Chapter 1: Oklahoma State Insurance

Definition of Insurance

Transfer of risk from the insured to the insurer

Law of Large Numbers

As the number of people in a risk “pool” increases, the more predictable losses tend to be.

Insurable Interest

Can I get insurance on my neighbor’s house? NO!! In order to use insurance, you have to have the potential for financial loss or hardship.

Risk

Chance of Loss

Types of Risk

1. Pure Insurable, no gain only loss

2. Speculative A gamble, chance of loss or gain, think horse race > spectator

Peril

Cause of loss- (Fire, lightning, Internal Explosion)

Hazard

Increase the chance of loss (wet floor, having gas can next to a fire)

3 Types of Hazards

1. Physical See/Touch/Feel- icy parking lot

2. Moral lying, committing fraud, dishonesty in general

3. Morale being careless or indifferent – not protecting property against weather, not putting breakable stuff away in a tornado, ** Making it Easy for a bad thing to happen

Loss

Loss in value, Quality of life lost after an accident

Indemnity

Reimbursement for loss, (theft), nothing more, nothing less. Indemnity = Reimbursement ONLY

Subrogation

Waiver that you sign, to give up rights to sue/collect damages from a third party, once the insurance company has indemnified (reimbursed) you for a loss.

Example “Be a Bro & go sue the person who hit me”

Accident vs.

not intentional, unexpected, sudden unplanned.

Occurrence

repeated exposure to something that would cause a loss (think water dripping on your floor for months & finally damaging it

Direct

Damage or harm caused to person or property -- get in an accident & total my car (Car is the direct loss)

Indirect Loss

Result of the direct loss- having to take the bus

Named Peril VS.

Specific stuff that’s covered on your insurance policy

Damages

Compensation for negligence

2 Types of Compensatory Damages

1. Special - Specific out of pocket expenses such as medical bills, or property damage.

1. Special - Specific out of pocket expenses such as medical bills, or property damage.

2. General– Paid for damages like pain and suffering (consortium)

Fiduciary

Are people ina position of trust

Punitive Damages

Punishment- meant to prevent someone from committing an extreme or outrageous act again. (Drinking & driving/ Running from the police)

Negligence

unintentional, failure to use the care that a reasonable person would. (Like speeding during a snow storm)

Burglary

entering property by force & taking things

Robbery

Threating someone & taking their things (Rob threatened me and stole my things)

who certifies TRIA

Secratary of the Treasury, Secretary of homeland security and attorney general

Theft

Any act of stealing

Special (Open) Vs

Open Peril stuff that isn’t specifically listed on the policy but is covered unless it’s specifically excluded (listed in the Exclusions section of the policy)

Mysterious Disappearance

something is lost but I’m not sure how- bag falling out of car- can’t report to police / no proof it’s actually gone gone – not covered by insurance.

Vacancy

no one and no stuff is home – completely empty --- not covered for vandalism after 60 days

Unoccupancy

No one lives there but the home has stuff in it (furniture)

Specific Coverage vs.

each property would need to have it’s on specific policy. If I have 5 stores each one would have its own policy tailored to what coverage I need

Blanket vs.

Covers more than one property at different locations – same coverage everywhere (one limit of liability)

Loss Valuation

How you get paid back for your loss

1. Actual Cash Value

Replacement Cost- Depreciation = ACV

2.Replacement Cost

Cost to replace with something of similar value at today’s costs

3.Market Value

How much a willing buyer would pay

4.Stated Value

The amount you the insured says your stuff is worth (Jewelry) The insurance company doesn’t have to agree that it’s worth XX amount. This is the most the insurance company would pay.

5.Agreed Value

You and insurance company agree something is worth (jewelry, fine art, etc.)

