insurerer
insurance company that receives premiums from people buying insurance
premium
the bill that must be paid to purchase the policy
-a large, uncertain loss (illness or death) is traded for a small, certain loss (premium)
contract of insurance or policy
agreement between insurer and the policy owner
-insurer promises to pay the insured or insured's beneficiary according to the terms of the policy if a loss occurs
loss
reduction in the value of an asset
-to be paid for loss, insured must notify the insurer by making a claim
exposure
amount of the loss
risk
possibility (uncertainty) that a loss might occur and the reason people buy insurance
-accident, sickness, or death: loss occurs
-two types of risk: speculative and pure
speculative risk
i.e. gambling, creates a risk situation that offers the opportunity for gain as well as the possibility of loss
-insurance does not cover this risk
pure risk
type of risk that insurers accept
-possibility that certain event will occur
-purpose of insurance is to restore the insured to the insured's original position, not to provide a person with the opportunity of making a profit on an accident or illness
-cha
peril
cause of a loss, such as sickness, death, or accident
hazard
situation that increases the possibility of loss occurring
-3 types: Physical, moral, morale
physical hazard
health condition or a dangerous occupation or hobby
moral hazard
making a false claim to defraud the insurance company or committing an illegal act then asking insurer to pay for injuries sustained while committing illegal act
-dishonest client is a moral hazard
morale hazard
when policy owner is unconcerned with impact of unnecessary medical claims on a company's financial condition
-someone who is careless and unconcerned about taking care of themselves
Underwriters
evaluate risk fo rthe probability of loss, severity, and potential dollar losses over time
ways to manage risk
STARR
Shared, transferred, avoided, retained, reducted
risk reduced
controlled i.e. when man with high blood pressure begins making healthier lifestyle choices such as losing weight or quitting smoking
risk retained
when person decides to assume financial responsibility for certain events by not buying an insurance policy and instead considers own personal assets
risk transferred
transferred to insurance company when insurance purchased
pooling concept
looking at groups of individuals to make predictions is an accurate way of predicting potential losses
mortality pool
Life Insurance company sets up where people share the risk
morbidity pool
Health Insurance sets up
morbidity
concerned with the severity of a loss, the duration of the sickness and the frequency of its occurrence
adverse selection
occurs when the only people that will buy the insurance are the ones that are going to use it
-a potential client can take advantage of the company
law of large numbers
allows insurance company to predict a group's expected losses
-the larger the number of separate similar risks combined into one group the more predictable the number of future losses of that group will be within a given time period
-essential that large
exposure unit
economic value of the individual person's life
-if enough exposure units are combined, the degree of error in predicting future losses decreases to a reasonable level
-larger the group the more closely the predicted experience will approach the actual los
reinsurance
form of insurance between insurers
-insurer agrees to accept all or part of a risk covered by another insurer
-reduces the risk of catastrophic loss
-make it possible fora carrier to share a policy's risk with a larger insurer group
-allows companies to r
treaty reinsurance
insurer has a contract under which the insuring company retains its limit and automatically cedes or transfers the remainder to the reinsurer
facultative reinsurance
the insuring company negotiates with the reinsurer; therefore each decision is made on a case by case basis
principle of indemnity
-restores the insured person in whole or part to the condition enjoyed prior to loss
-value not assigned to person's life but to person's potential earning power
disability income insurance
companies will issue only a policy that is limited to a set percentage of a person's gross income
insurable interest
to be insurable, risk must involve the possibility of only loss not gain and applicant must have a legitimate interest int he preservation of the life being insured
insurable risks
-must be a large number of homogeneous, similar units
-loss must be measurable (insurer must be able to place monetary value on the loss)
-timing of the loss must be uncertain
-loss must include an economic hardship
-loss must exclude catastrophic perils
types of insurers
insurers may be private commercial insurers (profit making), private noncommercial insurers (non profit), or US govt
stock insurers
-stockholders own shares in the company
-stockholders provide capital for the insurer
-in return, stockholders share in any profits or losses
mutual insurers
-no stockholders therefore ownership rests with the policy owners
-policy owners vote for a board of directors
-funds not paid out after paying claims and not used to pay for other costs of operation may be returned to the policy owners in form of policy
reciprocal organizations
-unincorporated group of individuals with each party insuring the other members
-each member is known as a subscriber
-group managed by attorney in fact'
-each subscriber agrees to share in the other subscribers losses
-type of group is also known as an a
fraternal insurers
