insurance
pooling of fortuitous losses by transfer of such risks to insurers, who agree to indemnify insureds for such losses, to provide other pecuniary benefits on their occurrence, or to render services connected with the risk
pooling
spreading of losses incurred by the few over the entire group, so that in the process, average loss is substituted for actual loss
law of large numbers
the greater the number of exposures, the more closely will the actual results approach the probable results that are expected from an infinite number of exposures
fortuitous loss
one that is unforeseen and unexpected by the insured and occurs as a result of chance
risk transfer
pure risk is transferred from the insured to the insurer, who typically is in a stronger financial position to pay the loss than the insured
indemnification
the insured is restored to his or her approximate financial position prior to the occurrence of the loss
requirements of insurable risk
1. there must be a large number of exposure units
2. the loss must be accidental and unintentional
3. the loss must be determinable and measurable
4. the loss should not be catastrophic
5. the chance of loss must be calculable
6. the premium must be economically feasible
reinsurance
an arrangement by which the primary insurer that initially writes the insurance transfers to another insurer part or all of the potential losses associated with such insurance
adverse selection
tendency of persons with a higher-than-average chance of loss to seek insurance at standard rates, which, if not controlled by underwriting, results in higher-than-expected loss levels
underwriting
the process of selecting and classifying applicants for insurance
casualty insurance
broad field of insurance that covers whatever is not covered by fire, marine, and life insurance; casualty lines include auto, liability, burglary and theft, workers comp, and health insurance
personal lines
coverages that insures the buildings and personal property of individuals and families or provide them with protection against legal liability
principle of indemnity
states that the insurer agrees to pay no more than the actual amount of the loss (the insured should not profit from a loss)
actual cash value
replacement cost less depreciation
fair market value
the price a willing buyer would pay a willing seller in a free market
broad evidence rule
the determination of actual cash value should include all relevant factors an expert would use to determine the value of the property
valued policy
pays the face amount of insurance if a total loss occurs
valued policy law
requires payment of the face amount of insurance to the insured if a total loss to real property occurs from a peril specified in the law
replacement cost insurance
no deduction for physical depreciation in determining the amount paid for a loss
principle of insurable interest
states that the insured must be in a position to lose financially if a covered loss occurs
subrogation
substitution of the insurer in place of the insured for the purpose of claiming indemnity from a third party for a loss covered by insurance (the insurer is entitled to recover from a negligent third party any loss payments made to the insured)
principle of utmost good faith
a higher degree of honesty is imposed on both parties to an insurance contract than is imposed on parties to other contracts
representations
statements made by the applicant for insurance
material
if the insurer knew the true facts, the policy would not have been issued, or it would have been issued on different terms
concealment
intentional failure of the applicant for insurance to reveal a material fact to the insurer
warranty
statement that becomes part of the insurance contract and is guaranteed by the maker to be true in all respects
binder
temporary contract for insurance and can be either written or oral
exchange of consideration
the value that each party gives to the other
legally competent
parties must have legal capacity to enter into a binding contract
aleatory contract
contract where the values exchanged may not be equal but depend on an uncertain event
commutative contract
one in which the values exchanged by both parties are theoretically equal
unilateral contract
only one party makes a legally enforceable promise
conditional contract
insurer's obligation to pay a claim depends on whether the insured or the beneficiary has complied with all policy conditions
conditions
provisions inserted in the policy that qualify or place limitations on the insurer's promise to perform
personal contract
contract is between the insured and the insurer
contract of adhesion
the insured must accept the entire contract with all of its terms and conditions
principle of reasonable expectations
an insured is entitled to coverage under a policy that he or she reasonably expects it to provide, regardless of policy provisions
waiver
voluntary relinquishment of a known legal right
estoppel
the loss of a legal defense because of previous actions that are now inconsistent with that defense
declarations
statements that provide information about the particular property or activity to be insured
insuring agreement
summarizes the major promises of the insurer
named-perils policy
only those perils specifically named in the policy are covered
open-perils policy (special coverage policy)
if the loss is not excluded, then it is covered
named insured
person or party named on the declarations page of the policy
first named insured
first name that appears on the declarations page of the policy as an insured
other insureds
persons or parties who are insured under the named insured's policy even though they are not specifically named in the policy
additional insured
person or party who is added to the named insured's policy by an endorsement
endorsements and riders
in property and casualty insurance, a written provision that adds to, deletes from, or modifies the provisions in the original contract.
in life and health insurance, a provision that amends or changes the original policy
deductible
provision by which a specified amount is subtracted from the total loss payment that otherwise would be payable
straight deductible
the insured must pay a certain number of dollars of loss before the insurer is required to make a payment
aggregate deductible
all losses that occur during a specified time period, usually a policy year, are accumulated to satisfy the deductible amount
calendar-year deductible
type of aggregate deductible that is found in individual and group medical expense policies
elimination (waiting) period
stated period of time at the beginning of a loss during which no insurance benefits are paid
coinsurance clause
encourages the insured to insure the property to a stated percentage of its insurable value. if not met at the time of the loss, the insured must share in the loss as a coinsurer
coinsurance percentage clause
provision that requires the insured to pay a specified percentage of covered medical expenses in excess of the deductible
premature death
the death of a family head with outstanding unfulfilled financial obligations
human life value
present value of the family's share of the deceased breadwinner's future earnings
whole life insurance
cash-value policy that provides lifetime protection
ordinary life insurance
a level-premium policy that accumulates cash values and provides lifetime protection to age 121
net amount at risk
the difference between the legal reserve and face amount of insurance
cash-surrender values
amount paid to a policy holder who surrenders the policy
variable life insurance
a fixed-premium policy in which the death benefit and cash values vary according to the investment experience of a separate account, which is similar to a mutual fund maintained by the insurer
universal life insurance (flexible premium life insurance)
a flexible premium policy that provides protection under a contract that separates the protection and saving components
current assumption whole life insurance
a nonparticipating whole life policy in which the cash values are based on the insurer's current mortality, investment, and expense experience
employee benefits
employer-sponsored benefits, other than wages, that enhance the economic security of individuals and families and are partly or fully paid for by employers
health maintenance organization (HMO)
organized system of healthcare that provides comprehensive medical services to its members on a prepaid basis
preferred provider organization (PPO)
plan that contracts with healthcare providers to provide certain medical services to the plan members at discounted fees
point-of-service plan (POS)
managed care plan that combines the basic characteristics of an HMO and PPO
consumer directed health plan (CDHP)
plan that combines a high-deductible health plan with a health savings account or health reimbursement arrangement
health reimbursement arrangement (HRA)
employer-funded plan with favorable tax advantages that reimburse employees for medical expenses not covered by the employer's standard insurance plan