6.Salvage Value

The amount you can get at the end of your property’s life (totaled car)

Liability

Liability = Responsibility

3 Types of Liability

1. Absolute- Hazardous activities- Firework shows, swimming polls, exotic pets.

2. Strict- Defective Products – car tires, ladders. (Keeps companies responsible for their products)

3. Vicarious- liable for others you’re responsible for- employee, children, domestic pets

Limits of Liability

the most your insurance would pay in an accident

Per Occurrence

The most your insurance would pay in any one accident

Per Person

The most your insurance would pay for any one person

Ag(e)gregate

Limits of liability during the policy period (year)

Split

30(Bodily Injury Per Person)/60(Bodily Injury Per Occurrence)/25 (Property Damage)

Combined Single Add Per Occurrence + Property Damage into ONE Limit! =

85K

Proximate Cause

First event in an unbroken chain of events. * If I cause a 10-car pile-up due to texting & driving. My Texting and driving would be the proximate cause.

Deductible

The amount the insured has to pay before their insurance will pay on a loss.

Coinsurance or Insurance to Value

responsibility to have property insured up to a certain limit. If I don’t have my property at the coinsurance, I’ll get paid out less due to not being covered enough. Usually, you’re required to be at 80% insurance for your property’s value.

Deposit Premium Audit

The insurer has the right to reevaluate the premium paid to determine if the correct amount has been charged. (This can result in a bill or a refund)

Certificate of Insurance

Proof of Insurance (the type of proof you’d want from your electrician before they work on your house) - Type of Insurance, Limits, Policy Term

Who is the Insured?

Insured is someone that is covered by the policy, regardless of  

whether or not they’re listed on the policy. 

• Ed is Insured. Ed is covered by the insurance policy.

Who is the Insurer?

The Insurer is the insurance company providing coverage to the Insured. 

• USAA is Ed’s Insurer. USAA is an insurance company. 

What is Exposure?

being at risk for a loss

What is Loss?

the reduction, decrease, or disappearance of value

John applied for insurance thru ABC insurance and upon review  of his application it was found that he submitted a fraudulent  claim in the past, what Hazard does John represent?

Moral |

– Transfer risk from one party to another party 

– Avoiding a risk by not participating in a risk 

– Reducing the severity or chance of loss 

– Taking full financial responsibility of a loss 

what is STARR mean?

5 methods of managing risk:

Sharing

Transfer

Avoidance

Reduction

Retention

Distributing or pooling a risk among several risk-takers with  similar loss exposures who agree to cover each other for their losses. Risk sharing  reduces the severity of the loss for any one party

Risk sharing

Involves shifting a risk to another party. Obtaining an insurance policy,  the most common means of managing risk, is an example of risk transfer because the  policy makes the insurer responsible for paying covered losses

Transfer

Is the elimination of risk by not participating in activities that involve a  chance of loss. Never operating a motor vehicle eliminates the risk of being at-fault  for an auto accident, but avoiding risks may also eliminate the possibility of enjoying life’s advantages. Avoidance is not always an effective method of managing risk.

Risk avoidance

Involves minimizing the risks we cannot completely avoid. For  example, installing fire sprinklers may reduce damage in the event of a fire. Reduction  is usually not a complete solution to most risks, however, since it cannot completely  account for the element of chance.

Risk reduction

Means assuming responsibility for a loss, like with self-insurance,  whereby an organization sets aside funds to pay potential losses. Self-insurance  relieves the insured from paying insurance premiums or qualifying for a policy, but it  can result in tremendous financial loss. 

Risk retention

When one takes action to minimize the severity of a  potential loss, they are practicing:

Risk reduction|

– Outside of the insured’s control 

– Loss has a specific cause, time, place, amount 

What are the Elements of Insurable Risks?

Large Number of Similar Risks 

Due to Chance 

Definite and Measurable 

Statistically Predictable 

Not Catastrophic 

Must Cause Financial Hardship

What is the Law of Large Numbers?

The larger the number of people with a similar exposure to loss, the more predictable losses will be.

As the number of people in a risk pool increases, future losses become more predictable.

