Unit 1 Cram Sheet Flashcards

Comprehensive vocabulary flashcards covering the fundamental concepts of insurance, risk management, insurer types, and agent authority based on the Unit 1 Cram Sheet.

Insurance

Transfer of risk from a person or business to an insurer.

Risk

Uncertainty or possibility of a loss.

Speculative risk

A chance of loss or gain; this type of risk is not insurable.

Pure risk

A chance of loss only; insurance companies will insure this type of risk.

Exposure

Risks for which the insurance company would be liable.

Peril

A cause of loss, such as a fire when a house burns down.

Hazard

Increases the chance of loss.

Physical hazard

A hazard that can be seen.

Moral hazard

A hazard resulting from dishonesty.

Morale hazard

A hazard resulting from carelessness.

STARR!

Methods of handling risk: Sharing, Transfer, Avoidance, Retention, and Reduction.

Contract (policy)

An agreement between the insured (1st party) and the insurer (2nd party).

Law of large numbers

The principle that the larger the group, the more accurately future losses can be predicted.

CANHAM

Elements of an insurable risk: Calculable, Affordable, Non-catastrophic, Homogeneous, Accidental, and Measurable.

Adverse selection

Risks that have a greater-than-average chance of loss; the tendency for high-risk individuals to get and keep insurance.

Reinsurance

An insurance company (the ceding company) paying another insurance company (reinsurer) to take some of the company's risk.

Facultative Reinsurance

The reinsurer evaluates each risk before allowing the transfer.

Treaty Reinsurance

The reinsurer accepts the transfer according to an agreement called a treaty.

Stock Insurer

Owned by stockholders; issues non-participating policies; dividends are taxable to stockholders and not guaranteed.

Mutual Insurer

Owned by policyholders (customers); issues participating policies; dividends are not taxable and considered a refund of premium.

Fraternal Insurer

Provides insurance and other benefits to members of a society.

Reciprocal Insurer

An unincorporated group managed by an attorney-in-fact where members pay an assessed amount if a loss occurs to any member.

Lloyd's association

Insurance provided by individual underwriters, not companies, that insures unusual risks like an athlete's arm or celebrity's hair.

Risk Retention Group

A liability insurance company created for policyholders from the same industry, such as car dealers.

Risk Purchasing Group

A group of businesses from the same industry joining together to buy liability insurance from an insurance company.

Self-insurance

A business that retains risk by reserving funds to cover its own claims.

Residual market insurance

Insurance from the state or federal government, including war risk, nuclear energy, flood, and federal crop insurance.

Domestic Insurer

An insurance company in the state where it is incorporated.

Foreign Insurer

An insurance company incorporated in another state or U.S. territory.

Alien Insurer

An insurance company incorporated in another country.

Certificate of authority

The state license required for an insurance company to be admitted or authorized.

Surplus Lines

Insurance sold by unauthorized/nonadmitted insurers to high-risk insureds if on a state's approved list.

Financial strength rating

A report card of the insurance company.

Direct response marketing

Marketing that involves no agent/producer; uses direct mail, magazines, television, internet, and radio.

Agency

A relationship where the insurance agent acts on behalf of the principal (insurance company).

Express Authority

Authority specified in the agent's written contract with the company.

Implied Authority

Authority that is not written but involves activities an agent normally does to sell insurance.

Apparent Authority

Activities an agent does that a reasonable person would assume as authority based on the agent's actions and statements.

Fiduciary Trust

The responsibility of an agent to promptly send premiums to the insurer, have product knowledge, and not commingle funds.