Principles of Insurance and General Insurance

What is insurance?

Transfer of the risk of loss from the insured to the insurer

Risk

The uncertainty or chance of loss occurring

Pure Risk

A situation that results in loss or no loss

Speculative Risk

A situation that results in loss or potential gain

Which type of risk is insurable?

Pure risk

Hazard

Things that increase the probability of a loss

Peril

The actual cause of a loss

Physical Hazard

Physical condition increasing risk

Moral Hazard

Dishonesty or character issues

Morale Hazard

Carelessness or indifference to loss

Methods of handling risk

• Avoidance

• Retention

• Sharing

• Reduction

• Transfer

Avoidance

Eliminating exposure to risk

Retention

Keeping the risk (deductibles/self-insurance)

Sharing

Spreading risk among a group

Reduction

Reducing severity or frequency of loss

Transfer

Shifting risk to another party (insurance)

Buying insurance is which risk method?

Transfer

Elements of an insurable risk

• Due to chance

• Definite and measurable

• Statistically predictable

• Not catastrophic

• Randomly selected and large group exposure

“Due to chance”

The loss must be accidental and outside control

“Definite and measurable”

The loss must be specific in time, place, and amount

“Statistically predictable”

The loss frequency can be estimated

“Not catastrophic”

An insurer cannot handle massive simultaneous losses

“Randomly selected and large group”

To predict losses using statistics

Law of Large Numbers

Larger group = more predictable losses

Adverse Selection

High-risk individuals more likely to buy insurance

Who owns stock insurance companies?

Stockholders

Who receives dividends in a stock company?

Stockholders

Who owns a mutual insurance company?

Policyholders

Who receives dividends in a mutual company?

Policyholders (return of excess premium)

What is a domicile insurer?

Incorporated in the same state as the company’s home office

What is a foreign insurer?

Incorporated in another state

What is an alien insurer?

Incorporated outside of the United States

Admitted Insurer

Properly licensed with a Certificate of Authority

Non-admitted Insurer

Not licensed in the state

Private Insurers

Funded by premiums

Government Insurers

Funded by taxes

Reinsurance

Insurance for the insurer

Who does an agent represent?

The insurer (principal)

If an agent knows something, who is also assumed to know it?

The insurer

Fiduciary Responsibility

Duty to act in trust (no commingling funds)

Expressed Authority

Authority written in a contract

implied Authority

Authority assumed necessary to do the job

Apparent Authority

Authority that appears to exist based on actions

What are the 4 elements of a contract?

1. Agreement — offer and acceptance

2. Consideration

3. Competent parties

4. Legal purpose

Offer and Acceptance

• Offer = An applicant submitting an application

• Acceptance = An insurer’s underwriter approves the application and issues a policy

Consideration

The insured’s payment of premium and the insurer’s payment in the event of a loss

Competent Parties

Requires both parties to be of legal age, mentally competent to understand the contract, and not under the influence of drugs or alcohol

Legal Purpose

Legal and not against public policy

What is contract of adhesion?

Take-it-or-leave-it contract

What is aleatory contract?

Unequal exchange of value

What is unilateral contract?

Only insurer is legally bound

What is conditional contract?

Conditions must be met for coverage

What is personal contract?

Between insurer and specific individual

Indemnity

Insured cannot profit from loss

What is utmost good faith?

Both parties must act honestly

Representations

Statements believed to be true

Misrepresentation

False statement that may void policy

Concealment

Withholding important information

Fraud

Intentional deception

What is a waiver?

Giving up a known right

What is estoppel?

Prevents taking back a waived right

What is a binder?

Temporary insurance coverage

When does a binder end?

When policy is issued or denied

Deductible Effect

Higher Deductible = Lower Premium

Policy Territory

Where coverage applies

Policy Period

The time coverage is active

Policy Limit

The maximum amount an insured may collect

Aggregate Limit

Total paid per policy year

Per Occurence

Maximum per single event

Per Person

Maximum for bodily injury to a single person in an accident

Split Limit

Separately stated limits of liability for different coverages

How are split limits organized?

Bodily injury per person, total bodily injury per accident, and property damage per accident

Combined Single Limit

One limit for bodily injury and property damage together