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Transfers the risk of loss from an individual or business entity to an insurance company which in turn spreads the costs of unexpected losses to many individuals

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Insurance

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Uncertainty or chance of a loss occurring

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Risk

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Refers to situations that can only result in a loss or no change. There is no opportunity for financial gain. Pure risk is the only type that insurance companies are willing to accept.

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Pure Risk

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Involves the opportunity for either loss or gain. An example being gambling. This type is not insurable

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Speculative Risk

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A unit of measure used to determine rates charged for insurance coverage. In life insurance, all of the following factors are considered in determining rates: The age of the insured; Medical history; Occupation; and Sex.

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Exposure

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A large number of units having the same or similar exposure to loss. The basis of insurance is sharing risk among the members of a large _____ group with similar exposure to loss

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Homogeneous

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Conditions or situations that increase the probability of an insured loss occurring. Conditions such as lifestyle and existing health, or activities such as scuba diving are ___ and may increase the chance of a loss occuring

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Hazards

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Individual characteristics that increase the chances of the cause of loss. They exist because of conditions such as past medical history, or a condition at birth such as blindness

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Physical Hazards

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Tendencies towards increased risk. ___ involve evaluating the character and reputation of the proposed insured. It refers to those applicants that may lie on an application for insurance, or in the past have submitted fraudulent claims against and insurer

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Moral Hazards

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Similar to that of moral except they arise from a state of mind that causes indifference to loss, such as carelessness. Actions taken without forethought may cause physical injuries

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Morale Hazards

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Are the causes of loss insured against in an insurance policy: Life insurance insures against the financial loss caused by the 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; Property insurance insures against the loss of physical property or the loss of its income producing abilities; and Casualty insurance insures against the loss and or damage of property and resulting liabilities

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Perils

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

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Loss

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One method of dealing with risk. Means eliminating exposure to a loss. Risk___ is effective, but seldom practical

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Avoidance

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The planned assumption of risk by an insured through the use of deductives, co-payments, or self-insurance. It is also known as self insurance when the insured accepts the responsibility for the loss before the insurance company pays. The purpose is: To reduce expenses and improve cash flow; to increase control of claim reserving and claims settlements; and to fund for losses that cannot be insured

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Retention

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The most effective way to handle risk is to transfer it so that the loss is borne by another party. Insurance is the most common method of transferring risk from an individual or group to an insurance company. Though the purchasing of insurance will not eliminate the risk of death or illness, it relieves the insured of the financial losses these risks bring. There are several ways to transfer risk: hold harmless agreements and other contractual agreements (but the safest and most common method is to purchase insurance coverage)

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Transfer

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The loss must be due to chance (accidental); The loss must be definite and measurable; The loss must be statistically predictable; The loss cannot be catastrophic; The loss exposure to be insured must involve large homogenous exposure units; and The insurance must not be mandatory

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Elements of Insurable Risks

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The basis of insurance is sharing risk among a large pool of people with similar exposure to loss. ____ states that the larger the homogeneous group the more predictable the losses will be. This enables insurers yo properly predict the average frequency and severity of future losses and to set appropriate premium rates

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Law of Large Numbers

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Insurance companies strive to protect themselves from the insuring of risks that are more prone to losses than the average risk. Poorer risks tend to seek insurance or file claims to a greater extent than better risks. Insurance companies have an option to refuse or to restrict coverage for bad risks, or charge them a higher rate for insurance coverage

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Adverse Selection

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A contract under which one insurance company indemnifies another insurance company for part or all of its liabilities. The purpose it to protect insurers against catastrophic losses. The originating company that procures insurance on itself from another insurer is called the assuming insurer

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Reinsurance

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Provide the capital necessary to establish and operate the insurance company. In return for their investments the stockholders share in any profits or losses. They issue nonparticipating policies in which the policy owners do not share in profits or losses arising in the operation of business. Earnings from operations may be distributed to the stockholders as dividends on stock or may be kept as "retained earnings"

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Stock Companies

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Owned by the policy owners and issue participating policies. Policy owners are entitled to dividends which are a return of excess premiums and are therefore nontaxable. Dividends are generated when the premiums and earnings combined exceed the actual costs of providing coverage, creating a surplus. Dividends are not guaranteed

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Mutual Companies

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A voluntarily formed organization that provides insurance benefits for members of an affiliated lodge, religious organization with a representative form of government. Since this organization only sell to their members and are considered charitable institutions, they are not subject to all of the regulations that apply to insurers that offer coverage to the public at large

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Fraternal Benefit Society

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Is not an insurance company. It provides support facilities for underwriters or groups of individuals that accept insurance risk. It is a group of individuals who operate an insurance mechanism using the same principals of individual liability of insurers in that each individual underwriter assumes a part of each risk. Each individual promises to pay a specified amount in the event that the contingency insured against occurs. Members are liable only for their portion of the risk and are no bound to assume any portion of a defaulting member

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Lloyd's Associations

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An insurance organization typically not regulated as a company by state authorities most often addressing a commercial casualty concern. These groups develop rates, collect premiums, and pay claims to accepted members. Typically, municipalities, hospitals, and manufacturers of hazardous products must seek such groups for reimbursement for claims that might occur out of their daily operations

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Risk Retention Groups

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The major difference is that the government programs are funded with taxes and and serve national and state social purposes, while private policies are funded by premiums

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Private Versus Government Insurers

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Offer many lines of insurance. They may be formed as stock, mutual, reciprocals, or fraternal insurers, and they must be authorized to transact insurance by the state insurance departments

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Private Insurers

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Provides insurance in those areas where private insurers either cannot, will not, write insurance. Those insurance programs provided by the government are commonly called social insurance, such as Medicare, Social Security, Federal Crop insurance and National Flood insurance.

