Section 2 - General Insurance Concepts

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