Insurance Ch 1

Risks

• Uncertainty , possibility of loss

Two types of risk

Speculative risk and Pure Risk

Speculative Risk

• Chance of loss or gain

• Not insurable 

Pure Risk 

• Chance of loss only

• insurance companies will insure

Exposure

Risk for which the insurance company will be liable

Insurance

Transfer of risk from person or business to an insurer.

Peril

• The cause of loss

• House burns down—peril is the fire

Loss

• Direct- Physical loss

• Indirect- Consequences of physical loss

Hazard

Increases the chances of loss

Physical Hazard

The hazard can be seen

Moral Hazard

Dishonesty

Morale Hazard

Carelessness

Sharing

In the risk sharing, two or more individuals or business agree to pay a portion of any loss incurred by any member of the group. Stockholders in a corporation share the risk.

Transfer

Risk transfer is what happens with insurance. The insurer (insurance company) agrees to pay if an insured (customer) has a loss—the insured no longer bears that risk. The individual has a cost in the form of premium payment.But in contrast to the loss which is large uncertain, the premium is a much smaller certainty.

Avoidance

Risk avoidance means eliminating a particular risk by not engaging in a certain activity. For example an individual who does not drive avoids the risk of injuring someone in an automobile collision and being held liable for those damages.

Retention

Risk retention means the individual or business will pay for the loss if it occurs, or a portion of the loss via deductible. If you don’t have car insurance to pay for the damages you cause to another person in an accident, you have retained that risk.

Reduction

Risk reduction refers to lessening the chances that loss will occur, or lessening the extent of a loss if it occurs. If a business installs a sprinkler system in its building, this will help reduce or eliminate the damege caused by a fire.

Contract (Policy)

An agreement between the insured and the insurer 1st Party - insured ( customer ) 2nd party- Insurer (insurance company)

An individual applied for auto insurance and obtained coverage from ABC insurance Company. Who is the first party Contract

The insured 

Which Statement best describes a peril?

A tornando damaged the insured’s home

The best example of reduction as a risk management technique is 

Wearing a seatbelt in car

Tiffany leaves her car unlocked when she goes to shopping. She figures her car and its contents are insured, so there is no reason to worry. Which type of hazard is this an example of?

Morale

A flood is an example of

Peril

Law of Large numbers

The larger the group the more accurately losses can be predicted.

Calculable

Premiums must be calculable based upon prior loss statistics for that particular risk in order to predict future loss

Affordable

The premium for transferring the risk should be affordable for the average consumer.

Non-Catastrophic 

The risk must be non-catastrophic for the insurance company. National or area disasters, such as floods, riots, wars and earthquakes, will often have coverage limitations in insurance policies. These events cause widespread simultaneous losses to many insured properties. The peril of war is excluded from most polices. If the insurer were to cover these types of risk, the risk could be detrimental(or catastrophic) to the insurer.

Homogeneous

The risk must be similar in nature so the same factors affect the chance of loss. For example, if an actuary was going to predict the likelihood that wood frame house would suffer a fire in California, the actuary would not include brick houses on the sample.

Accidental

The loss must have been caused due to the chance by the insured are not covered by insurance.

Measurable

A definite (time and place) and measurable loss means that proof of loss must be established with numbers and dollar amounts, not just casual references.

Adverse Selection

• Risk that have a greater-than-average chance of loss

• Not wanted by insurers

• Tendency for high- risk individuals to get and keep insurance

• Why insurers go through the underwriting process

• High risk= higher rate to insure or refusal.

Reinsurance 

• An insurance company’s insurance company

• Helps insurers spread their risk

Stock Insurer

• Owned by Stock holders

• Dividend is not guaranteed

• Dividend is paid to Stock holder

• Dividend is taxable to stock-holder

• Issue non-participating polices

Mutual Insurer

• Owned by Policyholders

• Dividend is not guaranteed

• Dividend is paid Policy holders

• Dividend is not taxable; considered refund of premium

• Issue participating polices

Franternal Benefit Society

• Provides insurance and other benefits 

• Must be a member to get the benefits 

Reciprocal Insurer

• Unincorporated

• Members are assessed if a loss occurs to any members of the group

• Managed by an attorney-in-fact

Lloyd’s Association

• Insurance provided by individual underwriters, not companies

• Insure unusual risk

• Hole-in-one contest

• Athlete’s arm

• Celebrity’s hair

Risk Retention Group

• Liability insurance company created for policyholders from the same industry 

• Example- a car dealer’s risk retention group in which only car dealers can be policy holders.

Risk Purchasing Group

A group of business from the same industry that join together that joins together to buy liability insurance from the insurance company 

Self-Insurance

• A business that pays its own claims 

• Reserves funds to cover losses 

• Retain risk rather than transfer 

The federal government provides insurance 

• War risk insurance 

• Nuclear energy insurance 

• Flood insurance 

• Federal crop insurance 

• Unemployment insurance ( at state level)

• Worker’s compensation (at state level)

Insurance Company Location 

• Domestic - The state where a company is incorporated

• Foreign - Company is incorporated in another state or U.S territory

• Alien- Company is incorporated in another country.

Certificate of authority

State license for an insurance

Authorized

• Insurance comapany

• Admitted

• Certificate of authority

• Sell, place , and service most insurance contracts

Unauthorized

• Insurance company

• Nonadmitted

• No certificate of authority

• Sell surplus lines insurance products

Surplus Lines

• Insurance sold by unauthorized / non admitted insurers- if on the state’s approved list of surplus insurers

• Can only be sold to certain high-risk insureds

• Cannot be sold solely for a cheaper rate than licensed/ admitted insurers 

•  Must be sold thru TX licensed surplus lines agent/ surplus broker

Financial Strength Rating

A report card of the company

An insurance company incorporated in wisconsin and conducting business in wisconsin known as a domestic company. What kind of company are they considered if they do business in Minnesota?

