Insurance
A social device for spreading the chance of financial loss among a large number of people
Protection against a financial loss
Insurer
Insurance company
Insured
Person covered by insurance
Producer/Agent
A person authorized to act on behalf of another person, who is called the principal (insurance company)
Policy
legal agreement between the insurer and the insured
Premium
what you pay for the protection that's provided
Loss
reduction in the value of an asset
Claim
the insured must notify the insurer to be paid for a loss
Risk
the possibility (uncertainty) that a loss might occur
Pure risk
a chance of loss only--no gain
Speculative risk
risk that offers the opportunity for gain as well as
the possibility of loss
Risk management - 4 ways to manage
retained, avoided, reduced, transferred
Two ways to transfer risk
Sue, the use of insurance
Law of Large Numbers
The more similar risks the insurance company groups together, the better their statistical data will be
The easier it will be for them to determine approximately how many losses they will have in a given time period
Insurable interest
A person is presumed to have an insurable interest in her own life, but can also be for relatives and spouse
Can also be based on financial loss if an individual dies
For Life Insurance,
insurable interest
must exist at the time of the application
For
Property and & Casualty
, insurable interest
insurable interest must exist at the time of the application and
at the time of loss
For Property, insurable interest
The insured must have a financial interest in the property being insured
Types of insurable risks #1
Large numbers of homogeneous units - similar risk exposures
Types of insurable risks #2
Loss must be ascertainable - you must be able to put a dollar value on the risk
Types of insurable risks #3
Loss must be uncertain (exclusions to certain losses - suicide)
Types of insurable risks #4
Economic hardship
Types of insurable risks #5
Exclusion of catastrophic perils: war, nuclear risk, and floods
The principle of indemnity
restores the insured person, in whole or in part, to the condition he or she enjoyed prior to the loss. Restoration may take the form of payment, repair, or replacement
Types of insurers: Stock
Owned by stockholders, also called shareholders
If dividends declared by BOD (sharing of earnings with stockholders), dividends paid to stockholders, NOT to policyholders
Dividends are taxable
Types of insurers: Mutual
Owned by policyholders
If dividends declared by BOD, dividends paid to policyholders.
Dividends are non-taxable--they are a return of over-payment of premium
True mutual insurer
All ownership rests with policyholders
Dividends from a mutual
are never guaranteed
Types of insurers: Non-profit service organization
Health insurance field only (HMO's)
Prepaid plans for hospital, medical, and surgical expenses
They do not provide cash benefits to the plan subscriber, but
instead pay the provider of medical services directly to the extent covered in the contract
Types of insurers: Reciprocal
Unincorporated group (USAA)
Member of the reciprocal is known as a subscriber
Subscribers purchase coverage as an indemnity agreement, not a policy
Members agree to insure each other in a circular fashion
Attorney-in-fact acts as CEO; oversees reciprocal,
Types of insurers: Fraternal
Lodge of fraternal organization (Knights of Columbus)
Created to sell insurance only to their members (life insurance only)
Policies sold are open contract - accessible policies, if the insurance company gets into financial difficulty, they can request th
Types of insurers: Reinsurance
Special type of insurance company that sells only to other insurance companies--they do not sell to the general public
Used to reduce risk of catastrophic loss; companies re-insure a portion of their risk, spreading or sharing the risk with another compan
Ceding insurer
Company purchasing reinsurance
Excess of loss basis
the re-insurer will pay only the portion of loss that exceeds a certain dollar amount; if there's a loss over and above that amount,then the reinsurance company comes in and pays
Quota share basis/fixed percentage basis
the ceding insurer lists a fixed percentage of the policy, and the reinsurance company will pay a fixed percentage of a certain loss
Facultative reinsurance
The ceding insurance company decides individually what risks they want to re-insure with the reinsurance company, and the reinsurance company determines and underwrites each risk individually instead of writing an umbrella policy
Types of insurers: Captive
Do not sell to the public; rare
A corporation formed to serve the insurance needs of their
stockholders
Most captive insurers are non-admitted alien corporations
Types of insurers: Excess and Surplus Lines
Insurance that cannot be placed through the normal marketplace (Lloyd's of London)
Insure high risk (David Beckham's legs insured for $7 million)
Types of insurers: Government
The federal government provides life and health insurance through various sources: flood, Medicaid, Medicare
Unauthorized carrier
Surplus lines do not have to be licensed in the state to sell, but the brokers who sell for them do
Domestic insurer
If an insurer is incorporated under the laws of the
state in which it conducts business, that insurer is considered a domestic insurer
Foreign insurer
If an insurer conducts business in a state where it is not resident, the insurer is considered a foreign insurer
Alien insurer
If an insurer is incorporated in a country other than the United States, it is considered an alien insure
Authorized (Admitted) insurer
A company secures a license and receives a Certificate of Authority from the Department of Insurance to transact insurance in a particular state; Once the insurer receives the license, it is considered "admitted" into the state as a legal insurer, and is
Best's Guide, Standard & Poor's, and Moody's
companies that rate insurance companies for their financial stability
They rate insurance companies according to the amount of financial reserves the company has available to pay future claims and other liabilities, such as cash surrenders
Unauthorized insurer
Not authorized to transact the business of insurance in a state
Also non-admitted
Insurance marketing systems
Different ways insurance is sold to the masses
Independent insurance producers
If the policy renews, agents have the right to switch customers to another company if it is in the best interest of the client; they own the expirations of their policies
They work for themselves or other producers
Paid a commission for each sale
Exclusive or captive producers
Represent only one company
May be paid a salary or compensated by commissions
Exclusive producers do not own the policy expirations; if you leave that company, the contracts stay with the company
Managing General Agent
The exclusive producer has a group of producers working for him/her
MGAs may be required to obtain an MGA license from the state Department of Insurance
MGAs may be independent, representing several insurance companies, or they may have an exclusive agree
Overriding commission
A commission which is in addition to the commission
paid to the soliciting producer
Direct writing companies
GEICO
Pay salaries to employees to sell products
Insurance company owns the expirations and the producers business
Franchise marketing system
AFLAC
Provides coverage to employees of small firms or to members of associations
Specialize in selling supplemental insurance to employees who have group coverage; they sell individual policies that vary according to the individuals' needs
Non-insurance sponsors
Often banks and companies that issue credit cards
Vending machines (accidental death only)
Reaches a select group of individuals who have a history of
periodic payments
Can producers/agents modify contracts?
