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CA Life Insurance
Unit 1 - Insurance Principles and Concepts
| Question | Answer |
|---|---|
| 3 main types of loss: | Human loss, property loss, liability loss. |
| What is a peril? | The event that caused the loss: when a building burns, the peril is fire. When a person dies, the peril is death. |
| What is a hazard? | A factor that increases the likelihood of a peril. |
| What are the three types of hazards for life insurance? | Physical hazard, moral hazard and morale hazard. |
| Physical hazards: | Material, structural or operational conditions that increase the chances of a peril. Examples: slippery floors or unsanitary conditions. |
| Moral hazards: | It's a lie. |
| Morale hazards: | Negligence, careless , irresponsibility, stupidity (such as DUI or reckless driving). |
| 5 ways to treat or deal with risks: | 1) Sharing, 2) Transfer, 3) Avoidance, 4)Reduction and 5) Retention. (STARR) |
| Sharing a risk is ... | When a group of people share the same risk and an individual may pay a portion of the losses incurred by others. Example: farmers. |
| Risk transfer ... | Means transferring the risk of a loss to another party (usually an insurance company) for a fee. |
| Risk avoidance means ... | To not undertake an activity that would involve the chance of a loss. Example: never flying to avoid being in a plane crash, never swimming to avoid the risk of drowning. |
| Risk reduction is ... | Techniques to reduce a risk. Examples: smoke alarms and fire sprinklers in a house or seat belts in a car. |
| Risk retention means ... | People assume the risk and for pay (or retain) the loss or a portion of it. Not having insurance is a form of retention or paying the deductible of an auto policy. |
| Insurable interest ... | A financial connection between the policy holder and the property or life to be insured. In life insurance it means that the policy owner has the potential of financial loss in the event of the insured's death. |
| For life insurance purposes, when does insurable interest have to exist? | At the time of the application, but not necessarily at the time of the insured's death. Example: a husband who takes out a life policy on his wife and later ends up divorcing her would still be able to collect the death benefit. |
| What are the requirements for a risk to be insurable? | 1) a large number of similar exposure units, 2) Loss should be measurable, 3) Uncertainty of loss Loss, 4) Loss must cause economic hardship to the insured and 5) No catastrophic loss exposure (such as war, nuclear hazards, flood and earthquake). |
| What is Adverse Selection? | It is a tendency for people with a higher probability of loss to seek insurance. |
| What is the Law of Large Numbers? | Large numbers make it possible to predict losses. The higher the number of similar risks grouped together the more accurate the prediction of losses. |
| What is demutualization? | When a mutual insurer goes public and turns into a stock insurer. |
| What are the different types of insurers? | 1) Stock insurers, 2) Mutual insurers, 3) Reciprocal insurers, 4) Fraternal insurers and 5) Lloyd's of London and Risk Retention Groups (RRG). |
| Stock insurer | Owned by stockholders, also known as non-participating because policyholders do NOT participate in stock dividends (unless they own stock). |
| Mutual insurer | No stockholders. Owned by policyholders. Also known as participating companies because the company pays policy dividends to its policyowners. |
| What is a policy dividend? | It is a refund of a premium overpayment (cash value policies). Funds not paid out after paying claims and other operating costs that are return to the policyholder. Dividends are not taxable, but dividend interests are. |
| Reciprocal insurer | Unincorporated groups of people providing insurance to one another through individual indemnity agreements. Subscribers pay premiums into an account and when someone suffers a loss, each subscriber is accessed an equal amount to pay the claim. |
| Who handles reciprocal insurance? | An attorney-in-fact, who is supervised by an advisory committee of subscribers. |
| Fraternal insurer | A social organization that usually engages in charitable and benevolent activities and operate as a life insurance carrier and offers coverage to its members. Example: Knights of Columbus (Catholic). |
| Lloyd's of London | Not an insurance company. It is a hub for insurers. Provides a meeting place and clerical services to members who conduct insurance business. Members are individually responsible for the insurance contracts they enter. |
| Risk Retention Group | Provides liability insurance only. Composed of members who are engaged in similar businesses or activities. It assumes the liability exposure of its members and spread all or a portion of it among them. |
| Reinsurer | It assumes the risk of an insurer, specially when policy limits surpass established the insurer's limits of coverage. |
| Self-insurer | Assumes (retains) its own risk. Normally, it sets aside reserve funds to cover losses and purchases excess insurance to cover large losses above a certain level. |
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