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Government Insurers

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An insurance company that has qualified and received a Certificate of Authority from the Department of Insurance to transact insurance in the state

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Admitted Insurer

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An insurance company that has not applied, or has applied and been denied a Certificate of Authority and may not transact insurance

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Non-admitted Insurer

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How insurance companies are classified.

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Location of Incorporation

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The financial strength of an insurance company is based on prior claims experience, investment earnings, level of reserves (amount of money kept in a separate account to cover debts to policyholders), and management, to name a few. guides to insurance companies' financial integrity are published regularly by the following various independent rating services: Am Best; Fitch; Standard and Poor's; Moody's; Weiss

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Independent Rating Services

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Insurance companies market their products in different ways: through agents or direct solicitation to the customers. The different types of marketing arrangements: Independent Agency System/ American Agency System ; Exclusive Agency System/ Captive Agents ; General Agency System ; Managerial System ; and Direct Response Marketing System

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Marketing (Distribution) Systems

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~ 1 independent agent represents several companies ~ Nonexclusive ~ Commissions on personal sales ~Business renewal with any company

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Independent Agency System/ American Agency System

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~ 1 agent represents one company ~ Exclusive ~ Commissions on personal sales ~ Renewals can only be placed with the appointing insurer

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Exclusive Agency System/ Captive Agents

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~ General agent-entrepreneur represents 1 company ~Exclusive ~Compensation and commissions ~ Appoints subagents

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General Agency System

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~ Branch manager (supervises agents) ~ Salaried ~ Agents can be insurer's employees or independent contractors

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Managerial System

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~ No agents ~ Company advertises directly to consumers (through mail, internet, television, other mass marketing) ~ Consumers apply directly to the company

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Direct Response Marketing System

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Defines the relationship between the principal and the agent/producer. The acts of the agent/producer within the scope of authority are deemed to be the acts of the insurer. In this relationship it is given that: An agent represents the insurer, not the insured ; Any knowledge of the agent is presumed to be knowledge of the insurer ; If the agent is working within the conditions of his/her contract, the insurer is fully responsible ; When the insured submits payment to the agent, it is the same as submitting a payment to the insurer. The agent is responsible for accurately completing applications for insurance, submitting the application to the insurer for underwriting, and delivering the policy to the policyowner.

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Law of Agency

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In applying the law of agency the insurer is the principal. The acts of an agent or producer who is acting within the scope of his or her authority are the acs of the insurer

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Insurer as Principal

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An agent will always be deemed to represent the insurer, not the insured. With regards to an insurance contract, any knowledge of the agent is presumed to be knowledge of the insurer. If the agent is working within the conditions of his/her contract, the company is fully responsible

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Producer/Insurer Relationship

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Is the authority a principal intends to grant to an agent by means of the agent's contract. It is the authority that is written in the contract

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Express authority

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Is the authority that is not expressed or written into the contract but which the agent is assumed to have in order to transact the business of insurance for the principal. It is incidental to and derives from express authority since not every single detail of an agents authority can be spelled out in the written contract.

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Implied authority

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AKA perceived authority. It is the appearance or the assumption of authority based on the actions, words, or deeds of the principal or because of the circumstances the principal created.

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Apparent authority

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Someone in a position of trust. More specifically, it is illegal for insurance producers to commingle premiums collected from the applicants with their own personal funds

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Fiduciary Responsibility

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Market conduct describes the way companies and producers should conduct their business. Producers must adhere to certain established procedures and failure to comply will result in penalties. Some of the market conduct regulations include: Conflict of interest ; A request of a gift or loan as a condition to complete business ; and Supplying confidential information

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Code of Ethics

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Legally binding and have 4 essential elements: (Must have these 4 elements in order to be legally binding) 1. Agreement - offer and acceptance 2. Consideration 3. Competent parties 4. Legal purpose

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Contracts

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Prepared by the insurer and accepted or rejected by the insured. Insurance policies are not drawn up through negotiations, and an insured has little to say about its provisions

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Contract of Adhesion

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There is an exchange of unequal amounts. The premium paid by the insured is small in relation to the amount that would be paid by the insurer in the event of loss

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Aleatory Contract

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Some provisions/ coverages must be offered by an insurance policy even though they are not specifically stated in the policy. If advertising, sales literature or statements by an agent imply that these provisions exist so the insured could reasonably expect coverage

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Reasonable Expectations

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AKA reimbursement. A provision in an insurance policy that states that in the event of a loss, an insured is permitted to collect only to the extent of his/her financial loss and is not allowed to gain financially because of the existence of an insurance contract. The purpose is to restore the full financial loss, but not profit from the loss

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Indemnity

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Statements believed to be true to the best of ones knowledge but that are not guaranteed to be true. For insurance purposes, it is the answers the insured gives to the questions on the insurance application

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Representations

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

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Warranty

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A legal term for the intentional withholding of information of a material fact that is crucial in making a decision. In insurance, the withholding of information by the applicant will result in an imprecise underwriting decision and may be grounds to void the policy

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Concealment

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Intentional misrepresentation or intentional concealment of a material fact used to induce another party to make or refrain from making a contract, or to deceive or cheat. It is grounds for voiding a life insurance contract if it is discovered during the first 2 years

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Fraud

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The voluntary act of relinquishing a legal right, claim or privilege

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Waiver

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A 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. It is a legal consequence of a waiver

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Estoppel

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