Unit 1: Introduction to Insurance:

Flashcards

Insurance

A contract that transfers the risk of financial loss from an individual or business to an insurance company.

Risk

The uncertainty or chance of a loss occurring.

Pure Risk

A situation where only the possibility of loss exists and no chance of gain. Pure risks are insurable.

Speculative Risk

A risk that offers a chance of loss or gain. These are not insurable.

Peril

The cause of a loss, such as fire, windstorm, or theft.

Hazard

A condition that increases the chance of a loss occurring.

Physical Hazard

A visible or tangible condition that increases the probability of loss (e.g., icy roads, frayed wires).

Moral Hazard

A hazard arising from dishonesty or character defects in an individual that increase the chance of loss.

Morale Hazard

A hazard arising from carelessness or indifference to loss because of the existence of insurance.

STARR

Sharing, Transfer, Avoidance, Retention, Reduction.

Exposure

The potential for accidents or other losses covered by insurance.

Indirect Loss

A consequential loss that occurs as a result of a direct loss.

Insurable Interest

A legitimate interest in the preservation of the life or property insured.

CANHAM (Elements of insurable risk)

Calculable, Affordable, Non-catastrophic, Homogeneous, Accidental, Measurable.

Adverse Selection

The tendency for higher-risk individuals to obtain insurance more often than average-risk individuals.

Law of Large Numbers

A principle that states that the larger the number of similar exposure units, the more predictable the losses.

Reinsurance

Insurance purchased by an insurance company from another insurer to reduce risk.

Stock Insurer

An insurance company owned by stockholders, profits may be distributed as taxable dividends.

Mutual Insurer

An insurance company owned by policyholders, profits may be returned as non-taxable dividends.

Reciprocal Insurer

An unincorporated group of members who share insurance responsibilities and risk.

Lloyd's Association

An association of individual underwriters that insure unusual risks.

Risk Retention Group

A liability insurance company owned by its members, often from the same industry.

Fraternal Benefit Society

A nonprofit organization that provides insurance benefits to members.

Self-Insurer

A business that pays its own claims and retains its risk.

Domestic, Foreign, and Alien Insurers

Domestic: incorporated in the same state. Foreign: another state/territory. Alien: outside the U.S.

Authorized (Admitted) Insurer

An insurer that has a certificate of authority to sell insurance in a state.

Unauthorized (Nonadmitted) Insurer

An insurer that is not licensed in the state, typically sells surplus lines insurance.

Surplus Lines Insurance

Insurance for high-risk individuals sold by nonadmitted insurers listed on the state's approved list.

Certificate of Authority

A license issued to an insurer to sell insurance in a particular state.

Types of Insurance Agents

Independent, exclusive/captive, general agents, direct-writing companies.

Direct Response Marketing

Insurance marketing without agents, through media like mail, TV, or internet.

Law of Agency

Legal relationship in which an agent acts on behalf of a principal (insurer).

Express Authority

Authority explicitly written in the agent's contract.

Implied Authority

Authority not written but assumed necessary to perform duties.

Apparent Authority

Authority an agent appears to have based on actions of the principal or agent.

Fiduciary Responsibility

The obligation to handle funds and duties with integrity and trust.

Bailee

A person or business that has temporary custody of someone else's property.

First-Named Insured

The individual listed first on the declarations page who has special rights and duties.