Health and Life Unit 1

Insurance

Transfer of risk

Risk

Uncertainty or possibility of a loss

Speculative risk

Chance of loss or gain; not insurable

Pure risk

Chance of loss only; insurable

Exposure

Risks for which the insurance company would be liable

Peril

A cause of loss

Hazard

Something that increases the chance of loss

Physical hazard

A hazard that can be seen

Moral hazard

A belief that intentionally causing a loss is acceptable

Morale hazard

Carelessness

STARR

Methods of handling risk: Sharing, Transfer, Avoidance, Retention, Reduction

Contract (policy)

An agreement between the insured and the insurer

1st Party

Insured (customer)

2nd Party

Insurer (insurance company)

Law of Large Numbers

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

CANHAM

Characteristics of insurable risks: Calculable, Affordable, Non-catastrophic, Homogeneous, Accidental, Measurable

Adverse selection

Risks that have a greater than average chance of loss

Reinsurance

An insurance company (ceding company) paying another insurer (reinsurer) to take some of its catastrophic risk

Facultative reinsurance

The reinsurer evaluates each risk before allowing the transfer

Treaty reinsurance

The reinsurer accepts the transfer according to a pre-set agreement

Stock Insurer

Publicly owned by stockholders; may pay taxable dividends; issues non-par policies

Mutual Insurer

Owned by policyholders; may return nontaxable dividends; issues participating policies

Fraternal Insurer

Provides insurance and other benefits; must be a member to receive benefits

Reciprocal Insurer

Unincorporated; members are assessed for losses; run by an attorney-in-fact

Risk Retention Group

Liability insurer created for and owned by policyholders from the same industry

Self-Insurance

A business that pays its own claims

Residual market

Insurance from the state or federal government

Domestic insurer

State where the company is incorporated

Foreign insurer

Any state or U.S. territory other than where incorporated

Alien insurer

Incorporated in any country other than the USA

Certificate of Authority

State license for an insurance company

Admitted/Authorized

Insurer required by the state to have a Certificate of Authority

Non-admitted/Unauthorized

Insurer not required to have a Certificate of Authority

Surplus Lines

Insurance sold by non-admitted insurers on the state's approved list, only to certain high-risk insureds

Financial strength rating

A report card of the insurance company

Agency

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

Express authority

What the agent's written contract with the company says

Implied authority

Not written, but things agents normally do to sell insurance

Apparent authority

Things the agent does that a reasonable person would assume as authority

Fiduciary-Trust

Promptly send premiums, know products, comply with laws, no commingling

CLOAC

Consideration, Legal purpose, Offer, Acceptance, Competent parties

Consideration

Giving something of value (info/premium for a promise to pay)

Legal purpose

Risk transfer doesn't violate the law

Offer

Made by the insured (application and first premium)

Counteroffer

Made by the insurer (agrees to issue with different terms)

Acceptance

Insurer accepts risk as presented

Competent parties

Insured must be age 18 and sane

Adhesion

Policy written by the insurer; ambiguity favors the insured

Aleatory

Unequal value exchanged; small premium for large potential coverage

Utmost Good Faith

Insured and insurer have a right to expect honesty from each other

Unilateral

Only one party (the insurer) makes a promise

Personal contract

Contract between insurer and insured that cannot be transferred to someone else

Conditional contract

Insured must pay premium and file a claim for coverage to apply

Indemnity

Pay for the loss but with no gain

Representation

Statement believed to be true

Misrepresentation

False information that would NOT affect the insurer's decision

Material misrepresentation

False information that WOULD affect the insurer's decision

Warranty

A promise guaranteed to be true; breaking it may void coverage

Concealment

Failure to disclose information

Fraud

Intentional act to cheat another

Waiver

Voluntarily giving up a right

Estoppel

A party can't deny actions another party reasonably relied on