What is Adverse Selection?

It is the idea that people are more likely to seek insurance for higher risk situations.

High risk insureds get and keep insurance to a greater degree than low  

risk insureds

Insurers can refuse or restrict coverage, or charge more for higher risks

The insuring of risks that are more prone to loss than  average (standard) risks is known as:

Adverse selection

What is Reinsurance?

Reinsurance is a device used by insurers to spread their risk and limit their loss.

Who owns a Stock Company?

Stock Companies are owned by stockholders / shareholders.

• Stockholders / shareholders share in profits and losses (taxable)

• Stock Companies write non-participating policies

Who owns a Mutual Company?

Mutual companies are owned by the policyowner.

• Policyowners are entitled to dividends (profits), which is the return of excess premiums (non-taxable)

• Issue participating policies

What is a Domicile?

A domicile refers to the location where an insurer is incorporated, not necessarily where the insurer conducts business.

What are the 3 Types of Domiciles?

Domestic

Foriegn

Alien

An insurer organized under the laws of this state, whether or not it is admitted to do business in this state.

Domestic Insurer

An insurer not organized under the laws of this state, but in one of the other states or jurisdictions within the United States, whether or not it is admitted to do business in the state or jurisdiction.

Foreign Insurer

An insurer organized under the laws of any jurisdiction outside of the United States, whether or not it is admitted to do business in this state

Alien Insurer

What is a Certificate of Authority?

Insurers must obtain a Certificate of Authority before transacting business

insurer is authorized to transact insurance in a given state, and will be granted a certificate of authority from that state’s department of insurance. Admitted insurers may be domestic, foreign, or alien insurers.

Admitted (Authorized) Insurers

is not authorized to transact insurance in a given state, either by failing to comply with state requirements or by not seeking admission. Generally, non-admitted insurers cannot do business on risks located in a given state.

Example: Surplus Lines Insurer

Non-admitted (Unauthorized) Insurers

When an insurance company becomes licensed to do business in this state, it is considered which of the following?

Admitted

What is the Law of Agency?

It explains the relationship between the principal (insurer) and the agent / producer.

Who does the agent represent?

The Insurer|

• Insurer is responsible for the agent’s action

• Paying an agent is like paying the insurer

• Knowledge of the agent is the knowledge of the insurer

What are the Agents responsibilities?

Agent is responsible for completing applications, submitting for underwriting, and delivering the policy to the policyowner

What are the 3 Types of Agent Authority?

Express- Written in contract

Implied- Not Written, but Assumed

Apparent- Exceeds given authority

What is a Fiduciary?

Fiduciaries are people in a position of trust.

What are an Agent’s Fiduciary Responsibilities?

• Agents must treat applicants and insureds ethically

• Premiums given to the agent must be promptly given to the insurer

• Failure to submit funds could be considered embezzlement

Fiduciary Duties is?

is an agent who handles insurer funds in a trust capacity. Certain funds, like premium payments, legally belong to the insurer and must be handled in good faith

T or F a insurance producer are required to emphasize profitable policies

F

What is the Fair Credit Reporting Act?

It protects consumers against the circulation of inaccurate or obsolete personal or financial information

What is the Gramm-Leach-Bliley Act?

It regulates when and how non-public information can be shared with a third party.

• Must notify customer at the beginning of relationship and annually

• Customer must be able to opt out

The GLBA requires financial institutions—including insurers—to notify consumers of information-sharing practices when the institution discloses consumers’ nonpublic personal information to nonaffiliated third parties when?

must be provided at the time the customer relationship is established and annually thereafter, either in writing or electronically with the consumer’s permission.

What is the TRIA?

The Terrorism Risk Insurance Act is a temporary federal program created to share the risk of loss from future terrorist attacks with insurers.

An act of terrorism is an act certified by whom?

the Secretary of the Treasury, Secretary of Homeland Security, and Attorney General.