Life and health agents generally do no have authority to issue or modify insurance contracts
Bind coverage
Life and health producers usually cannot bind
coverage
Property and Casualty producers may bind or commit their companies by oral or written agreement
Insurance binder
A temporary oral or written agreement to provide insurance coverage until the permanent policy is issued
They create immediate coverage
Law of Agency
As an agent you are a representative of the insurance company
The insurance company is responsible for your acts while you sell insurance
The law that governs the relationship between a principal and his or her agent
Authority of an agent/producer
express, implied, and apparent
Express authority
An explicit, definite agreement set forth in the contract
The authority granted to an agent by means of the agent's written contract
Implied authority
Authority not expressly granted under an agency contract, but it is actual authority that the producer has to transact the principal's business in accordance with general business practices
Authority to conduct customary business practices as an agent, im
Apparent authority
Authority a 3rd party is led to believe you have
Authority a producer seems to have because of certain actions taken on his part. This action may mislead applicants or insureds, causing them to believe the producer has authority that he does not, in fact,
Fiduciary duty
A person legally appointed and authorized to hold assets in trust for another person (insured or applicant)
All premiums received by a producer are funds received and held in trust
Producer responsibilities to the company
1) A producer owes the duty of loyalty
2) The producer owes a duty to obey the company and to perform in accordance with instructions given by the company
3) A producer has a duty to act with that degree of care that a reasonable person would exercise und
Insurance coverage
usually does not begin until the policy is delivered to the insured by the producer, except when binding receipts are used
Errors and Omissions (E&O) insurance
Covers negligence, error, or omission by the insurer or the producer who is the insurer's representative
Protects producers from financial losses they might suffer if insureds sue to recover for their financial loss due to a producer giving them incorrect
E&O policies
Cover only losses due to negligence, error or omission
Do not cover embezzlement or filing of false financial statements or bodily-injury or property-damage liability
Contracts
must contain 4 essential elements, COAL:
Consideration
Offer
Acceptance
Legal Purpose and legal capacity
Consideration
The exchange of something of value between the parties
Does not have to be equal
Offer
The offer must be clearly communicated
Usually made by the client when:
1) completes & signs the application
2) writes a check for the first premium
Acceptance of Offer
The underwriter approves the application and issues the policy for delivery
Legal Purpose and Legal Capacity
Contracts for illegal purposes are unenforceable in court
All parties to a contract must be competent to contract, meaning they must be of age, of sound mind, and not under the influence of drugs or alcohol
Meeting of the minds; mutual agreement
An agreement between parties in which each party is aware of the commitments that is being made by each individual
The offer and acceptance
Doctrine of Adhesion
states if the insurance contract language is vague or unclear, any ambiguity will be construed in favor of the insured (this is the reason insurance companies do not want to go to court, because they often lose)
representation
The truth to the best of the client's knowledge.
Based on the Doctrine of Utmost Good Faith, which applies to all parties involved, including the applicant, the producer, and the insurer
Doctrine of Estoppel
Once a waiver of a known right has occurred, the party
waiving those rights is stopped from asserting that right in the future
If an insurance company fails to enforce a provision in their policy, then they are stopped from enforcing it in thefuture
Waiver
Voluntary giving up of a known right
Concealment
Deliberate omission of a material fact
Fraud
A deliberate attempt to deceive the producer or insurance company
Warranty
An absolute guarantee of truth
If written, are sometimes required to be notarized
Breach of warranty
Insurance company will void policy
Unilateral
Only one party to the contract, the insurer, makes an
enforceable promise to pay a covered claim if the premium has been paid
Aleatory
For personal contracts of insurance, the outcome depends upon chance
The insured may pay a premium, but never have a claim
Moral hazard
A dishonest client
Morale hazard
A careless client
Physical hazard
A dangerous occupation or hobby
Adverse selection
Insurance firm's acceptance of applicants who are uninsurable (or at a greater than normal risk), but conceal or falsify information about their actual condition or situation. Approval of their application has an 'adverse' effect on insurance companies, b
L&H uses
Conditional or binding receipts
P&C uses
Binders