-benefit societies are Life Insurance carriers that exist as social organizations and usually engage in charitable and benevolent activities
-membership from fraternal organization
-asses policy owners in times of financial difficulty
-affinity between me
surplus lines
-if risk is very large or unusual, typical carriers may be unwilling to assume it
-specialty carriers (surplus line broker) attempt to place the risk with unauthorized carrier
-not covered by Ohio Guaranty fund
Lloyd's association
-similar to Lloyd's of London
-incorporated group of individuals who band together to assume risks in the area of surplus lines
-each person individually responsible for the share of the risk they agree to assume
govt insurers
-fed government offers military life and health insurance plans
-fed, state, and local govt provide social insurance to those without disability or retirement income or medical care (Medicare and Medicaid)
risk retention groups
-only provide certain types of liability insurance protection for individuals who engage in similar activities or businesses
-owners are also insureds
classification of insurers
defined by corporate status and location of headquarters or domicile
-domestic, foreign, and alien
domestic insurer
conducts business in a state it is incorporated in
foreign insurer
conducts business in a state other than where its offices are located
alien insurer
incorporated in a country outside USA
financial strength of carrier
rated according to amount of financial reserves each company has available to pay future claims and other liabilities
agents
-do not have authority to issue or modify insurance contracts
-solicit, receive, and forward applications for the contracts written by their companies
-cannot bind coverage
broker
-not direct rep of any particular company nor is the broker under exclusive contract to any one company
-independent salesperson who selects a client's insurance coverage from the company that best fills the client's needs
-like agent may operate as an in
law of agency
understanding of the law of agency, as insurance company must act through its agents
agency
relationship in which one person is authorized to represent and act for another person of a corp
principal
person or entity for which the agent acts
agent granted 3 types of authority
1. expressed authority
2. implied authority
3. apparent or perceived authority
expressed authority
explicit, definite agreement
-authority principal gives agent as set in agency contract
implied authority
-not expressly granted under agency contract
-authority to transact the principal's business in accordance with general business practices
apparent or perceived authority
-authority a person seems to have because a principal has created the appearance of authority to a third person
-authority public believed agent has based on agent's actions and advice
fiduciary relationship
-developed when a person relies on or placed confidence, faith, or trust in another person's action or advice
-agent has obligation of acting in insured's best interest
premiums received by agent
-held in trust
insurance contracts
-policies are contracts
-in order to be enforceable in court must contain four elements (COAL)
consideration
offer
acceptance of offer
legal purpose and legal capacity
consideration
-entails exchange of something of value between parties
-client pays premium and insurance company promises to pay claim if applicant is insurable
-honest answers on app
offer
-offer made by client when he signs the app and writes a check for the first premium payment
-asking company without giving a check with the app is inviting the insurer to make an offer (no temp insurance applicable)
acceptance of offer
-done when underwriter approves the app and issues policy for delivery
-agreement between company and applicant means that the offer, or counteroffer, has been accepted and all conditions met
legal purpose and legal capacity
contracts for illegal purposes are unenforceable in court
-all parties to a contract must be competent, meaning they must be of age, sound mind, and not under influence of alcohol or drugs
unilateral
-insurance policy is one-sided since only insurer makes any legally enforceable promise
-insurer promised to pay covered claims if insurer pays premium
conditional
-both parties must comply with certain specified conditions
aleatory
-number of dollars to be paid by each party is unequal
Doctrine of Adhesion
-any ambiguity in contract language will be construed for the favor of the insured since that person had no chance to change it when purchased
personal contract
-ownership cannot be transferred without consent of company
representations
the truth to the best of the client's knowledge
Doctrine of utmost good faith
applies to all parties involved
-all statements on an applications are always representations
warranty
statement made on an application for insurance that warranted to be true in all aspects
concealment
deliberate omission of a material fact
material facts
-relevant and would possibly change the insurer's offer
fraud
deliberate attempt to deceive the agent or insurance company to get someone to part with something of value such as paying more for a claim then is necessary or paying for a fake claim
waiver
voluntarily giving up a known right
-once given up, cannot be used as defense in court
doctrine of estoppel
-once waiver of a known right has occurred, the party waiving that right is stopped from asserting that right in the future
doctrine of reasonable expectations
client may reasonably expect certain losses to be covered