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Insurance

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device for transferring the chance of financial loss among a large number of people. Most common way to transfer risk

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Risk

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possibility of an occurrence of a loss or the chance a loss may occur.Primary reasons insurance is purchased

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Types of Risk

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Speculative Risk and Pure Risk

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Speculative Risk

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risk for which it is uncertain as to whether the final outcome is a gain or a loss.Ex:Gambing.

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Problems with Speculative Risk

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Not insurable

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Pure Risk

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involves the probability or possibility of a loss with no chance for gain. Ex:accidents,sicknesses.

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Benefits of Pure Risk

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only type of risk that insurance companies will insure. Pure risk circumstances can only result in a loss or no change

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Loss

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unintential redution, decrease, or disapperance of value of a person or property insured by a policy. Reason for a claim against an insurance policy

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Exposure

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measure of the vulnerability of a loss. Usually expressed in dollars or used to determine rates charged for insurance.

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Exposure units

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used in determining medical history, sex,age,occupation of an insured

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Hazards

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circumstances or conditions that increase the possibility that a loss will take place.

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Three types of Hazards

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Physical, Moral,Morale

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Physical

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causes ones body to become physically stressed and increase the chances of a loss.Ex:slippery floors,skydiving

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Moral

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maximizing behavior. Ex: dishonesty,creates a loss on purpose or lies on an application

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Morale

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arise from an insureds indifferent attitude to loss. . Refers to ones state mind or the way one thinks. Ex: doesn't lock doors,repairs leaks, or wear a seat belt while driving.

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Perils

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causes of loss.Perils are causes of a possible loss outlined in an insurance policy. Ex:premature death and loss of income caused by sickness or a car accident.

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Avoidance

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ending a specific exposure or taking steps to remove a hazard. Not practical way to handle a risk, by nt being exposed to an activity

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Retention

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insured has decided to assume the financial responsibility for certain events by the use of deductables, co-payments, or self--insurance . Insurance companies base their insurance on retention

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What does retention result from?

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Reduction of expenses and improvement of cash flow, increased control of claim settlements, funding losses that are uninsurable.

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Sharing

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dividing or sharing of a risk for a business or a group of individual with the same or similar exposure to a loss. Ex: Reciprocal Insurance Exchange

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Reduction

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attempt to reduce the possibility of death,injury, or loss of property. Ex: Having annual physical, installing an alarm system or changing diets

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Transfer

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involves transferring all or part of a risk to another party. Ex: homeowner purchases insurance on their home

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adverse selection

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tendency of an individual with a greater than average chance of a loss to purchase insurance. Insuring risk more prone to losses than an average risk.

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Ways insurance companies protects itself against adverse selection:

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Limitations on coverage, Higher premiums , rejections of the risk

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law of large numbers

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theory of probability that is the bais for insurance. larger the number of risk units considered, the more closely the losses reported will equal the underlying chance of loss. Ex: helps insurer predict which types of individual in the US will die in a given year

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Reinsurance

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agreement between insurance companies under which one insurance company transfers part or all of risk to another insurer. provides protection against catastrophic loss

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Types of Insurers

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Stock companies(owned by stockholders), Mutual Companies (Participating), Fraternal Benefit Societies, Reciprocal Insurers, Lloyds associations (Lyod's of London), Risk Retention Groups, Self Insurers, Surplus Lines.

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Stock Companies(Owned by Stockholders)

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owned by stockholders to whom earning are distributed as taxable dividends on their shares, or reinvested by the company.

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Mutual Companies(Participating)

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owned by policyholders. form of dividends to their policyholders. Board of Trustees ages the company

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Fraternal Benefit Societies

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Life or Health insurance carriers. Exist as social nonprofit organizations, voluntarily provide insurance only for their members. operate for charitable institutions.

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Reciprocal Insurers

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unincorporated groups of individuals firms, or commonly termed subscribers, reciprocal insurance company or exchange. chief is an attorney in fact who manages and operated the risk sharing arrangement

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Lloyds Associations(Lloyds of London)

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group of individual underwriters that accept of reject risks offered to underwriters invest money in risks that cannot get insurance in the normal market. many states prohibit this.

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Risk Retention Groups

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liability insurance companies that are not regulated by the state. limited to people in the same business or activity. exposes them to similar liability risks. Assume and spread liability exposure to the group member and alternative risk financing mechanism for their liability. Often cover manufacturers, municipalities against commercial casualties.

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Self Insurers

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Insurance company develops a formal program identifying, evaluating and funding its losses. Called self insuring

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Self insurance

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retaining risk

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Two characteristics of self-insurance

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large number of homogenous exposure units must be present, so large numbers can be used to predict losses and rates and there must be sufficient liquid assets to pay claims and other costs of retaining a risk

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Stop loss coverge

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self insurers buy insurance to cover losses beyond a set limit

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Surplus Lines

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coverage that must be purchased from an unauthorized company since it is not available through a licensed company. Involves high risk market

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Purchasing groups

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entities that buy insurance for groups with related businesses and risk. Exempt from most state laws of regulation outside the incorporated. Group members belong to businesses with the same type of liability

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Government Plans

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provides life and health insurance through various sources because insurers either cannot or will not write the insurance.

