Basic Insurance Concepts and Principles

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. (i.e. brokers and agents)

Applicant/Proposed insured

A person who requests or seeks insurance from an insurer.

What is the principle stating that the larger the number of people with a similar exposure to loss, the more predictable the actually losses will be?

Law of Large Numbers

Moral vs. Morale Hazard

Moral - tendencies towards increased risk, involves evaluating the character/reputation of the proposed ensured (i.e. an applicant who has submitted fraudulent claims) Morale - state of mind that causes indifference to loss, carelessness (i.e. putting on makeup in the car)

Peril vs. Hazard

Peril is the CAUSE of loss. Hazard is a condition that increases LIKELIHOOD of loss.

What are the five methods of managing risk?

Sharing, Transfer, Avoidance, Retention, reduction

Death Benefit

The amount payable upon the death of the person whose life is insured

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. An agent who is in violation of the agency contract may be held personally liable to the insurer.

life insurance

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

beneficiary

a person who receives benefits

Pure Risk

a risk that presents the chance of loss but no opportunity for gain (this is the type of risk insurance companies are willing to accept)

Legal Hazard

a set of legal or regulatory conditions that affect an insurers ability to collect premiums that are commensurate with (equal in value to) the exposure to loss that the insurer must bear

Speculative Risk

a situation in which either profit or loss is possible, example, gambling

Insurance companies strive to protect themselves from ________________ _____________, the insuring of risks that are more prone to losses than the average risk.

adverse selection

What four factors are used when determining a life insurance rate?

age medical history occupation sex

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

exposure

A large number of unites having the same/similar exposure to loss is known as ...

homogenous

principal

insurer, the company who issues the policy

Casualty Insurance

insures against the loss and/or damage of property and resulting liabilities

Insurer

party who will indemnify if loss occurs

Policyholder

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

What are the three different types of hazards?

physical (medical conditions) moral ("immoral"/fraudulent) morale (carelessness)

Property insurance insures agains the loss of __________ __________ or the loss of it's ____________-___________ abilities

physical property, income-producing

Distribution of exposures exists when ________ are balanced between poor and preferred. It is also called _____________________.

risks spread of risk

What does the law of large numbers allow an insurance company to do?

set more accurate insurance rates/premiums

Insured

the person or business for which the insurer assumes the risk (may or may not be the applicant or policy-owner)