Insurance gen
In the face of this uncertainty, insurance was developed as a means for spreading a financial loss among many persons so that the cost to any one person is relatively small.
Insurance
is a contract that indemnifies another against loss, damage, or liability arising from an unknown event
Indemnify
means to make a person whole by restoring that person to the same financial position that existed before the loss.
The insured
policyowner
the premium
pays a set amount of money
the insurer
the insurance company
What is insurance
A person protects themselves against risk by purchasing an insurance policy. The insured (policyowner), pays a set amount of money (the premium) to the insurance company (the insurer). In return, the insurer agrees to pay the other party (the insured bene
1.3
The agreement between the insurer and the insured, the person who is covered by the insurance, is established in a legal document referred to as a contract of insurance or a policy. The insurer promises to pay the insured according to the terms of the pol
1.4 risk
simply means uncertainty of financial loss, or the chance of loss, when more than one outcome is possible.
Pure risk
means that there is only a chance of loss�the loss may or may not happen�and there is no possibility for gain. The risk associated with the chance of an accident is an example of pure risk. Only pure risk is insurable.
Speculative risk
involves both an uncertainty of loss and of gain. Insurance does not protect individuals against losses arising out of speculative risk because these risks are undertaken voluntarily. For example, betting at the race track and investing in the stock marke
Peril
is the immediate specific event causing loss and giving rise to risk. It is the cause of a risk. For example, when a building burns, fire is the peril. When a person dies, death is the peril.
hazard
is any factor that gives rise to a peril. For purposes of life insurance, there are three basic types of hazards: physical, moral, and morale.
Physical hazards
arise from material, structural, or operational features of a risk situation (slippery floors or unsanitary conditions would be physical hazards).
Moral hazards
arise from people's habits and values (filing a false claim is an example of moral hazard)
Morale hazards
arise out of human carelessness or irresponsibility (failing to take safety precautions is an example of morale hazard).
STARR
Sharing�Sometimes, when a risk cannot be avoided and retention would involve too much exposure to loss, we may choose risk sharing as a means of handling the risk. By sharing risk with someone else, an individual also shares potential losses. That is, the
1. 4. 4 Law of Large Numbers
the larger the group the more predictable the outcome of loss is.
Example
Consider two groups of 40-year-old males. The first group has 10,000 males, and the second group has 50,000 males. A more accurate prediction can be made of how many of those indivi
exposure unit
is the item of property or the person insured.
1. 4. 5 Insurable Interest
A basic rule governing insurance states that before an individual can benefit from insurance, that individual must have a legitimate interest in the preservation of the life or property insured.
For life insurance, insurable interest must exist at the tim
1. 4. 6 Insurable Risks
1. 4. 6. 1 Large Numbers of Homogeneous Units
A large number of similar exposure units is necessary in order for the pooling and sharing mechanisms of insurance to function.
1. 4. 6. 2 Loss Must Be Measurable
The insurer must be able to place a specific m
1. 5. 1 Indemnity
states that insurance should restore the insured, in whole or in part, to the condition the insured enjoyed before the loss. In life and health insurance, the concept of indemnity has a slightly different meaning in that a person's economic value or human
1. 5. 1. 1 Subrogation
Subrogation entitles one who has paid for another's loss to take over the other's right to recourse from the party responsible for the loss. A subrogation clause in an insurance policy gives the insurer the right to sue [only in health insurance cases.]
1. 5. 2 Limit of Liability
Life insurance policies usually use the term face amount to refer to the maximum liability of the insurer for a death claim.
1. 5. 3 Deductibles
(the term has no application in life insurance)
1. 5. 4 Coinsurance
It means that within a specified coverage range, the insured and insurer will share the allowable expenses. It is usually expressed in percentages (e.g., 20-80%).
1. 6 Types of Insurance
Insurers market a variety of insurance products. The most common products offered are property, casualty, life, and health insurance and annuities.
Property insurance protects the insured against the financial consequences of the direct or consequential l
1. 6 Types of Insurance (cont.)
Accident and health or sickness insurance protects the insured against financial loss caused by sickness, bodily injury, or accidental death and may include benefits for disability income. It may reimburse the insured for actual medical expenses incurred
1. 7 Types of Insurers
1. 7. 4 Fraternal Insurers
Fraternal benefit societies are primarily life insurance carriers that exist as social organizations and usually engage in charitable and benevolent activities. Fraternals are distinguished by the fact that their membership is u
1. 7 Types of Insurers (cont.)
1. 7. 7 Excess and Surplus Lines
Occasionally, it may be difficult to place a risk in the normal marketplace. If the risk is very large or unusual in nature, typical carriers may be unwilling to assume it. For some special risks, the only market may be wi
1. 8. 1 Insurer's Domicile (Domestic, Foreign, and Alien Insurers)
Domestic insurers A company is a domestic insurer in the state in which it is incorporated.
Foreign insurers A foreign insurer is licensed to conduct business in states (the District of Columbia or other US territories) other than the one in which it is i
1. 9 Types of Distribution Systems
1. 9. 1 Agency System
Insurance is made available to the public through a number of distribution systems, including the following.
Independent insurance agents sell the insurance products of several companies and work for themselves or other agents. The i
1.10 Producers
1. 10. 1 Categories of Producers
Producers may function as agents, representing the insurance company, or as brokers, representing the potential insured.
Producers acting as agents are not only categorized by their function in the industry but also by the
1. 10 Producers (cont.)
1. 10. 1. 2 Property and Casualty Agents
Agents appointed by property and liability insurance companies generally are granted more authority. These agents may bind or commit their companies by oral or written agreement. They sometimes inspect risks for th