Health Insurance Terms / Definitions Unit 1

What does STARR stand for?

( Sharing, Transfer, Avoidance, Retention, Reduction) Sharing- In risk sharing, two or more individuals agree to pay a portion of any loss incurred by any member in the group. Stockholders in a corporation share the risk of profit or loss. Transfer- transfer of risk is what happens with insurance. The insured agrees to pay if an individual or business has a loss. The individual or business has a cost in the form of a premium payment. However, in contrast to the loss, which is large and uncertain, the premium is a much smaller certainty. Demo: Insurance companies use the risk management method of transfer to spread a risk of loss among thousands if not millions of insurance. Not everyone will experience an accident while they on an insurance policy. The large number of insurers who do not have an accident will be paying for the losses of the few who do have an accident. This is the only way that insurance can work and make the premiums affordable. Avoidance- risk avoidance means eliminating a particular risk by not engaging in a certain activity. For example, an individual who does not drive avoids the risk of injury someone in a collision and being held liable for those damages (e.g., work from home if the roads are covered in ice). Reduction- risk reduction may refer to lessening the chance that a loss will occur, or to lessening the extent of a loss that does occur. For example, wearing seatbelts reduce is the severity of a car accident; installing a smoke alarm will not prevent a fire, but it may keep individuals from serious harm. Retention- risk retention means the individual will pay for the loss if it occurs. Without health insurance a person will have to pay the bill if they need hospitalization. This is an example of intentionally retaining a risk.

What is the "Law of Large Numbers"?

( The larger the group- the more accurate losses can be predicted) The law of large numbers is the principal that makes insurance possible. The larger the group, the more accurately losses can be predicted. Insurance companies cover millions of people and businesses. It is impossible to guess specifically who will suffer a loss in the future, but thanks to the law of large numbers, they can be fairly certain how many losses will occur in the group as a whole. While insurance companies cannot specifically name which individuals will have a loss each year; they can predict fairly accurately how many dollars and claims they will have to pay out each year based on the actual losses they have experienced in the past. This prediction allows them to charge each insured a premium that, put together, will cover all claims and operating cost.

What is reinsurance?

( protect insurance company from catastrophic losses in certain geographical areas.) Reinsurance is like insurance for insurers. It transfers risk from one insurer to another insurer. To reduce the total amount of loss it is liable for, one insurer may pay the other insurer a premium to assume a portion of its risk. The company reducing its risk is called the ceding insurer. The company assuming the risk is called the reinsure. Example- ensuring risk in certain geographical areas may expose the insurer to the potential of having to pay for a large number of losses at one time. This may happen due to such things as earthquake or hurricane. To protect the company from these catastrophic losses, the insured pays a premium to another insured to transfer a sum of all of its risk in these areas. The company excepting the risk is called the reinsure. There are two ways this process can work. 1. The reinsurer considers each risk before allowing to transfer it to be made from the ceding company. This is called facultative reinsurance. 2. The reinsure accepts all risk of a certain type from the ceding company. This is called treaty reinsurance.

What is a hazard?

(An increase in the chance of loss) Anything that increases the chance that a loss will occur. Hazards do not cause the loss. When you think of the term hazard, think of some thing that becomes more dangerous and can make a loss more likely to happen. Example- physical, moral, and morale Demo: Think of hazards in the same way you parent a child. On a parent says to their child, get down before you get hurt! The parent recognizes a higher chance of the child getting hurt based on what they are doing and, for that reason, the chance of getting hurt is increased.

What are fraternal benefit societies?

(Benefit of members) Fraternal benefit societies exist for the benefit of its members and offer life insurance as one of the benefits of membership. Fraternals also provide social activities and usually engage insurable and benevolent causes. Fraternals are organized under a large system, operate as nonprofit societies, and receive some income tax advantages. The operator insurance programs under a special section of the state insurance code. Fraternal policies are called certificate, and members who only life insurance are called certificate owners. A distinctive feature of fraternal life insurance is that certificate holders may be assessed additional charges of premiums are not sufficient to pay claims during a given period. Policies with this feature are referred to as open contracts. By comparison, mutual and stock insurance insurers are not accessible and are sometimes referred to as legal reserve companies.

What does CANHAM stand for?

