Life & Health Unit 1

General Insurance

What is insurance?

A contract that transfers the risk of financial loss from an individual or business for certain losses if they occur.

What is risk?

Uncertainty about whether a loss will occur.

• If a loss is certain to occur, it does not involve risk.

• Insurance is designed to cover only losses that involve risk.

• Death is certain, the timing of the loss is uncertain.

What is speculative risk?

Speculative risk has the possibility of a loss or a gain, like gambling - loss is not insurable.

What is pure risk?

Pure risk has the possibility of a loss and can be covered by insurance, like the chance of being in a car accident.

What is loss?

Reduction in the value of an asset.

• To determine the amount of loss, value of the asset is measured before and after loss.

What is exposure?

Risks for which the insurance company would be liable.

• The risk assumed by an insurer and the amount they are responsible to pay out a any give time.

What is peril?

The cause of a loss.

life insurance = death

health insurance = accidents or illness

property & casualty = fire, lightning, etc.

What are the 3 types of hazards?

physical = wet floor

moral = moral character (dishonesty)

morale = carelessness (leaving door unlocked)

What are the 5 methods of handling risk?

STARR

Sharing = share the risk to pay the loss

Transfer = insurer agrees to pays if the individual or business has a loss. The individual/business has a cost in the form of a premium payment.

Avoidance = eliminate risk - don’t drive

Reduction = lessen the chance - wear seatbelt

Retention = Individual pays for the loss

What is The Law of Large Numbers?

The larger the group—the more accurate losses can be predicted

What are the 6 elements of insurable risk?

CANHAM

Calculable

Affordable

Non-catastrophic

Homogeneous (risks must all be similar in regard to factors that affect the chance of loss)

Accidental

Measurable (dollar amount - insurance covers the financial loss of unexpected death or medical bills from sickness)

What is adverse selection?

Higher-risk individuals. Underwriter evaluates risks that have a greater than average chance of loss.

What is reinsurance?

Transfers some or all risk from one insurer to another insurer. Protects the insurance company from catastrophic losses in certain geographical areas.

ceding insurer = company reducing its risk

reinsurer = company assuming the risk

facultative reinsurance = the reinsurer considers each risk before allowing the transfer from the ceding company.

treaty = the reinsurer accepts the transfer.

TYPES OF INSURERS: organizational structures based on ownership & operation.

Stock Insurers

Stock insurer is a business formed as a public or private corporation.

• Owned by S/S (stockholders/shareholders).

• Board of directors chosen by S/S.

• If company makes money, taxable dividend from profits may be paid to S/S.

• Issues non-par policies.

TYPES OF INSURERS: organizational structures based on ownership & operation.

Mutual Insurers

Mutual insurer does not have stock or stockholders; owned by its policyholders/policyowners.

• Owned by the policyholders (customers).

• Board of directors chosen by policyholders.

• If company is profitable, excess premiums can be rturned to its policyholders-nontaxable dividend.

• Issues participating (par) policies.

TYPES OF INSURERS: organizational structures based on ownership & operation.

Fraternal Benefit Societies (Fraternal Insurer)

Fraternal benefit societies exist for the benefit of its members, share common bond (e.g., religion or occupation), and offers life insurance as one of the benefits of membership. Must be a member of the society to get the benefits.

• Provide social activities, engage in charitable causes.

• Nonprofit societies organized under a lodge system, receive some income tax advantages.

• Operate their insurance programs under special section of state insurance code.

fraternal policies = called certificates

members who own life insurance = called certificate holders

Certificate holders may be assessed additional charges if premiums don’t cover claims. Policies with this feature are open contracts.

TYPES OF INSURERS: organizational structures based on ownership & operation.

Reciprocal Insurer

Reciprocal insurers are unincorporated groups groups of people that agree to insure each other’s losses under a contract.

“you reciprocal me, and I’ll reciprocal you"

• Known as subscribers.

• If subscriber suffers a loss covered by the reciprocal insurance agreement, each subscriber pays equal amount to pay the claim.

• Administration, underwriting, sales promotion = handled by an attorney-in-fact.

• Attorney-in-fact often controlled & overseen by advisory committee or subscribers.

TYPES OF INSURERS: organizational structures based on ownership & operation.

Risk Retention Group (RRG)

A risk retention group formed for the sole purpose of providing liability insurance to its policyholders.

• Must all be member of the same type of business or industry.

car dealers, colleges or universities

medical/legal = doctors or lawyers pooling risks for malpractice

TYPES OF INSURERS: organizational structures based on ownership & operation.

Lloyd’s Association

Lloyd’s Associations, named in reference to the famous underwriting group Lloyd’s of London.

• Not an insurance company.

• Insurance provided by individual underwriters, or groups pool to underwrite risks.

• Insure unusual risk, e.g., hole-in-one contests, body parts of celebrities.

TYPES OF INSURERS: organizational structures based on ownership & operation.

Self-Insurance

Self-insurance retains risk rather than transferring risk.

• A business that pays its own claims.

e.g., Costco, Wal-mart

• Big companies often self-insure employee health benefits (stop loss insurance) for catastrophic claims instead of group health policies.

What is Residual Market?

Residual Market is insurance from the state or federal government.

• Federal gov’t = social security benefits, military life insurance etc.

• Feds also provides, supports, or subsidizes insurance programs for catastrophic risks. e.g., war, flood, crop losses.

• State gov’t = unemployment insurance, workers’ comp, disability, etc.

Define Domestic, Foreign, and Alien Insurers

Domestic = the state where an insurer is incorporated, state of domicile. Incorporated in AZ, does business in AZ.

Foreign = the insurer writes business in states other than where they are domiciled. Insurer located in TX, but selling insurance in MI.

Alien = Insurer incorporated in any country other than USA.