Insurance License

Insured

someone protected, or covered, by an insurance policy.

Policyowner

someone who owns, and has control of, an insurance policy.

Insurer

the insurance company that sells an insurance policy; also known as the carrier or principal.

First Party

the insured.

Second Party

the insurer.

Third Party

someone other than the insured or the insurer.

Premium

the amount of money the insurer charges the policyowner for an insurance policy.

Producer

the individual person that sells or services insurance for an insurer.

Commissioner

the head of the Utah Department of Insurance, who is responsible for all Utah insurance matters.

Risk

the chance of loss.

Loss

a negative financial consequence of an unplanned event.

Speculative Risk

situations in which one can either gain or lose, such as gambling and investments.

Pure Risk

situations in which there is only a chance of loss.

Hazard

Circumstance increasing the likelihood of a loss.

Physical Hazard

An increased chance of loss due to external circumstances which are outside of human control.

Morale Hazard

An increased chance of loss due to someone's carelessness.

Moral Hazard

An increased chance of loss due to someone's lack of character or trustworthiness.

Exposure

a unit of measurement that measures the amount of risk.

Peril

the cause of loss.

Perils in Property and Casualty Insurance

Examples include wind, fire, explosion, and car accidents.

Perils in Life and Health Insurance

Examples include sickness and injury.

Law of Large Numbers

Principle that predicts loss probability; larger sample sizes lead to more predictable results.

Elements of Insurable Risks

Criteria that must be met for risks to be insurable.

Due to Chance

The occurrence of loss cannot be certain and must be outside of the insured's control.

Definite and Measurable

Insurers are willing to insure risks where loss can be identified and measured.

Definite

Exact or obvious, like damage to something or illness.

Measurable

Can be calculated or measured.

Statistically Predictable

A reasonable estimate of the likelihood of loss must be calculable using statistics.

Not Catastrophic

Insurers cannot pay for massive widespread devastation, such as wars, floods, or earthquakes.

Large, Diverse Pool of Risks

Insurers want to spread their risk by insuring many cars, homes, and businesses across a wide area.

Methods of Handling Risk

Techniques to manage risk, also known as risk management.

Risk Sharing

Distributing risk among parties, observed in various cultures.

Examples of Risk Sharing

Neighbors helping neighbors, faith-based medical cost sharing plans, and reciprocal exchanges.

Risk Transfer

Shifting risk to another party, such as through buying insurance.

Examples of Risk Transfer

Buying insurance and incorporating a business.

Risk Avoidance

Eliminating a certain risk completely by not owning an asset or refraining from an activity.

Examples of Risk Avoidance

Deciding not to own a home or not to fly in an airplane.

Risk Reduction

Taking care to lessen the likelihood of incurring a loss.

Risk Retention

Keeping the consequences of incurring a loss upon yourself.

STARR

A mnemonic to remember the methods of handling risk: Sharing, Transfer, Avoidance, Reduction, Retention.

Example of Risk Avoidance

Deciding to not own a home to avoid all the hassles, headaches and possibility of loss that comes with home ownership.

Example of Risk Reduction

Wearing a seatbelt.

Self-Insured

Those who choose risk retention as a method for handling risk may be proactive by saving up enough funds to cover any potential loss.

Deductible

the amount of money the insured must pay for a loss before the insurer will begin covering it.

Co-payment

a percentage of the remaining loss, after the insurer has begun covering it, that the insured is still required to pay.

Distribution Systems

Ways insurers distribute policies.

Independent Agency

the insurance company sells its products through independent insurance agencies that can represent and sell for multiple insurance companies.

Exclusive Agency

the insurance company sells its products through agencies that are contracted to sell its products, typically only allowed to represent and sell for that insurance company.

Direct Writer

the insurance company's products are sold by employees of the company who are licensed insurance producers.

Direct Response

the insurance company's products are sold directly through the mail, phone, or Internet without licensed insurance producers.

Stock Companies

Corporations owned by stockholders who do not necessarily own a policy with that company.

Nonparticipating Policies

Policies where policyholders do not own a share of the company or receive dividends; dividends are paid to shareholders, which are taxable for shareholders.

Mutual Companies

Companies owned by policyholders and not investors.

Participating Policies

Policies where policyholders own the company and receive dividends; dividends paid to policyholders are not taxable.

Fraternal Benefit Societies

Corporations that have no capital stock and exist solely for the benefit of its members and their beneficiaries.