(Calculable, Affordable, Non-catastrophic, Homogeneous, Accidental, Measurable) Calculable- premiums must be calculable based upon prior loss Statistics for that particular risk in order to predict future losses. Affordable- The premium for transferring the risk should be affordable for the average consumer. Noncatastrophic- Insurance cannot ensure events that caused widespread losses to large numbers of insurance at the same time. That is why the peril of war is excluded from most policies because the risk is much too large for the insurance company to pay. Homogeneous- The individual risk that the insurer covers must all be similar, or a homogeneous, in regard to factors that affect the chance of loss. Accidental- Insurance is a method of handling a risk. If a loss is certain to occur, there is no risk. Measurable- it must be possible to estimate the loss as a dollar amount. Insurance covers the financial loss of unexpected death or medical bills from sickness.

What is a peril?

(Cause of loss) The insurer agrees to cover losses caused by a specify Pirro. For life insurance, the Piro is death. For health insurance, the pills are accidents or illnesses. Examples- Death, Accidents, sickness, property damage due to natural causes (fire,lightning,etc.) Demos: If a house burns down, the peril (cause of loss) is the fire. If electronics in a home or destroyed because of lightning, the cause of loss (peril) is lightning. If you drive your car through a hailstorm and the cars body is damaged, the peril is hail. A peril is simply what caused the loss.

What is pure risk?

(INSURABLE) Risks that only involve the possibility of experiencing a laws and they can be recovered by insurance. The chances of being in a car accident is an example of a pure risk.

Law of Agency

(Insurance agent acts on behalf of the principal (insurance company)) Agencies in a relationship in which one person is authorized to represent and ask for another person or for a corporation. The person authorized to act on behalf of the other is called an agent. The person on his behalf the agent ask is called the principal. Insurance, then sure is the principal in a sales representative or producer is the agent. An agency relationship is created by the constant of both agent and the principal.

Domestic, Foreign, and Alien Insurers

(Insurance company location) • In its home state-that is, the state in which the insurer was formed (chartered or incorporated) and is headquartered-an insurer is referred to as domestic insurer. And ensure his home state is also called the state of domicile. • An insurer that writes business and states other than where it is domiciled is referred to as a foreign insured. For example, an ensure that is located in Texas, but is selling insurance and Wisconsin, it's considered foreign. • An insurer formed under the law of any country other than the United States and its territories is considered an aliensure. The citizens of the United States or any US territory such as Puerto Rico, it insured based in any other country is an alien and insurer.

Private vs. Government Insurers

(Insurance from the state or federal government) The federal government provides a wide variety of insurance benefits during number of progress. These include Social Security benefits, military life insurance benefits, federal employee compensation benefits, and various retirement benefit programs. It also provides, support, exercise a number of insurance programs designed to cover catastrophic risk, including insurance before risk, flood, and crop losses. The federal government provides a wire variety of insurance benefits through a number of progress. These include Social Security benefits, military life insurance benefits, federal employee compensation benefits, and various retirement benefit programs. It also provides, support, exercise a number of insurance programs designed to cover catastrophic risk, including insurance for war risk, flood, and crop losses. at the state level, governments are involved in providing unemployment insurance, Worker's Compensation insurance, disability insurance, and medical insurance for the needy. Local governments are participate in providing medical, disability, and retirement benefits.

What is Lloyd's Associations?

(Insurance provided by individual underwriters, not insurance companies) Lloyd's associations, named in reference to the famous underwriting group Lloyd's of London, are not insurance companies. Rather, they provide a hub for the exchange of information among member underwriters who actually transact the business of insurance. Members are individually liable and responsible for the contracts of the insurance into which they insert. Over the years, Lloyd's association has insured unusual ways such as hole-in-one contest, the hair of athletes, and the body parts of celebrities. Most Lloyd's association insurance needs to be sold by surplus lines intermediaries because they are only license in a few states.

What is speculative risk?

(NOT INSURABLE) Risks that have a possibility of a loss and also hold the possibility of making a gain. Insurance companies will not ensure gambling losses or investments because someone could win money or you could lose money, these are examples of speculative risk.

Direct response

(No agent/producer involved) Indirect response marketing, there is no producer/agent. Policies are sold directly to the public by the insurer. Direct response marketing is conducted through the mail, by Advertisements in newspapers and magazines, on television and radio or through the Internet.

Aleatory Contract

(Not equal value-small premium for a large amount of coverage) Insurance policies on aller contracts, meaning that the value receives from the contract by which each party may be un equal. Ordinarily, each party to contract is expected to receive benefits from the country that are at least roughly equivalent.

Unilateral Contract

(Only one promise made) •Insurance company promises to pay for a covert loss • insured does not promise to pay the premium

What is loss?

(Reduction in value of an asset) A reduction in the value of an asset. To determine the amount of a loss, the value of the asset is measured before and after the loss. Demo: Value Before Loss - Value After Loss ————————————- = Total amount of loss

What are self-insurers?