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Social insurance

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medicare, medicaid, Social Security.

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Private Insurers

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Mutual, Stock, Fraternal, Reciprocals

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Difference between government and private users

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government insurers are tax funded and serve both nation and state social needs and private insurers transact insurance by State Insurance Depts.

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Agent/ Producer

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anyone who solicits, sells, procure or gains renewal of insurance on behlf of another

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Insurer as Principal

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actions of the agent/ broker are taken to be the actions of the principal. First and foremost responsible to an insurer

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Agent of Insurer

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always represent an insurer(company). Solicits and negotiates insurance contracts on behalf of an insurance company.

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Three types of authorities granted to agents/producers

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Express, Implied, Apparent

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Express

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Written in the contract. Explicitly, definite agreement an insurer grants to a producer.Form of a written contract that gives producer permission to represent their company.

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Implied

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Implied there is training. not formally communicated, but it is assumed by the agent in order to transact business on behalf of the insurance company. ability to act outside authority granted in an agency agreement and it extends the companies liability. Influence by expressed authority of an agent, not writen

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Apparent

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appars to have authority. apperance of authority based on actions,words, or deeds undertaken by an agent/producer on behalff of the principal(company). agent uses material that represents a company Ex: business cards, books). Even though agent does not have power to accept premium, it appears client that the agent has the authority to prevent policy from lapsing.

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Responsibilities to the applicant/insured

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agent is a fiduciary who handles insurer funds in a trust capacity. agent/producer must promptly collect and account for all premiums. agent protects interest of an insured by following Code of Ethics.

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Code of Ethics

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high degree of professionalism is expressed, and the applicants interest is always a priority.

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Contracts

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agreement between two or more parties in which an offer is made and accepted and is enforceable by law.

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Four essential elements in order to have a legally enforceable contract

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1. offer and acceptance 2. consideration(value), 3.competent parties,4. legal purpose

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Offer and Acceptance

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terms of a contract offered by one party to another and accepted in its entirety is called offer and acceptance. Party receives an offer, accepts the offer and promises to do something if the one making the offer promises to do something in return.

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When does acceptance occur

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when an underwriter works for an insurance company and the company approves an application

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Consideration

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something of value which is the binding force in the contract.Consideration offered by the client(insured) is premium and the representations on the application. Consideration offered by an insurance company is the promise to pay in accordance with the terms of the policy(contract) in the event of a loss or claim

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Competent Parties

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Must be 18 years old and mentally capable to comprehend the contract. Party must not be under the influence of drugs and alcohol upon entering into a contract.

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Legal Purpose

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purpose and performance of a contract must be legal otherwise there is no contract

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Distinct characteristics of an insurance contract

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unilateral contract, personal contract, contract of adhesion, aleatory contract,conditional contract,

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Unilateral Contract

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One party, an insurer(company) is bound to pay for any losses covered in an enforced policy. Does not make a promise, but pays a premium. Insured part of the consideration. Insurer must pay the claim

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Personal Contract(Person-Company)

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contract between insurer and individual.Insurer(company) has the right to decide with whom it is going to do business. Client cannot transfer the contract to someone else without the written consent of an insurer

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Contract of Adhesion(cannot be negotiated)

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offered on "take it or leave it" or "accept it or reject it" or "as is" bases. Insurance contracts are Contracts of Adhesion because the terms are drawn up by an insurer and an insured simply adheres to the terms.

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Aleatory Contract(Unequal Value)

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number of dollars or value exchanged are not equal.inusred pays a small premium amount for a large amount of risk to be covered in their policy

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Conditional Contract

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must be met by an owner and insurer in order for the contract to be fulfilled.

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Privilege of an insurer

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right to determine wording

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Reasonable expectations

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certain things that are expected in an insurance policy must be provided even though they are not specifically stated in policy.

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Indemnity(Reimbursement)

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contractual agreement in an insurance policy to compensate(reimburse) an insured to the extent of their loss without financial gain. Insurance is designed to restore an insured financial status to the level it was before their loss. Policyholder may only receive the maximum amount state in their policy.

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Utmost Good Faith(Answers To Questions Should Be Truthful)

answer

insurance contract, each party is entitled to rely on valid critical information of the other party, without any attempt to conceal or deceive each other. Insurer relies on statements on an application and the insurred depends on the insurance company to pay their claims.

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Representations

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statements on an application, in the absence of fraud.

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Misrepresentations

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opposite of representations. Fraudulent,material and intentional statements. Statement discovered by insurance company would change their unerwriting decision.

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Warranty

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statement that is absolutely true. insurance policy depends on true information.

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Fraud

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intentional misrepresentation or suppression of facts,made by a person with the sole intent to gain from their acts. Fraud can void a contract if found in the first two years.

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Waiver

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release of a known right, claim or privilege.

