What is Insurance?
a contract in which 1 party (insurance company) agrees to indemnify (make whole) the insured party against loss, damage, or a liability arising from an unknown event.
What is life insurance?
a policy that protects survivors from losses suffered after an insured's death
What does insurance do?
transfers the risk of loss from an individual or business entity to an insurance company which spreads out costs of unexpected losses to many individuals
What is risk?
uncertainty or chance of a loss occurring
Pure risk
refers to sutuations that can only result in a loss or no change, no opportunity for financial gain
What type of risk do insurance companies accept?
pure risk
Speculative risk
involves opportunity for loss or gain
Hazard
conditions or situation that increase probability of an insured loss occurring
Physical hazard
individual characteristics that increase the chances of the cause of loss
Example of a physical hazard
past medical history, existing conditions, (blindness)
Moral hazard
tendencise towards increased risk. moral hazards inclove evaluating character of insured
example of moral hazard
applicants who may lie on an application for insurance or in the past have submitted fraudulent claims against an insurer
Morale hazard
similar to moral hazards, except that they arise from a state of mind that causes indifference to loss, such as carelessness
example of morale hazard
actions taken without forethought may cause physical injuries
Peril
perils are causes of loss insured against in an insurance policy
Life Insurance
insures against the financial loss caused by the premature death of the insured
Health Insurance
insures against mediacal expenses and/or loss of income caused by the insured's sickness or accidental injury
Property Insurance
insures against the loss and/or damage of property and resulting in liabilities
Loss
reduction, decrease or dissappearance of value of the person or property insured in a policy, caused by a named peril. Insurance provides means to transfer loss
Exposure
is a unity of measure used to determine rates charged for insurance companies
What are factors considered in determining rates for life insurance?
age of insured, medical history, occupation, sex
Homogeneous
large # of units having the same or similar exposure to loss
Avoidance (method of handling risk)
eliminating exposure to a loss
Example of avoidance
avoid being killed in an airplane crash by not riding on airplanes (not practical)
Retention (method of handling risk)
is planned assumption of risk by insured through use of deductibles, co-payments, or self-insurance
What is the purpose of retention?
1. to reduce expenses, increase cash flow
2. to increase control of claim reserving and claims settlements
3. to fund losses that cannon be insured
Sharing (method of handling risk)
method of dealing with risk for a group of individual persons or businesses with the same or similar exposure to loss to share the loss that occurs within that group
What is a formal risk sharing agreement?
A reciprocal insurance exchange
Reciprocal
insurance resulting from an interchange of reciprocal agreements of indemnity among persons known as subscribers
Risk Retention Group (RRG)
is a liability insurance company owned by its members.
What is the purpose of a risk retention group?
assume and spread all or part of the liability to a group of members.
What can an RRG do?
may re-insure another RRG's liability as long as the members of the 2nd group are engaged in the same or similar business or industry
Risk Purchasing Group
an entity which offers insurance to groups of like businesses with similar exposure to risk
Private insurance
offer many lines of insurance, may be formed as stock, mutual, reciprocals, or fraternal insurers.
Government insurance
provides insurance in areas that private insurers can not.
examples of government insurance
medicare, social security, federal crop insurance, and national flood insurance.
Admitted insurers
insurers who meet the states financial requirements and are approved to transact business in the state
Non-admitted insurers
insurers who have not been approved to do business in the state
Surplus lines
insurance that is not available in the regular market place. Insurance for high risk individuals and placed with a non-admitted insurers who specialized in a high risk market.
Domestic insurers
insurance company incorporated in this state (home office in the state it was formed)
Foreign insureres
insurance company that is incorporated in another state or territorial possession. (company chartered in CA would be a foreign company in NY)
Alien insurers
insurance company incorporated outside the United States
Independent Agency System/ American Agency System (types of marketing arrangements
-1 independent agent represents several companies
-nonexclusive agency
-commissions on personal sales
-business renewal with any company
Exclusive Agency System/Captive Agents (types of marketing arrangements)
-1 agents represents 1 company
-exclusive agency
-commissions on personal sales
-renewals placed with appointing insurer
General Agency System (types of marketing arrangements)
-General Agent-entrepreneur represents 1 company
-exclusive agency
-compensation and commissions
-appoints subagents
Managerial System (types of marketing arrangements)
-branch manager
-salaried
-agents can be employees or independent agents
Direct Response Marketing System (types of marketing arrangements)
-no agents
-advertise directly to consumers
-consumers apply directly to company
Financial Status (Independent Rating Services)
financial strength based on prior claims, experience, investment earnings, levels of reserves, and management.
Insurance companies financial integrity are published by:
-AM Best
-Fitch
-Standard and Poor's
-Moody's
-Weiss
Reinsurance
contract under which one insurance company (the reinsurer) indemnifies another insurance company for all or part of its liabilities
Agent
an individual licensed to sell/solicit or negotiate insurance contracts on behalf of insurer
The Law of Agency
defines relationship between the principal and the agent/producer: the acts of agent/producer with the scope of authority are deemed to be the acts of insurer
Express authority
authority a principal intends to grant to an agent by means of agents contract. It is the authority that is written in the contract.