(Retention/ Abusiness that pays its own claims) Self-insurance is a means of retaining, rather than transferring, risk. Businesses made develop a formal program for self ensuring all of or a portion of certain risk. They set aside savings to cover losses in advance and may even have a claim system like an insurance company. They often contract with an insurance company to manage the day-to-day operation of the business.

What is exposure?

(Risk for which the insurance company would be liable.) The risk assumed by an insurer and the amount that the insurer is responsible to pay out at any given time. Exposure is expressed in units. For example, the unit for life insurance exposure is $1000 of death benefit and premium rates apply per unit of exposure. Demo: The calculations for insurance premiums is the rate multiplied by the number of exposure units. Ex: If the life insurance rate is $32 per $1000 of death benefit, the premium for a $100,000 policy would be 32×100 = $3200.

What is adverse selection?

(Risks that have a greater than average chance of loss.) The tendency for a higher risk individuals to get and keep insurance more than individuals who represent an average level of risk. The statistics insurers used to predict their losses are based on average risk. Adverse selection could cause the insurance company to experience more losses than predicted. It increases the chance that they have not collected enough premiums to pay for their losses. to avoid adversal election, insurers make an extensive evaluation of information related to a particular risk— a process called underwriting. If an underwriter determines that a risk is higher than average, the insurer may charge a higher rate to ensure the risk, limit the amount of coverage it will issue on the risk, or refuse the application for insurance altogether.

What are reciprocal insurers?

(Subscribers) Reciprocal insurer's on unincorporated groups of people that agree to ensure each other's losses under contract. The members of the Reese typical groups are known as subscribers. Each subscriber has an account through which premiums are paid and earned interest is tracked. If any subscribers of suffers a lost covered by the reciprocal insurance agreement, subscriber account is assessed an equal amount to pay the claim. Administration, underwriting, sales promotion, and claims handling for the reciprocal insurance are handled by an attorney-in-fact. The attorney-in-fact is often control in overseen by an advisory committee of subscribers.

Insurance

(Transfer of risk) Is a contract that transfers the risk of financial loss from an individual or business to an insurer. In return the insurer agrees to cover the individual or business for certain losses if they occur.

Risk

(Uncertainty) Is uncertainty about whether a loss is certain to occur. If a loss is certain to occur, it does not involve risk. Insurance is designed to cover only losses that involve risk. In regard to life insurance, although death is certain to occur to everyone, The timing of the loss is uncertain.

What is a physical hazard?

(can be seen or determined) A condition identifiable by using lab equipment that produces tangible evidence of its existence. Example- heart condition, wet floor, etc.

What is a risk retention group?

(liability insurance for policy holders) A risk retention group (called a RRG) is an insurer formed for the sole purpose of providing liability insurance to its policyholders. In RRG is owned by the insurance or members. The policyholders must all be members of the same type of business. They are regulated by the state where they are headquarter; however, they can operate in other states as well.

What is a mutual insurer?

(policyholders/policyowners) A mutual insurer does not have stock or stockholders. It is owned by its policyholders, also known as policy owners. They elect a board of directors that in turn appoints the officers who operate the company. Funds that remain after paying claims and operating cost may be distributed to the policy owners as policy dividends. Mutual policy dividends are considered to be a nontaxable return of excess premium. Mutual policies are referred to as participating, or par, policies because the part policy owners participate in the operating results of the company.

What is a stock insurer?

(shareholders/stockholders) A business formed as a public or private corporation and owned by stockholders, also known as shareholders. The board of directors that oversees the operation of the company is chosen by the stockholders/shareholders. Profits from the insurance operation may be distributed to the stockholders as dividends. The policies issued by stock insurers are called non-participating, or nonpar, policies to distinguish them from the participating policies issued by mutual insurers.

What are the two types of risk?

1) Speculative Risk 2) Pure Risk

Fraud/false statements (Federal Regulation)

1. A person who transact insurance an interstate commerce and who intentionally makes false material statements in connection with financial reports or documents presented to insurance regulators appointed to investigate the person into influenced the actions of such officials is subject to: •a fine( •imprisonment for up to 10 years; or •both 2. Imprisonment may be ordered for up to 15 years at the false statements jeopardized the safety in soundness of an insurer and we're significant cause of the insurer be placed in conservation, rehabilitation, or liquidation by the courts. 3. officers, directors, agents, and employees of an insurance company who will unlawfully embezzle or miss appropriate fines are subject to the same consequence described above.

What are the three types of hazards?

1. Physical 2. Moral 3. Morale

What are the four types of agents?

