Insurance

Transfer of risk

Risk

uncertainty/possibility of a loss

Types of risk

Speculative and Pure

Speculative Risk

chance of loss or gain; not insurable

Pure Risk

chance of loss only; insurance companies will insure

Peril

cause of loss

hazard

Something that causes an increase in the chance of loss

Types of Hazards

Physical, Moral, Morale

Physical Hazard

The hazard can be seen

Moral Hazard

a belief that intentionally causing a loss is acceptable

Morale Hazard

carelessness

Methods of Handling Risk (STARR)

Sharing, Transfer, Avoidance, Reduction, Retention

Contract

An agreement between the insured and the insurer

1st party

Insured (customer)

2nd party

insurer, insurance company

Law of Large Numbers

The larger the group, the more accurate losses can be predicted

Risks that can be insured have the following characteristics

Calculable, Affordable, Non-catastrophic, Homogeneous, Accidental, Measurable (CANHAM)

Adverse Selection

risks that have a greater than average chance of loss

Reinsurance

an insurance company (the ceding company) paying another insurance company (reinsurer) to take some of the companies risk of catastrophic loss

Facultative

The reinsurer evaluates each risk before allowing the transfer

Treaty

The reinsurer accepts the transfer according to an agreement

Stock Insurer

- publically owned by stockholders/shareholders- if the company makes money, a taxable dividend from the profits may be paid to the stockholders/shareholders- issues non-par policies

Mutual Insurer

-Owned by policy holders (customers)-If the company is profitable, can return excess premium to policyholders-nontaxable dividend-Issues participating policies

Fraternal Insurer

-provides insurance and other benefits-must be a member of the society to get the benefits

Reciprocal insurer

-unincorporated-members are assessed the amount they have to pay if a loss to any member of the group occurs-run by an attorney-in-fact

Lloyd's association

Insurance provided by individual underwriters not companies

Risk Retention Group

Liability insurance company created for policyholders from the same industry

Risk Purchasing Group RPG

a group of businesses from the same industry joining together to buy liability insurance from an insurance company. rpg is not the insurance company

Self-insurance

a business that pays its own claims

Residual Market

insurance from the state or federal government

Domestic Insurance Company

the state where a company is incorporated

Foreign Insurance Company

any state or U.S. territory other than the state where incorporated

Alien Insurance Company

incorporated in any country other than USA

Certificate of Authority

state license for an insurance company

Admitted or Authorized Insurer

state requires the insurance company to have a certificate of authority

Non-admitted Insurer

unauthorized-insurance company not required to have a Certificate of Authority from the state

Surplus Lines

- Insurance sold by unauthorized/nonadmitted insurers; if on the state's approved list of surplus insurers- Can only be sold to certain high risk insureds- Cannot be sold solely for a cheaper rate than licensed/admitted insurers

Financial Strength Rating

a report card of the company

Methods of Marketing

- Independent- Exclusive or captive- General agents or managing general agents- direct writing companies-direct response-no agent/producer involved

agency

the insurance agent acts on behalf of the principal (insurance company)

Types of Agent Authority

express, implied, apparent

Express Authority

what the agent's written contract with the company says

Implied Authority

not written but are the actions agents normally do to sell insurance

Apparent Authority

Things the agent does that a reasonable person would assume as authority, based on the agents' actions and statements

Fiduciary Trust

- Promptly sends premiums to insurer- Has knowledge of products- Complies with laws and regulations- Does not commingle funds

Consideration

the giving up of something of value-Insured gives info and money (premium) to the insurance company -insurance company gives a promise to pay (policy) to the insured

Legal Purpose

risk transfer doesn't violate the law

offer

Insured submits applicant and first months premium to the insurance company Counteroffer (made by insurer)

Acceptance

Insurer accepts risk as presented

Competent Parties

insured age 18 and sane

Adhesion

Policy written by the ins companyIf not clear, court will that the side of the insured

aleatory

not equal value - small premium for a large amount of coverage

Utmost Good Faith

the insured and insurance company have a right to expect honesty from each other

unilateral

Only ONE promise made. Insurance company PROMISES to pay for a covered loss. Insured does NOT promise to pay the premium

Personal

contract between the insurance company and the insured; cannot be changed to someone else

conditional

insured must pay the premium for coverage and file a claim if a loss occurs

indemnity

pay for the loss but with no gain

representation

believed to be true

Misrepresentation

information given that is not true but would not affect the insurance company's decision

Material Misrepresentation

information given that is not true and DOES affect the insurer's decision

Concealment

failure to disclose known facts

Intentional concealment

Coverage could be voided

Unintentional concealment

Coverage cannot be voided

fraud

intentional act to cheat another

Waiver

voluntarily giving up a right

Estroppel

Actions reasonably relied on by one party can't be denied by the party that accepted same previously

Repercussions for fraud, embezzlement, and false statements

Fine and or imprisonment (10-15 years)

In order to be insured a group must be randomly selected in order to avoid

adverse selection

Jill met with an insurance agent to discuss purchasing a $500,000 term life insurance policy. If she signs a contract two weeks later while intoxicated

Jill will not be presumed to be competent

Not encompassed by agency law

Knowledge of the principal is knowledgeable of the agent

Josephine sells insurance for one company and is an independent contractor, not an employee of the insurer. She is

captive agent

According to the law of large numbers

the larger the number of risks combined into one group, the less uncertainty there will be as to the amount of loss that will be incurred.

Susan decides to drive fast in a horrible snowstorm because she knows that if she gets in an accident, her insurance will cover her. This is an example of

morale hazard

ABC Insurance is licensed to sell insurance in Wisconsin. When a company is licensed in a state, it is considered

admitted

In an insurance contract, the second party is

The insurer

The tendency of higher risk individuals to get and keep insurance

Adverse selection

A licensed independent life or health insurance producer may represent

1 or more authorized insurers

The inclination of higher risk individuals to be "first in line" to get and keep ins

Adverse selection