Implied authority
authority not expressed or written into the contract, but which the agent is assumed to in order to transact the business of insurance for the principal.
Apparent authority
authority is the appearance or the assumption of authority based on the actions, words, or deeds, or the principal or because of circumstances the principal created.
Fiduciary responsibility
although agents act for insurers they are legally obligated to treat applicants and insureds in an ethical manner because an agent handles funds of an insured
Market conduct
describes the way companies and producers should conduct their business, it is a code of ethics.
Some market conduct regulations include, but are not limited to:
-conflict of interest
-a request of a gift or loan as a condition to complete business
-supplying confidential information
Contract
is an agreement between 2 or more parties enforceable by law
Elements of a legal contract
1. agreement
2. consideration
3. competent parties
4. legal purpose
Offer and Acceptance
offer by one party, other part must accept this offer in exact terms.
Offer and Acceptance in insurance
In insurance the offer is made when submitting the application, acceptance is when underwriter approves the application and issues a policy.
Consideration
the binding force in ant contract, considers is something of value that each party gives to the other
Competent parties
must be capable of entering in to a contract in the eyes of the law
Legal prupose
the purpose of the contract must be legal and not against public policy
Contract of Adhesion
prepared by insurer, accepted or rejected by insured. Insurance policies are not drawn up through negotiations
Aleatory Contract
Insurance contracts are aleatory which means there is an exchange of unequal value.
Personal Contract
between insurance company and individual company has a right to decide whether to do business with an individual.
Unilateral Contract
only one part is legally bound to do anything. Insured makes no legally binding promises however, insurer is legally bound to pay losses covered by a policy.
Conditional Contract
requires that a certain condition must be met by the policy owners and the company in order for the contract to be executed and before each fulfills obligations
Reduction
actions taken to lessen possibility or severity of a loss
Transfer
most effective way to handle risk, transfer it so the loss is borne by another party
Due to chance
a loss that is outside the insured's control
Definite and measurable
a loss that is specific as to the cause, time, place, and amount. An insurer must be able to determine how much the benefit will be and when it becomes payable
Statistically predictable
insurers must be able to estimate the average frequency and severity of future losses and set appropriate premium rates
Not catastrophic
Insurers need to be reasonably certain their losses will not exceed specific limits
Randomly selected and large loss exposure
There must be a sufficiently large pool of the insured that represents a random selection of risks in terms of age, gender, occupation, health, and economic status and geographic location.
Law of large numbers
states that the larger the number of people with a similar exposure to loss, the more predictable actual losses will be.
Adverse selection
the insuring of risks that are more prone to losses than the average risk. Poor risks seek insurance or file claims to a greater extent that better risks.
How do insurance companies protect themselves from adverse selection?
by refusing coverage or charging higher rates
Private insurers
companies funded by premiums
Government insurers
funded with taxes, serve national and state social purposes.
Stock Companies
owned by stockholders who provide capital necessary to establish and operate the insurance company who share in profits and losses
Mutual Companies
owned by policy owners and issue participating policies. Policy owners are entitled to dividends, which are a return of excess premiums making them nontaxable
Dividends
generated when premiums and earnings combined exceed the actual cost of providing coverage creating a surplus, not guaranteed
non-participating policy
do not share in profits or losses, does not pay dividends, except taxable dividends are paid to stockholders.
Fraternal benefit society
organization formed to provide insurance for members of an affiliated lodge, religious or fraternal organization with a representative form of government. Sell only to members, not considered insurers, but subject to regulations that apply to insurers tha
Lloyd's Associates
not an insurance company. Lloyd's provides support for underwriters or groups that accept insurance risk. Each underwriters assumes part of each risk, but is only liable for their portion of risk
Ambiguities in a contract of Adhesion
favor of insured
Reasonable expectations
if an agent implies through advertising, sales literature, or statements that these provisions exist an insured could reasonably expect coverage
Indemnity
sometimes referred to as reimbursement is a provisions in an insurance policy that states that in the event of loss, and insured or beneficiary is permitted to collect only to the extent of the financial loss
Utmost good faith
the principle of utmost good faith implies that there will be no fraud, misrepresentation or concealment between the parties. In insurance, both insurer and insured must be able to rely on the relevant information. Insured is expected to provide accurate
Representations
are statements believed to be true to the best of one's knowledge, but are not guaranteed to be true
Misrepresentations
untrue statements on the application and could void the contract
Material misrepresentation
is a statement that, if discovered would alter the underwriting decision of the insurance company. If material misrepresentations are intentional they are fraudulent
Warranty
is an absolutely true statement upon which the validity of the insurance policy depends
Concealment
is the legal term for the intentional withhold of information of a material fact that is crucial in making a decision
Fraud
is the intentional misrepresentation or intentional concealment of a material fact used to induce another party to make or refrain from making a contract or to deceive or cheat a party.
Waiver
is the voluntary act of relinquishing a legal right, claim, or privlege
Estoppel
is a legal process that can be used to prevent a party to a contract from reasserting a right or privilege after that right or privilege has been waived. Estoppel is a legal consequence of a waiver