1.Independent insurance agents: are individuals that sell the insurance products of several companies and are independent contractors, not employees of the insurer(s). Independent agents on the renewals of the policies they sell. 2.Exclusive or captive agents: represent only one company. These agents are sometimes referred to as career agents. Captive agents are independent contractors, not employees of the insurer. The insurance company owns the renewals of the policy so on their behalf. 3.General agents (GAs) or managing general agents (MGA's): hire, train, and supervise other agents within a specific geographical area. GA's and MGA's receive overriding commissions (overrides) on the business produced by the agents they manage. 4.Direct-writing companies: usually pay salaries to employees who's job function is to sell the companies insurance products from a company office. This type of producer is not usually paid a commission and the insurer owns all the business produced.

Fiduciary

A fiduciary is a person in a position of financial trust. If as a fiancy nary, the agent has an obligation to act in the best interest of the insured. The following are examples of an agent fiduciary responsibility. all premiums received by an agent are funds received and held in trust. The agent must account for and pay the correct amount to the insured, insurer, or other agent entitled to the money. The insurance premium must be kept separate from the agent personal funds. failure to do this can result in commingling.

Misrepresentation

A misrepresentation is a representation that is actually false. For example, suppose Adam size insurance application as "Adam L Jones" even though his first certificate shows no middle name he just adopted the "L" because he think it sounds good. Adam represents himself as Adam L Jones, but the L is a misrepresentation. misrepresentations do not necessarily void insurance contracts. To do so, they must be material misrepresentation- that is, the false information must have been determining (or material) Factor in the insurance acceptance of the risk. If the insurer would have rejected the application or written the coverage on a different basis had the correct facts better been known, the information is material.

representation

A representation is a statement that has believed to be true, to the best of the one's knowledge at the time it is given.

Residual Market Insurance

A type of insurance owned by the federal government that is not typically available from other private insuresrs'.

Warranty

A warranty is a statement that is guaranteed to be true. If a warranty is not kept, there is a breach of warranty that avoids the contract. warranty- promise • Always made by the insurance company, if promise to pay is broken company can be sued by the insurer • Maybe may bother insured, if promise is broken and sure it may have no coverage. • Guaranteed to be true

Suitability considerations

An agent has a responsibility to make purchase recommendations that are appropriate, or suitable, in light of a client's particular needs, objectives, and circumstances

Personal Contract

An agreement between an insurance company and an individual that states that insurance policies cover the individual's insurable interest. personal contracts can't be assigned to someone else! auto and homeowner insurance policies are personal contracts. However, assignment can take place with life insurance policies pledge as a security for a bank loan.

Utmost Good Faith

An obligation to act in complete honesty and to disclose all relevant facts.

Agreement (Offer and Acceptance)

An offer is made when the applicant submits an application for insurance with initial premium to the insurer. The offer is accepted after it has been approved by the insurer. there is no offer if the applicant sends the application to the insurance company without payment of the premium. Such an application is merely an invitation to the company to make an offer. The insurance company makes an offer by issuing the policy. The applicant accepts it by paying the first premium. Acceptance of an offer must be unconditional and unqualified. If a acceptance is qualified or conditional no agreement has been reach. A qualify acceptance is actually a rejection of the offer and is called a counter offer.

Consideration

Consideration first one exchange of value. When you see the word consideration think money! Each party to the contract must get something valuable to the other. In an insurance contract, the applicant provides consideration in the form of the information (representations) in the application in the premium payment, and the insurance provides consideration in the form of a promise to pay a certain loss occurs.

What is a morale hazard?

Consists of carelessness or indifference that individuals have because they are covered by insurance and protected from loss. For example, employees scheduling unneeded doctor visits. Or leaving the doors and windows unlocked or not at home.

Concealment

Consumement is the intentional failure to disclose known facts. It insure maybe be able to void the insurance contract if it can approve that an applicant or insured attentionally concealed a material fact like a heart attack. if intentional and the information is material coverage can be voided! if not intentional coverage cannot be voided!

Agent Authority

Express - What the agents written contract with the company says. Implied - Not written but are the things agents normally do to sell insurance. Apparent - Things the agent does that a reasonable person would assume as authority, based on the agents' actions and statements.

