Chapter 1

Risk

Uncertainty/chance of a loss occurring

Pure risk

Situations that can only result in a loss or no change, there is no opportunity for financial gain, only type of risk insurance companies are willing to accept

Speculative risk

Opportunity for loss or gain, example would be gambling, these risks are not insurable

Perils

The causes of loss insured against in an insurance policy

Life insurance

Insures against financial loss caused by premature death of the insured

Health insurance

Insures against the medical expenses and/or loss of income caused by the insured’s sickness or accidental injury

Hazards

Conditions/situations that increase probability of an insured loss occurring

Physical hazards

Individual characteristics that increase the chances of the cause of loss, they exist because of a physical condition, medical history, or condition at birth

Moral hazards

Tendencies towards increased risk, involve evaluating the character and reputation of the proposed insured, refers to applicants who lie on the application or in the past have submitted fraudulent claims against an insurer

Morale hazards

They arise from a state of mind that causes indifference to loss, such as carelessness, actions taken without forethought may cause physical injuries

Loss

The reduction, decrease, or disappearance of value of the person or property insured in a policy, caused by a named peril

Insurance

Transfer of risk of loss from an individual, business, or entity to an insurance company, this spreads the costs of unexpected losses to many individuals

Due to chance

Characteristic of pure risk: the loss is outside the insured’s control

Definite and measurable

Characteristic of pure risk: loss that is specific to the cause, time, place, and amount; insurer must be able to determine how much the benefit will be and when it becomes payable

Statistically predictable

Characteristic of pure risk: insurers must be able to estimate the average frequency and severity of future losses and set appropriate premium rates

Not catastrophic

Characteristic of pure risk: insurers need to be reasonably certain their losses will not exceed specific limits

Randomly selected and large loss exposure

Characteristic of pure risk: must be sufficiently large pool of the insured that represents a random selection of risks in terms of age, gender, occupation, health and economic status, and geographic location

Avoidance

Method of risk management: eliminating exposure to a loss

Retention

Method of risk management: planned assumption of risk by an insured through the use of deductibles, co-payments, or self-insurance.

Retention

Purpose of ______ is to reduce expenses and improve cash flow, increase control of claim reserving and claims settlements, and to fund losses that cannot be insured

Sharing

Method of risk management: dealing with risk for a group of individual persons or businesses with the same or similar exposure to loss to share the losses that occur within that group

Reduction

Method of risk management: lessening the possibility of risk by doing things like installing smoke detectors, having annual physicals to detect health issues, or making a change in our lifestyle

Transfer

Method of risk management: moving the risk so that it is borne by another party, insurance is the most common method of doing this

Spread the risk

Principle of life insurance; ex: an insured pays a premium to in insurance company and in return the company assumes the risk of that person dying early

Insurable interest

The policyowner must face the possibility of losing money or something of value in the event of a loss

At the time of application

Important: insurable interest must exist _________

Life of the insured

Important: policyowner must have insurable interest in the _________

Agreement, consideration, competent parties, legal purpose

The 4 essential elements for an insurance contract to be legally binding

Offer and acceptance

Agreement is also known as _________

Offer

In insurance the applicant usually makes the ______ when submitting an application

Acceptance

________ takes place when an insurer’s underwriter approves the application and issues a policy

Consideration

__________ is something of value that each party gives to the other

Consideration

Important: the ________ on the part of the insured is the payment of premium and the representations made in the application while the _________ on the part of the insurer is the promise to pay in the event of a loss

Parties to a contract

The ____________ must be capable of entering into a contract in the eyes of the law; generally they must both be of legal age, mentally competent, and not under the influence

Legal

The purpose of a contract must be _____ and not against public policy

Insurable interest; consent

To insure the legal purpose of a life insurance policy it must have both _________ and ________

Contract of adhesion

A __________ is prepared by one of the parties (insurer) and accepted or rejected by the other party (insured). They are not drawn up through negotiations and the insured has little say about its provisions. Any ambiguities in the contract are in favor of the insured

Aleatory

Insurance contracts are ________, meaning there is an exchange of unequal amounts or values. Ex: the premium paid by the insurer is small in relation to the amount that will be paid by the insurer in the event of a loss

Personal

In general, an insurance contract is _________ because it is between the insurance company and an individual

Unilateral contract

In an __________ contract only one of the parties of the contract is legally bound to do anything. The insured makes no legally binding promises, but an insurer is legally bound to pay losses covered by a policy in force

Current

As long as premium payments are ______, the insured has legal rights to the death benefit and the insurer cannot refuse to pay it

Conditional contract

A ___________ requires that certain conditions must be met by the policyowner and the company in order for the contract to be executed, and before each party fulfills its obligations

Conditional contract

Ex of a ___________: insured must pay a premium and provide proof of loss in order for the insurer to cover a claim

Reasonably expect coverage

An insured could ___________ if an agent implies through advertising, sales literature, or statements that provisions or coverage is offered by an insurance policy

Indemnity

Provision in an insurance policy that states in the event of a loss, an insured or beneficiary is permitted to collect only to the exntent of the financial loss and is not allowed to gain financially

Reimbursement

What is indemnity also referred to as?

Utmost good faith

The principle of __________ implies there will be no fraud, misrepresentation, or concealment between the parties

Representations

Statements believed to be true to the best of one’s knowledge, but they are not guaranteed to be true

Misrepresentations

Untrue statements on an application are _________ and could void a contract

Material misrepresentation

A statement that, if discovered, would alter the underwriting decision of the insurance company

Warranty

An absolutely true statement upon which the validity of the insurance policy depends

Concealment

The legal term for the intentional withholding of information of a material fact that is crucial in making a decision; this may void a policy

Fraud

Intentional misrepresentation/concealment of a material fact used to induce another party to make or refrain from making a contract, or to deceive/cheat a party

Waiver

Voluntary act of relinquishing a legal right, claim, or privilege

Estoppel

Legal process that can be used to prevent a party to a contract from re-asserting a right or privilege after that right or privilege has been waived

Mortality rate

The relationship of the number of deaths that occur within a group to the number of people who belong to the group over a particular period of time

Mortality tables

________ indicate the number of individuals within a specified group starting at a certain age, who are expected to be alive at a succeeding age; they indicate the natural premium for an individual applying for life insurance

Natural premium

The amount of premium that must be collected from each member of a group composed of the same age, sex, and risk in order to pay $1,000 for each death that will occur in the group each year