs, or a portion of the loss via a deductible. If you don't have care insurance to pay for the damages you cause to another person in an accident, you have retained that risk

'Commingling' is

the legal act of mixing personal funds with the insured's or insurer's funds

treaty (agreement) reinsurance

the reinsurer accepts all risks of a certain type from the ceding company

facultative (optional) reinsurance

the reinsurer considers each risk before allowing the transfer from the ceding company (An insurance company that passes the part or all of its risks from its insurance policy portfolio to a reinsurance firm).

an insurer is referred to as domestic if

the state in which the insurer was formed and usually headquartered.

adverse selection

the tendency for higher-risk individuals to get and keep insurance as compared to individuals that represent an average level of risk.

a loss is defined as

the unintended, unforeseen damage to property, injury, or amount paid.

in a direct response market

there is no producer or agent. policies are sold directly by the insurer. Direct response marketing is conducted through the mail, by advertisements in newspapers and magazines, on tv and radio, or through the mail.

Lloy'd associations

they are not insurance companies. rather they provide a hub for the exchange of information among member underwriters who actually transact the business of insurance. (underwriters sign and accept liability and guaranteeing payment in case loss or damage occurs.)

Insurance is a contract that

transfers the risk of financial loss from an individual or business to an insurance company

In risk 'sharing',

two or more individuals or business agree to pay a portion of any loss incurred by any member of the group. Stockholders in a corporation share the risk

Insurance companies have _______________ departments to evaluate a risk and rate an exposure

underwriting

to avoid adverse selection, insurers make an extensive evaluation of information related to a particular risk- a process called

underwriting

reciprocal insurers are

unincorporated groups of people that agree to insure each other's losses under a contract. members are assessed if a loss occurs to any member of the group. Members are known as subscribers. The attorney-in-fact is often controlled and overseen by an advisory committee of subscribers.

risk 'transfer' s

what happens with insurance. The insurer (insurance company) agrees to pay if an insured (customer) has a loss-the insured no longer bears that risk.

agent authority-express=

wording in the contract that specifically tells the producer what they can and cannot do. -If the producer is given express authority to write a $500,000 life insurance policy, he cannot write a $1,000,000 policy.