Responsibility to Applicants/Insureds

Fiduciary=trust • Promptly send premiums to insurer • Knowledge of products • Comply with laws and regulations • No commingling

Financial ratings of insurers

Financial strength rating - a report card of the company

Competent Parties

For a contract to be binding, both parties must have the legal capacity to make a contract. The insured are applicant must be a legal age (usually 18) and be mentally compet competent to make insurance contract. Applications of minors usually must be signed by an adult parent or guardian.

fraud

Fraud is an intentional act designed to deceive and induce another party to part with something of value. Fright means all Ms.Rose events representation, consuming, or both, but not all acts of misrepresentation or consumer or access fraud. If someone intentionally lies to obtain coverage or to collect on a false claim, it would be a matter of fraud. If someone misrepresents something on an application (perhaps a medical treatment the person is embarrassed to talk about) without intent to obtain that something of value, no far has occurred.

Estoppel

Illegal doctrine that prevents a party from deny in action if it had been accepted previously. For example, by repeatedly accepting late premium payments, and insurance company may have waived its right to cancel the policy for non-payment or late payment of premium. In the future, the insurer may be legally estopped from making any prompt cancellations for non-payment because the policyholder has begun to rely on the prior acceptance of late payments.

indemnity

Indemnity- Restore to the insurance original pre-loss condition, no better, no worse! The principal of her story and insured to his or her pre-loss financial state is not as indemnification.

conditional

Insurance policies are conditional contracts because they require certain conditions to be fulfilled in order for performance under the contract to be enforced. For example, the contract may require certain documents to be submitted to prove that a laws has occurred. In the case of life insurance, a death certificate must be filed.

Elements of a Legal Contract (CLOAC)

Insurance policies are legal contracts nor subject to the general law of contracts. To form a valid contract, five elements must be present. • Consideration • Legal purpose • Offer • Acceptance • Competence parties

Characteristics of insurance contracts

Insurance policies possesses a number of special legal characteristics. This unique combination of features reflects the distinctive nature of the insurance contract.

Surplus Lines Insurers

Insurance sold by unauthorized/non-admitted insurers- if on the states approved list of surplus insurers Can only be sold to certain high risk insureds Can't be sold just for a cheaper rate than licensed/admitted insurers. For example, sometimes an individual or business has an exceptionally large or split specialized risk that no authorized ensure can will cover.

What is a moral hazard?

It refers to the actions people take after they have entered into a transaction that makes the other party to the transaction worse off. Example- Dishonesty is a moral hazard because it increases the chance that an individual might lie on an insurance application or fake a loss.

Commingling

Makes personal funds with the insured's or insurer's funds. Any agent who takes funds held intros for personally use is guilty of deaths and will be punished as provided by law. The agent must be knowledgeable about the features and provisions of various insurance policies and be able to explain important features to the insured.

Reasonable Expectations

Means the other party will not try to conceal pertinent information or otherwise act deceptively. Violation of the reasonable expectation can void the claims of the offending party under a contract of utmost good faith.

What does the acronym STARR represent?

Methods for handling risk.

Misrepresentation vs material misrepresentation

Misrepresentation: information given that is not true ;however, the correct information would not affect the insurance companies decision insured mistakenly gives one number of their address wrong does not void coverage. Material misrepresentation: information given that is not true this information does affect the insurance decision insured has a conviction for driving while intoxicated could void coverage.

What is a agency system?

Most insurers sell their products through Insurance producers (brokers or agents). Brokers legally represent the insured. Agents legally represent the insurer, not the insured. There are four types of agents.

What does the acronym CANHAM represent?

Risk that can be insured.

Authorized vs Unauthorized Insurers

States usually require companies to have a license to sell insurance in the state. The license is called a certificate of authority. When a company is license it is called admitted or authorized. some states allow companies to sell insurance to certain types of risk (call surplus) without having to have a license. These companies are then called non-admit it, unauthorized, non-approved.

Legal Purpose

To be valid, a contract must be for legal purposes and not country to public policy. For example, and agreement to purchase stolen goods will not be a valid contract because it lacks legal purpose.

Waiver

Waiver is defined as the intentional involuntary giving up of a known right.

Unit 1 Cram sheet

https://static.kaplanlearn.com/assets/44/16/LHe1_CramSheet_01.pdf?_ga=2.74117328.377329555.1655568225-508683315.1655408170

Adhesion

•Policy written by the insurance company • if ambiguous (not clear)- court will take the side of the insured

Legal Contract (CLOAC)

■ Consideration—giving something of value --Insured gives information and money(premium) to the insurance company --Insurance company gives a promise to pay(policy) to the insured ■ Legal purpose—risk transfer doesn't violate the law ■ Offer (made by insured) --Insured submits application and first month's premium to insurer --Counteroffer (made by insurer) ■ Agrees to issue policy but with higher premium or restrictions/exclusions ■ Insured either accepts the conditions or withdraws her application ■ Acceptance—insurer accepts risk as presented ■ Competent parties—insured age 18 and sane