Admitted Insurer

Also called an authorized insurer, this type of company has been authorized to sell insurance within the state of Utah.

Certificate of Authority

The license an admitted insurer receives from the Utah Insurance Department.

Non-Admitted Insurer

Also called an unauthorized insurer, this type of company has not received authorization by the state of Utah.

Surplus Lines

This type of insurance for hard-to-place risks is known as surplus lines.

Domicile

A company's ________ refers to the location where it is incorporated or headquartered.

Domestic Companies

Domestic companies are incorporated and formed under the laws of Utah.

Foreign Companies

Foreign companies are incorporated and formed under the laws of another state or United States territory.

Alien Companies

Alien companies are incorporated and formed under the laws of a country other than the United States.

Reinsurance

Reinsurance is insurance for insurance companies.

Originating Company

This is the insurer that sells the policy (or policies) to the customer and then cedes (transfers) some of the risk to a reinsurer.

Reinsurance Company

This is the insurer that assumes (takes) the risk.

Facultative Reinsurance

This is for a large or unusual risk, such as a very big building or a very large amount of life insurance on one person.

Treaty Reinsurance

This is when the originating insurer agrees in advance to cede (transfer) many risks to a reinsurer.

Treaty Reinsurance

XYZ Insurance Company purchases treaty reinsurance to protect itself if the storm losses to buildings and cars in a particular state during a specific year exceeds a certain amount — $50,000,000 for instance.

Reciprocals

A reciprocal is also known as a reciprocal insurance exchange where policyowners pool their money together to provide insurance for each other.

Attorney-in-Fact (AIF)

A separate entity hired to manage the reciprocal insurance exchange.

Lloyd's Associations

A ______ ___________ is a group of individuals that join together and pool their money to assume certain risks for a fee.

Risk Retention Groups (RRG)

A ____ _________ _____ (RPG) is a state-approved insurance company that provides liability insurance to large businesses.

Government Insurers

Federal and state governments act as the insurer of last resort—they provide insurance for individuals and businesses that have difficulty finding insurance elsewhere.

Examples of Government Insurance

Examples include flood, terrorism, crop, workers compensation, and wind in high risk areas.

Medicare

Additional examples of government insurance.

Insurer Financial Ratings

Financial status of insurers is often assessed through financial ratings.

A.M. Best

One of the five independent rating services that evaluate the financial strength of insurance companies.

Fitch

One of the five independent rating services that evaluate the financial strength of insurance companies.

Kroll Bond Rating Agency (KBRA)

One of the five independent rating services that evaluate the financial strength of insurance companies.

Moody's

One of the five independent rating services that evaluate the financial strength of insurance companies.

Standard & Poor's

One of the five independent rating services that evaluate the financial strength of insurance companies.

Law of Agency

Legal relationship between agents and insurers.

Express Authority

Authority given by the insurer to the producer, clearly stated in a written contract.

Implied Authority

Authority that is not clearly stated in the contract but is understood as a matter of common sense.

Apparent Authority

Authority that a producer is assumed to have, created when an action by the producer suggests such authority.

Market Conduct

The commitment of insurers and agents to do the right thing even when no one is looking; a code of ethics for insurance professionals.

Consideration

Value exchanged in the contract; each party must give something of value to the other party.

Competent Parties

Both parties, the insured and the insurer, must have the legal capacity to enter a contract.

Insured's Consideration

The insured pays money, called premium, for the insurance policy and must be honest and truthful when making statements.

Insurer's Consideration

The promise to provide insurance coverage and pay claims when the insured suffers a covered loss.

Principal

The insurer in the law of agency relationship.

Agent

The individual who represents the insurer in the law of agency relationship.

Moral Obligations

Obligations that extend beyond legal ones in the context of market conduct.

Chamber of Commerce Meeting

An event where producers can market products, implied authority allows attendance even if not explicitly stated in the contract.

Payment Assumption

If the agent receives a payment from the insured, it is assumed the insurer has received it.

Knowledge Assumption

Any knowledge of the agent is also knowledge of the insurer; the insurer cannot deny knowing it later.

Curly Customer

A hypothetical customer in an example illustrating apparent authority.

Peter Producer

A hypothetical producer in an example illustrating apparent authority.

Express Authority

This is the authority given by the insurer to the producer; it is clearly stated in a written contract between the insurer and the producer.