Foreign

All of the following statement about a stock insurance company are true EXCEPT 

A stock company is a participating company 

What do insurance companies use to help predict how many losses will occur in a group or class of individuals 

The law of large numbers 

States require companies to have a license to sell insurance in the state. The license is called 

A certificate of authority 

All of the following are requirements of an insurable pure risk EXCEPT

The risk must be catastrophic for the insurance company 

Insurers may be classified according to their financial strength. This includes all of the following factors EXCEPT

Number of clients

Independent insurance agents

Are individuals that sell the insurance products of several companies and are independent contractors, not employees of the insurers. Independent agents own the renewals of the policies they sell.

Captive (exclusive) agents 

Are individuals that represent only one company. Captive agents are independent contractors, not employees of the insurer. The insurance company owns the renewals of the policies sold on their behalf.

General agents (GA) or managing general agents (MGAs) 

Are individuals that hire, train, and supervise others agents within a specific geographical area. GA’s and MGAs earn overriding commissions (overrides) on the business produced by the agent they manage.

Direct-Writing companies

Are companies whose products are sold by employees, not independent contractors. This type of producer may be compensated by salary, commision, or both. The insurance company owns the renewals of the policies sold on their behalf.

Methods of Marketing

• Independent 

• Exclusive of captive 

• General agents or managing general agents 

• Direct- writing companies 

Direct Response

• No agent / producer involves

• Direct mail, magazines , television, internet , and radio advertisements 

Agency

The insurance agent acts on behalf of the principal( insurance company)

Express

Authorities written in agent contracr

Implied

Authorities not written in agent contracts but task agent must preform; implied that agent has this authority

Apparent

Task the agent does that a reasonable person would assume as authority, based on the agent’s actions and statements

Fiduciary

• Promptly sends premiums to insurer

• Has knowledge of products

• Complies with laws and regulations

• Does not commingle funds

Carl hands our business card with his company’s logo to all new prospects that he meets at at golf outing. This is an example of 

Implied Authority 

Agency is a relationship in which one person is authorized to represent and act for another person or corporation. In insurance, the insurance agent acts on behalf of 

The principle

Which of the following types of advertising does not involve an agent and is conducted through the mail, by advertisements in newpapers and magazines, on television and radio, or through the internet

direct response

What is a contract or device for transferring risk from person, business, or organization to an insurance company

Insurance

Which of the following represents a pure risk

The chance your house may burn down

suzanne regularly leaves her side door unlocked when she leaves for work. One afternoon, a thief entered her apartment and stole all of her jewelry. What was the hazard in this example

The door being unlocked

Since Jeff lives in a good neighborhood across the street from the fire station, he decides to cancel his fire insurance policy. This is an example of which risk management method

Retention

Sometimes an individual or business has an exceptionally large or specialized risk that no authorized insurer can or will cover. In this case, the individual or business may call

a nonadmitted insurance company

Elements of a Legal Contract

• Considerate

• Legal purpose

• Offer

• Acceptance

• Competent Parties

Consideration 

 Money and

statements made on applica-

tion

Legal Purpose

Risk transfer doesn’t violate

the law

Offer (made by insured)

• Insured submits application

  and first month premium to

  insurer

•  Insurer accepts or insurer

  declines the risk

Counteroffer (made by insurer)

• Agrees to issue policy but with

higher premium or restrictions/exclusions

• Insured either accepts the

conditions or withdraws their

application

Competent

• Legal age (usually 18)

  ■ Mentally sane

  ■ Sober

Which of the following terms describes a legal agreement between two competent parties that promises a certain performance in exchange for a certain consideration?

 A consideration

Which of the following is not an element of a legal contract?

Unilateral

Adhesion

• Policy written by the insurance

  company

  ■ Adhesion = glue

  ■ Insured has no input

  ■ If ambiguous, court will take

  the side of the insured

Aleatory

• Unequal value

  ■ Pay small premium and have

  a large claim, or pay premiums

  for many years without a claim

Utmost Good Faith

The insured and insurance

company have a right to expect honesty from each other.

Unilateral

• Insured may cancel the con-

  tract anytime

  ■ Insurer must pay covered

  losses

Personal

 Contract between the insurance company and the insured

■ Cannot be changed to some-

one else

Conditional

insured must pay the premium for coverage and file a claim if a loss occurs

Indemnity

• Pay for the loss with no gain

  ■ No more! No less!

Representation

• Believed to be true

• Statements on applications are considered representations 

Misrepresentation

information given that is not true but would not affect the insurance company’s decision

Material misrepresentation

information given that is not true and DOES affect the insurer’s decision

Warranty

• Promise 

• Breach of warranty may void the contract

Concealment

• Failure to disclose

  – Concealing or hiding infor-

  mation!

  ■ If intentional, and the informa-

  tion is material (important),

  coverage could be voided

  ■ If NOT intentional, coverage

  can NOT be voided

Fraud

intentional act to cheat another

Waiver

voluntarily giving up a right

Estoppel

once a waiver has been created, it can’t be changed

Jill is filling out an insurance application with information that she believes to be true. The information that she is providing is considered

a misrepresentation

A guarantee that something is true is

a warranty

An insurance contract is prepared by one party

(the insurance company) with little or no

opportunity for the other party (the insured) to

bargain. This characteristic is called

adhesion

In insurance, an insured may pay premiums for

many years without having a loss, or an insured

may suffer a loss and get a larger amount of

money from the insurance company than he has

paid in premiums. For this reason, an insurance

 aleatory