Chapter 1
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| Life Insurance | An insured transfers the risk of dying prematurely to the insurer by paying a premium and entering into a legal contract
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| Health Insurance | An insured transfers the risk of falling ill or suffering injury to the insurer by paying a premium and entering into a legal contract
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| Risk | defined as the uncertainty concerning financial loss, the chance of loss, or the probability of loss.
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| Pure Risk | involves the chance for loss only
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| Speculative Risk | cannot be insured because it involves the chance for loss or gain (ex:betting on a horse race is speculative risk)
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| Risk Management Techniques: | Avoidance, Retention, Transfer, Sharing, Reduction
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| Avoidance (Risk Management Technique) | when an individual avoids the risk of loss completely by not engaging in any activity or owning property.
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| Retention (Risk Management Technique) | Most common method for handling risk. Deductible is the most basic illustration of retention. The policy owner will pay for a smaller portion of the loss than an insurer.
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| Transfer (Risk Management Technique) | One party transferring the chance of loss to another party. (The purchase of insurance is a form of risk transfer)
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| Sharing (Risk Management Technique) | Sharing risk distributes the risk among a number of persons. Each person bears a portion of the risk in relation to what he has invested. (ex: Corporation is a form of business where investments of many people are pooled together)
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| Reduction (Risk Management Technique) | Reduction may be accomplished through loss prevention and loss control. (control: sprinkler system in fire, prevention: security guard to reduce risk)
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| Risk is measured how? | according to statistics of past losses.
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| Risk Management is a multi-step process used to | control, prevent, or reduce risk.
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| Risk Management involves a 4 step process of: | 1. identifying the possible risks present (exposure) 2. determining what action to take in order to reduce or control risk 3. implementing specific action 4. monitoring the action taken in order to make changes as needed
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| Hazard | a condition that increases the chance of a loss occurring
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| Physical Hazard | tangible hazards (cracked sidewalks, chemicals stored in a garage, unsafe automobile brakes, etc)
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| Moral Hazard | Hazards that derive from the mental attitudes of individuals. 1. dishonest acts(suffering a loss on purpose to receive insurance proceeds) 2. carelessness (losses to apathy) 3. irresponsible activities (driving drunk) Moral (dishonest)while Morale for2&3
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| Perils | direct happenings or events that cause a loss.
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| Common Perils: | fire, windstorm, negligence, burglary, robbery, and flood damage
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| Economic Loss | the decrease or disappearance of economic value.
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| Pure Loss | characterized by the actual destruction of property.
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| Direct Loss | The loss from an insured peril that is the direct physical loss of the property insured.
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| Indirect Loss | is removed from the cause of the direct loss but its related to it. This classification of loss is also known as consequential loss.
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| Law of Large Numbers | An insurer is able to assume many risks with the reasonable assurance of experiencing a certain number of losses. A mathematical rule simply stating that as more exposure numbers increase the more likely an expected event will occur.
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| Rate | price per unit of exposure
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| Premium | the entire (total) cost of coverage for a group of exposure units
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| Types of Rates | Manual, Class, Individual
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| Manual Rates | Rates that are listed in a manual or rate book
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| Class Rates | Rates that apply to large groups of homogeneous loss exposures
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| Individual Rates | Also known as SPECIFIC rates, these are used when large numbers of homogenous exposures do not exist. Hence, they involve an individual rate for each subject of insurance.
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| Rating Bureau | an organization owned by member insurance companies.
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| The purpose of Rating Bureau | to accumulate an analyze statistical data to develop rates, calculate rates for lines of insurance, and file rates with state regulatory authorities for approval.
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| Benefits of a Rating Bureau | 1. they may develop policy forms and endorsements 2. Insurers are usually subscribers to, or actual members of, a rating bureau 3. Lower costs and expenses to insurers, standardizing policy forms and endorsements, and aid small insurers who dont have data
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| Independent Filings | when insurers file rates with a particular state by themselves. More expensive.
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| Non bureau insurers | for insurers who wish to remain outside a rating bureau, file independently and use rate cutting practices
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| Adverse Selection | tendency of persons whose exposure to loss is higher than average to purchase or continue insurance to a greater extent that those whose exposure is less than average.
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| Insurable interest | when the insured would suffer a financial loss if the property insured were destroyed or damaged and must exist at the time of loss.
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| Elements of insurance risk | Economic feasibility, calculation of probability, suffienctly large numbers, definite and measurable, fortuitous and accidental, less than catastrophic
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| Economic Feasibility -Elements of insurance risk | The premium must be affordable
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| Calculation of Probability - Elements of insurance risk | The potential loss incurred must be calculable in order to be insured.
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| Sufficiently Large Numbers - Elements of insurance risk | For a risk to be insurable, there must be a sufficient number of insureds available with a similar potential loss.
