Loss
An unplanned reduction in economic value resulting from the occurrence of a covered peril.
Direct loss: death, disability
Indirect loss: loss of income due to death or disability
A direct loss is the immediate result of an event involving an insured peril
Law of Large Numbers
A mathematical principle that is the basis for predicting the odds of a loss occurring in a certain population in any given year.
The law of large numbers does not predict who will suffer a loss, only the odds of a loss. While it's impossible to predict w
Contract of adhesion
A type of contract in which one party (the offeror) drafts the terms that must be accepted as-is by the offeree. Insurance policies are this type.
Because applicants for insurance have no input in the drafting of the insurance contract's language, ambigui
Medicare
A federal insurance program that provides medical care benefits to covered workers (retirees).
Medicare has evolved over the years and now includes four parts: A (hospital care), B (physician and lab care), C (a managed care alternative to Parts A and B),
Insurable Risk (5 Criteria)
Not all risks are insurable. Those that meet five insurability criteria are known as an ________ risk.
To be insurable:
Loss must be definable and measurable.
The covered peril must be accidental or outside the insured's control.
The risk must be shared b
reinsurance
The process through which insurance companies spread large risks among other insurers.
The insurer looking to spread some of the risk is the ceding company. The insurer accepting the risk is the reinsurer. The ceding company pays a premium to the reinsure
Underwriting vs. Actuarial Departments
Two related insurance company functions. Through the process of _________, applications are assessed for insurability and to assign premium rates. The ________ department analyzes data to help estimate future losses and to produce rate tables.
Underwriter
The five basic elements of a valid contract
Offer, acceptance, consideration, competent parties, and legal purpose
An applicant makes an insurance offer, which results in a contract (policy) only if the offeree (insurer) accepts the offer (application). The applicant's consideration is the signed a
Express, Implied, and Apparent Authority
The three basic forms of agent authority are _________, _________, and __________.
Examples:
Express authority�The right to sign an application as an agent for the insurer.
Implied authority�Using a computer program to identify insurance needs and to reco
Stock Insurance Company
A form of insurance company that is owned by stockholders who may or may not also be policyowners. May distribute stock dividends (taxable).
Like all forms of corporations, stock insurance companies may be privately held or publicly traded.
Buyer's Guide and Policy Summary
Two related disclosure documents that are required by most states to be presented to life and health insurance applicants at some point during the buying process.
The Buyer's Guide, given at the beginning of the buying process, explains the general featur
Representations and Warranties
Representations are statements the applicant makes on an application that are deemed to be true to the applicant's best knowledge. Warranties are statements the insurer makes in the contract.
Incorrect statements on an application will not void the contra
Agents vs. Brokers
Two basic types of insurance producer: an ______ represents a single insurer and a _____ sells policies from multiple insurers.
Insurance companies may use either of two types of representatives to sell their insurance products: agents (who sell only that
Indemnity vs. Valued Contract
Two forms of insurance contract. An indemnity contract bases policy benefits on reimbursement of actual losses. A valued contract bases benefits on a stated amount without regard for the value of the loss.
Medical expense insurance policies are indemnity
Mutual Insurance Company
A form of insurance company that is owned by policyowners. May distribute policy dividends (non-taxable) through participating policies.
While structured in many ways like a corporation, a mutual insurance company does not issue stock and is owned by poli
Risk Management
The natural process by which people contend with the perils faced daily, of which there are five common techniques.
Five common risk management techniques: avoidance, reduction, retention, sharing, and transfer. Risk transfer occurs through the purchase o
Underwriting
The process by which an insurance company assesses an application to determine if it represents an insurable risk.
If the risk is deemed insurable, the underwriter also determines the proper premium for that particular applicant using rates compiled by th
Fraternal Insurance Company
A non-profit form of insurance provider sponsored by an organization of people who share a common ethnic, religious, or vocational affiliation.
Fraternal insurers are nonprofit organizations, sponsored by a fraternal society, that operate under a special
Domestic, Foreign, and Alien Insurers
Insurers can be categorized by their state of domicile. There are three categories, known as _____, _____, and _____.
Example: Excel Insurance Co. is chartered in Delaware, where Excel is considered a domestic company. In Illinois or any other state where
Social Security (OASDI)
A federal insurance program that provides disability, death, and retirement benefits to covered workers and their qualifying beneficiaries.
Social Security benefits are available to covered workers, who earn rights to these benefits by paying a payroll ta
Risk
A basic insurance term referring to the possibility of incurring a loss.
Pure risk: untimely death, disability
Speculative risk: gambling, stock investments
With insurance, risk means the "chance of loss." There are two types: pure risk (loss only) and sp
Buyer's Guide and Policy Summary
Two related disclosure documents that are required by most states to be presented to life and health insurance applicants at some point during the buying process.
The Buyer's Guide, given at the beginning of the buying process, explains the general featur
Managerial System vs. General Agency System
Two variations of the career agency system in which producers represent a single company. One is headed by a company employee called a general manager (GM), the other by an independent contractor called a general agent (GA).
Two forms of career (or captiv
Peril and Hazard
Two related general insurance terms:
Peril is the immediate cause of a loss (and the event that is insured against).
Hazard is any condition that increases the risk of incurring a loss.
As the immediate cause of a loss, a peril is the event that insurance
Independent Agency System
An insurance distribution system in which the manager and producers are fully independent and not affiliated with any single insurer.
Independent agencies typically represent multiple companies. Managers of independent agents, sometimes called personal pr
Insurable Risk (5 Criteria)
Not all risks are insurable. Those that meet five insurability criteria are known as an ________ risk.
To be insurable:
Loss must be definable and measurable.
The covered peril must be accidental or outside the insured's control.
The risk must be shared b
concealment
The willful nondisclosure of material facts on an application for the purpose of obtaining insurance.
Concealment is the deliberate withholding of material facts when applying for insurance, and is a form of fraud. Concealed facts give the insurer grounds
Contract of adhesion
A type of contract in which one party (the offeror) drafts the terms that must be accepted as-is by the offeree. Insurance policies are this type.
Because applicants for insurance have no input in the drafting of the insurance contract's language, ambigui
Admitted Insurer
An insurer that has a certificate of authority in a given state is said to be an___________ insurer in that state.
A non-admitted insurer is a legitimate company that does not hold a certificate of authority in a particular state.