Code of ethics pre licensing chapter 1

study for exam make sure you pass on the 1st time its $98 per try

insurance

all of the above

insurer

An insurer usually an insurance company agrees for a consideration (premium) to assume, for a specified extent any losses suffered by the insured

What is the difference between insurer and insured?

the insurer is the insurance company, the insured is the policy owner

the insured is…

the policy owner

the insurer is…

the insurance company, or carrier that by contracts subject to code restrictions, indemnifies losses, provides pecuniary benefits or renders services

What is risk?

Uncertainty of loss and it is present whenever two or more possibilities exist there are 2 types in insurance

Name the types of risk

pure risk, speculative risk

Pure risk

the chance of loss only with no chance of gain or profit, death, sickness, and likelihood of needing medical care are examples of pure risk

Speculative Risk

involves a chance of loss and also a chance of gain. (example: investing in the stockmarket, and purchasing a lottery ticket)

What type of risk is insurable?

only pure risks are insurable

Peril

A potential loss. Insurance indemnifies an insured when a peril that is insured against causes a loss

what does indemnify mean?

to secure against hurt, loss, or damage

How many types of hazards are there?

4

What are the types of hazards?

Physical, moral, morale, and legal

physical hazards

can usually be seen, touched, tasted, or smelled (bad brakes on a car, poor health, or potholes in a driveway are physical hazards)

moral hazards

Risk an insurance company incurs when assuming an applicant is trustworthy and honest. (Dishonesty addictions and or illegal activity create moral hazards.)

Morale hazards

occur when a person is indifferent to the consequences of their actions. (speeding and drunk driving)

legal hazards

come from the court actions that increase the likelihood or size of a loss. They are usually associated with liability insurance. (lawsuits are legal hazards)

what is the law of large numbers?

helps predict the probability of loss when it is applied to the risks associated with perils that could occur for a large group of similar insured entities over a long period of time

the larger the number (of persons insured), the easier…

to accurately predict outcomes in a group and/or over time.

Loss exposure

is the potential for incurring a loss. The amount of loss exposure is a major guideline for determining the cost of insurance.

Ideally insurable risk

an ideally insurable risk is one that presents only a chance of loss with no potential for gain

The risk of loss must be:

• uncertain, in property and casualty insurance the uncertainty is not when, but if. in life insurance the uncertainity is not if, but when.

• accidental, this refers to an unseen and unplanned event

• due to chance, refers to very random acts or events

Insurable events

are events that may be insured. (they include any contingent or unknown event, past or future, except for lotteries, gambling, or civil contingent damage awards against unlicensed people. For insurance to be legal the policy owner/insured must have insurable interest in the event, property, or person insured. otherwise the policy is void.)

insurable interest

the inherent or acquired right one has to be indemnified (restored to the condition one was in before the loss), in the event of a loss to an event a person or property.)

How many components does insurable interest have?

3

What are the 3 components of insurable interest?

1. legitimate financial interest

2. potential for economic hardship

3. no possible gain or profit

in property and casualty insurance, insurable interest is measured by…

the dollar value at risk

for life insurance, insurable interest must exist at the time of application, but…

not necessarily at the time of loss. It can be identified in 2 ways: a financial relationship, “strong love and affection generated by blood or marraige”

A financial relationship:

a business partnership, someone who provides financial support for another or a bank that lends someone money, are examples of financial relationships that could hold an insurable interest

“Strong love and affection generated by blood or marriage.”

in life insurance insurable interest must exist between the owner of the contract and the life being insured. Spouses insuring each other, children, insuring their parents, and parents insuring their children, are good examples of this type of insurable interest

in life insurance, insurable interest must exist at the time of application, but…

not necessarily at the time of loss

indemnity

to restore someone to the approximate financial condition they were prior to incurring loss. (“restoration” may be cash payments, repair, or replacement of the damaged insured item)