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| Definite and measurable | The risk of loss must be definite and measurable in both time and place such as death
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| Fortuitous and accidental | The risk must also be unexpected and unintended.
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| Less than catastrophic | Insurers do not desire to cover individuals who may all suffer losses at the same time because the insurer would suffer catastrophic losses.
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| Type of Insurers: | Domestic Foreign Alien Stock Mutual Reciprocals Fraternal insurers Private vs. Government Insurers Authorized (admitted) Unauthorized (non admitted) Surplus Lines Purchasing Group Risk Retention Group Lloyd's of London
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| Domestic Insurance Company | a company incorporated to in, domiciled in, and organized under the laws of a given state and having its home office located in that state.
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| Foreign Insurance Company | is incorporated or organized under the laws of one state but is licensed and permitted to conduct the business of insurance in another state.
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| Alien Insurance Company | A company incorporated or organized outside the United States but licensed in a given state is an alien insurer in that state.
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| Stock insurance company | is owned by the holders of the company's stock.
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| Mutual insurance company | is owned by its policy holders who share in the company's profits in the form of dividends.
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| Reciprocals | combine some characteristics of a mutual insurer (owned by its policyholders) and a Lloyd's Association (individuals assume the risks). Managed by an attorney-in-fact.
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| Reciprocal Exchange | (interinsurance association) is a type of cooperative insurance.
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| Fraternal Insurers | aka Fraternal Benefit Society is a special type of insurer providing insurance benefits, particularly life insurance for its members.
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| Private vs. Government Insurers | Private is in the business to make money. Government provide social insurance plans on a state or federal level.
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| Authorized (admitted) insurance company | an insurer that has received a certificate of authority from a given state and is therefore licensed or authorized to conduct business in that state.
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| Unauthorized (non admitted) insurance company | an insurer that has not received a certificate of authority from a given state and is therefore not licensed or authorized to transact business in that state.
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| Surplus Lines Company | common form of unauthorized carriers.
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| Purchasing group | composed of members whose businesses or activities are similar and has as it purpose the purchase of insurance on a group basis to cover the members' similar exposures.
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| Risk Retention Group | composed of members who are engaged in similar businesses or activities. Providing only liability insurance.
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| Lloyd's of London | This organization is a not an insurance company. It is a voluntary association of persons who agree to share in insurance contracts. All individual's are responsible for the amount of coverage they write.
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| contract | an agreement between two or more competent parties under the terms of which each promises to perform in a manner specified, for a consideration (promise or payment).
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| Elements of a legal contract | Offer and acceptance (agreement) Competent parties Legal Object or purpose Consideration
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| Offer and acceptance (agreement) - legal contract | One party must make make an offer, and the other party accepts it, rejects it, or makes a counteroffer (the insurer).
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| Competent Parties - legal contract | Most individuals except those who are insane, drugged or drunk, enemy aliens, forced to enter contract, and minors
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| Legal object or purpose - legal contract | to be valid a contact must not be against public policy.
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| Consideration - legal contract | Something of value must be given in consideration of the coverage provided by the insurer.
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| Aleatory contracts | based on uncertain events in the future where the value given up by one party
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| contracts of adhesion | when one party (insurer) creates the contract terms and the other party (insured) must adhere or comply with them.
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| Utmost good faith | Each party must rely on the fact that information supplied by the other party is true.
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| Executory contracts | when some act prescribed in the contract remains to be performed
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| Unilateral contract | in a contract only the insurer promises to perform. A promise is made by only one party.
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| conditional contract | obligation of the company to pay a claim depends upon certain acts, such as the payment of premiums and providing proof of loss.
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| indemnity | cover in the case of a loss
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| Legal Principles applicable to insurance contracts | Waiver, Estoppel, Comparison of waiver and Estoppel, Parole Evidence Rule
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| Waiver - (Legal Principles applicable to insurance contracts) | the intentional or voluntary relinquishment of a known right in an insurance contract. 1. A waiver must be expressed (written or verbal) or implied 2. It does not apply to perils that are not covered under the policy 3. A waiver is contractual in nature
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| Estoppel - (Legal Principles applicable to insurance contracts) | This doctrine is used to protect an innocent injured party. Must have the following: 1. There must be false representation of material fact 2. There is a reasonable reliance on the representation 3. Harm will result (to the insured).
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| Comparison of waiver and estoppel - (Legal Principles applicable to insurance contracts) | 1. Waiver = contractual in nature/estoppel = tortuous in nature and rests upon false representation. 2. Waiver = intention of the party waiving/estoppel = defeat the party estopped. 3. Waiver is subject to parole evidence rule, estopple no
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| Parole evidence rule | prevents the introduction into evidence of oral agreements of oral agreements made before the written agreement. 1. Life insurance contracts are subject to this rule. 2. This rule does not become effective until a binding contract exists.
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awad
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