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Estoppel

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legal right to stop someone from reasserting a right that was previously waived.

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Concealment

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intentional suppression and failure to disclose information,facts,and circumstances.

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Rescission

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insurer has right to cancel a policy

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Fair Credit Reporting Act(FCRA)

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admisited and enforced by Federal Trade Commission. Protects consumers from receiving inaccurate or outdated information.

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Consumer Reports

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written information regarding a consumers character,credit,reputation,habits,and lifestyle.

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Ivestigative Consumer Report

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more thoroughly investigated than in Consumer Report. Contains non medical information.

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ERISA

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Employees Retirement Income Security Act of 1974 was created to ensure all employees receive their benefits and pensions promised by their employers.

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COBRA

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Consolidated Omnibus Budget Reconciliation Act of 1985. employer with 20 or more employees must provide notification statements to eligible individuals to extend their group coverage

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Do Not Call Registry

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organizations must refer every 31 days. any phone number on the list must be omitted from a company's call list.

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Exceptions to the Do Not Call Registry

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Non-profit, commercial reasons, businesses that stab;shed a business relationship in the last 18 months with a consumer , business was given written permission to make from a consumer

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Date fair credit reporting act became a law

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April 25,1971

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Designed to Improve Accuracy of Credit Reports

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Fair Credit Reporting Act

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Contains Information on the Habits and Lifestyle

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Consumer Report

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Act Ensurers all Employees Receive Benefits and Pensions Promised by Employers

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Employee Retirement Income Security Act

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Passed Employee Retirement Income Security Act

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Federal Government

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Industry and Producer

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professional member companies that form groups by the type of service or industry in which they are affiliated.

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Types of associations

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Variable Annuities, Life and Heath and Property and Causalty agents.

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NAIC( National Association of Insurance Commissioners)

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NAIC exchanges information,develops uniformity in regulatory practices, drafts model regulations for the states.

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NCOIL (National Conference Of Insurance Legislators)

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organization whose main concern is to improve the quality of insurance legislation and to help State legislators work together.

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Professional Member Companies that Form Groups by Service Type

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Industry Associations

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Association Composed of all the US Commissioners

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NAIC

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Educates Legislators so they can make decisions to improve insurance matters

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National Conference of Insurance Legislators (NCOIL)

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Type types of Perils

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Accidents and Sicknesses

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Accidental Injury

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Accidental Injury is considered an unintentional or unforeseen act that causes bodily harm

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Sickness

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A sickness is an illness or disease that occurs during the term of an insurance policy. Most Health Insurance claims are due to sicknesses, rather than accidents.

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What are causes of loss called?

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Perils

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loss of income from disability

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fr an accident or sickness is covered under Disability Income Policies. Loss is the primary risk associated with a disability

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Medical Expense

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benefits may be paid to an insured, but an insured would have the responsibility of paying the medical charges.

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Dental Expense

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covered under Hospital or Medical Expense Policy

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types of limited policies

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accident, specified disease, hospital identity,blanket insurance,prescription drugs, vision care,travel, credit disability,special risk policy.

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accident only

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insurance against bodily injury,death,disability,or in some cases only an accident

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Specified (Dread) Disease

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Cancer and Heart Disease

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Hospital Indemnity(Income)

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pays an amount per week or month directly to an insured while an insured is hospitalized without reference to exprenses actually paid or incurred.

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Blanket Insurance(Teams, Passengers,Other)

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Health insurance contract that cover member of a specific class that are not individual identified. Student, campers,sports teams,and passengers on a common carrier are examples.

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Prescription Drugs

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c-payment amount and the insurance company pays the balance.

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Marketing Requirements

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Advertising,Prohibited Advertising of Life and Health Insurance Guaranty Association, Sales Presentations, Outline Of Coverage

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Advertising

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Full and fair disclosure and honesty in advertising applies to any health insurance advertisement for presentation,distribution or other means of advertising.

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Prohibited Advertising of Life and Health Insurance Guaranty Association

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considered Unfair Trade Practice to advertise that an insurers policy is guaranteed or covered by the life and health insurance guaranty association

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Sales Presentations

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must be honest,accurate,complete,and defined to be clear

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Outline of Coverage

answer

must be presented at the time of application or upon delivery of the policy to an insured(client)

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Field Underwriting

answer

initial evaluation and screening process, performed by agents(producers) in the insurance field.

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Health Insurance underwriting

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lessen the probability of adverse selection

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clarification of risk

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preferred , standard,substandard,declines

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preferred risk

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reduced risks of loss and as a result are covered at the reduced, discounted rate

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standard

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average exposure to a loss or a claim

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substandard

answer

refers to smokes, those with poor health or have dangerous hobbies. pay higher rated up premium

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declined

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underwriter believes present too high of a risk and therefore are not insurable.

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Pre-existing conditions

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health or physical conditions that an insured had in existence 6-12 months before their policy was issued

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Pre-existing condition exclude

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waiting period

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waiting period

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generally 15-30 days after the issue date of their policy.

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