Underwriting

Insurance underwriter is a technician who evaluates risks and determines if that risk is withing the scope of the insurer’s underwriting guidelines. (underwriters select the rate and issue the insurance if it meets the insurer’s guidelines)

obtaining reliable information for property and casualty or personal lines insurance begins with…

1. a review of the application

2. physical inspections of property to reveal hazards or potential hazards

3. dmv records

4. a review of consumer credit reports, which may include information about the applicant’s background and reputation

For life, health, and disability insurance the same information is needed. Underwriters may also require

1. medical examination

2. attending physician’s statements

3. MIB group inc information

4. responses to questionaries

5. telephone interview with the applicant

Adverse selection

tendency of those who are most in need of insurance to apply. Underwriting protects insurers from adverse selection by eliminating high-risk applicants. (teminally ill people are more likely to want insurance than healthy people. people who live in high flood areas are more likely to want insurance than those living in no flooding areas)

Spread of risk

is the way insurance companies manage and attempt to distribute its risk in a profitable way

management of risk

• avoidance

• reduction

• retention

• transfer

• sharing

Avoidance

some risks are not worth the trouble for some insurers because they carry too much exposure

reduction

reduce the likelihood or the severity of the loss exposure (installing a sprinkler system would limit the loss if a fire should occur)

retention

instead of buying insurance some people retain the risk and the loss themselves. Retention is self insurance

transfer

a “hold harmless” agreement transfers the risk from one person to someone else. This method is what people do when they purchase insurance.

Sharing

By having 5-6 different insurers share a risk, a total loss could still occur, but the loss exposure would be shared by the entire group. (this concept is used in the area of larger risks.)

company underwriters review each applicant to determine whether or not the applicant meets these standards. Those that do will be rated to determine the amount of risk. risks are rated by

1. class

   1. compared to the risk for similar groups of insureds

2. insured’s experience

   1. based on the insured’s past record of behavior

3. underwriter’s experience

   1. based on the underwriter’s best judgement

field underwriting

is the screening process that every agent goes through when evaluating and qualifying prospects

classifying risks: after all underwriting information is gathered and analyzed applicant are assigned one of the following risk classification so appropriate rates may be assigned

1. preferred risk

   1. aplicant is above the standard health and moral guidelines

2. standard risk

   1. applicant falls within normal underwriting guidelines

3. substandard risk

   1. applicant falls below normal guidelines (usually due to poor health)

   2. NOTE: may still be insured at times with special exclusions or increased rates

pre-selection

is the process undertaken by field underwriters (agents) to target prospects that are most likely to provide insurer with low risk clients

post-selection

takes place in the insurance office, when company underwriters review and rate the applicant that the agent has pre-selected

what is the goal of pre- and post- selection

to accurately rate the risk before the policy is issued, rather than “post-claim”

Post-claim underwriting

is the rescission, cancellation or limiting of a policy or group certificate because the insurance company did not complete underwriting and/or answer all reasonable questions before writing a policy. NOTE: it is illegal for any insurer to engage in post-claim underwriting for any type of insurance

A deductible

is an amount of money ( dollar deductible ) tha must be paid, or time that must pass (elimination period), before an insurer will provide benefits after a loss. [the higher the deductible the lower the premium]

Retention limit

an isurer’s retention limit is the amount of risk an insurer would normally accept on a given contract

reinsurance

is when the insurer, or ceding company, shared the risk with another insurer known as the reinsurer.

• reinsurance is used when an insurance company is asked to take a risk that is greater than its retention limit

companies reinsure risks that are in excess of the retention limit in one of two ways:

• treaty

• facultative

treaty

an agreemnt where the ceding company transfers all excess risk up to the limits if the agreement, to a reinsurer

facultative

when an insurance company has no agreements, or has used them all, facultative reinsurance can assume that excess risk and facilitate the issuing of policy

for either treaty or facultative the ceding company (primary insurer) transfers its risk to the reinsurance company (another insurer) but…

retains the responsibility of paying any losses to the insured. In this way the reinsurance company is invisible to the client.

there are approximately 20 classes of insurance

1. life (includes annuities)

2. property & casualty

3. fire

4. inland marine

5. ocean marine

6. title

7. surety

8. disability

9. plate glass

10. liability

11. worker’s comp

12. common carrier liablity

13. boiler & machinery

14. burglary

15. credit

16. sprinkler

17. team & vehicle

18. automobile

19. mortgage

20. aircraft

21. mortgage

22. miscellaneous

annuities are not a class of insurance

taking steps to remove a hazard, engage in an alternative activity or otherwise end a specific exposure. One of the four major risk management techniques

Avoidance of risk

Memorandum containing detailed information concerning the passing of reinsurance from one insurance company to another under a reinsurance agreement

bordereau

Any interest in a subject of insurance or any legal relation to it such a nature that a certain happening might cause monetary loss to the insured.

insurable interest

Shifting all or part of a risk to another party. Insurance is the most common method of risk transfer, but other devices such as hold harmless agreements also transfer risk. one of the four major risk management technique is?

transfer of risk

A fortuitus event, unforeseen and unintended

accident

Term used interchangeably with the word “coverage” to denote the insurance provided under the terms of a policy. Term used to indicate the existence of fire-fighting facilities in an area known as a “protected” area.

protection

A risk, which meets most of the following requisites the loss insured against must be capable of being defined. It must be accidental. It must be large enough to cause a hardship to the insured. It must belong to a group of homogeneous risks large enough to make losses predictable. It must not be subject to the same loss at the same time as a large number of other risks. The insurance company must be able to determine a reasonable cist for the insurance. The insurance company must be able to calculate the chance of loss.

insurable risk

The state of being subject to the possibility of loss. The extent of risk as measured by payroll, gate receipts area or other standards. The possibility of loss to a risk being caused by its surroundings. This is used in property insured building suffering loss because a dynamite factory next to it exploded.

exposure

This law states that the larger the number of exposures considered, the more closely the losses reported will match the underlying probability of loss. The simplest example of this law is the flipping of a coin. The more times the coin is flipped the closer it will come to actually reaching the underlying probability of 50% heads and 50% tails

law of large numbers

A condition of morals or habits that increases the probability of loss from a peril. An extreme example would be an individual who previously burned his or her own property to collect the insurance.

moral hazard

The cause of possible loss

peril

uncertainty as to whether a gain or loss will occur. An example would be a business enterprise where there is a chance that the business will make money or loose it. These types of risks are not insurable.

speculative risk

The party to an insurance arrangement who undertakes for losses, provide pecuniary benefits or render services. It is desirable to use this word in preference to “carrier” or “company” since it is a functional word applicable without ambiguity to all types of individuals or organizations performing the insurance functions. This word generally used in statutory law

insurer

An event that result in an insured loss. In some lines of insurance such as liability, it is distinguished from accident in that the loss does not have to be sudden and fortuitous and can result from continuous or repeated exposure which results in bodily injury or property damage neither expected nor intended by the insured

occurance

Taking steps to reduce the probability or severity of a possible loss. For example, installing alarms and sprinkler systems to reduce the risk of fire loss to a building. One of the four major risk management techniques. See risk management.

hazard reduction

All the following are characteristics of an ideally insurable loss exposure” except”

losses that are catastrophic

all the following are used to determine an insurable risk except for

the risk of loss must be a speculative risk

In the insurance industry, causes of loss are called perils. Perils, in turn are affected by hazards. Of the following which is a general category of hazard:

Moral hazards

The agent has a responsibility in underwrinting an insurace policy

in all cases

All of the following are examples of avoiding risk except

an insured realizes his driving skills are diminishing, so he decides to purchase more liability insurance on his auto policy

A(n)__________ department is responsible for evaluation and selection of acceptable applications:

underwriting

an underwrting department can classify acceptable risk as:

all answers are correct