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Insurance Unit 1
| Term | Definition |
|---|---|
| Insurance | Transfer of risk from a person or business to an insurer. |
| Risk | Uncertainty/possibility of a loss. |
| Speculative Risk | Chance of loss or gain; not insurable. |
| Pure Risk | Chance of loss only; Insurance companies will insure. |
| Exposure | Risks for which the insurance company would be liable. |
| Peril | A cause of loss. (EX. a house burns down; peril is the fire.) |
| Direct | Physical loss. |
| Indirect | Consequence of the direct loss |
| Hazard | Increases the chance of loss |
| Physical Hazard | The hazard can be seen. |
| Moral | Dishonesty. |
| Morale Hazard | Carelessness. |
| STARR | Method of handling risk. S- Sharing T- Transfer A- Avoidance R- Retention R- 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 future losses can be predicted. |
| CANHAM | Elements of an insurable risk. C- Calculable A- Affordable N- non-catastrophic H- Homogeneous A- Accidental M- Measurable |
| Adverse Selection | Risks that have a greater than average chance of loss. *Not wanted by insurers. *Tendency for high-risk individuals to get and keep insurance. *Why insurers go through the underwriting process. *High risk = higher rate or refusal to insure. |
| Reinsurance | An insurance company (the ceding company) pays another insurance company (reinsurer) to take some of the company's risk. * Reinsurers help spread the insurer's risk. |
| Facultative | The reinsurer evaluates each risk before allowing the transfer. |
| Treaty | The reinsurer accepts the transfer according to an agreement called treaty. |
| Stock Insurer | * Owned by stockholders. * Dividend is not guaranteed. * Dividend is paid to the stockholder. * Dividend is taxable to stockholders. * Issues nonparticipating policies. |
| Mutual Insurer | * Owned by the policyholders (customers). * Dividend is not guaranteed. * Dividend is paid to the policyholder. * Dividend is not taxable; considered refund of premium. * Issues participating policies. |
| Fraternal Insurer | * Provides insurance and other benefits. * Must be a member of the society to get the benefits. |
| Reciprocal Insurer | * Unincorporated. * Members are required to pay an assessed amount if a loss to any member of the group occurs. * Managed by an attorney in fact. |
| Lloyds Association | Insurance provided by individual underwriters, not companies. Insures unusual risks. (EX. Hole in one contest, Athletes arm, Celebrity's hair) |
| Risk Retention Group | * Liability insurance company created for policyholders from the same industry. * For example, a car dealers risk retention group in which only car dealers can be policyholders. |
| Risk Purchasing Group | * A group of businesses from the same industry joining together to buy liability insurance from an insurance company. * The risk purchasing group is not the insurance company. |
| Self Insurance | A business that pays its own claims. * Reserves funds to cover losses. * Retains risk rather than transfers. |
| The federal government provides residual market insurance. Insurance from the state or federal government. | * War risk Insurance. * Nuclear energy Insurance. * Flood Insurance. * Federal crop Insurance. * Unemployment Insurance. (at state level) * Workers compensation. (at state level) |
| Domestic | The state where a company is incorporated. |
| Foreign | Company is incorporated in another state or U.S. territory. |
| Alien | Company is incorporated in another country. |
| Certificate of Authority | State license for an insurance company. |
| Admitted or Authorized | State requires the insurance company to have a certificate of authority. |
| Non Admitted or Authorized | Insurance company not required to have a certificate of authority from the state. |
| Surplus Lines | * Insurance sold by unauthorized/non-admitted insurers if on the state's approved list of surplus insurers. * Can only be sold to certain high-risk insureds. * Cannot be sold solely for a cheaper rate than licensed/ admitted insurers. |
| Financial Strength Rating | A report card of the company. |
| Methods of Marketing | * Independent. * Exclusive or captive. * General agents or managing general agents. * Direct writing companies. |
| Direct Response | No agent/ producer involved. * Direct mail, magazines, television, internet, and radio advertisements. |
| Agency | The insurance agent acts on behalf of the principal (insurance company). |
| Express Authority | What the agents written contract with the company says. |
| Implied Authority | Not written; activities an agent normally does to sell insurance. |
| Apparent Authority | Activities an agent does that a reasonable person would assume as authority, based on the agent's actions and statements. |
| Fiduciary Trust | * Promptly sends premiums to the insurer * Has knowledge of products * Complies with laws and regulations * Does not commingle funds |
Created by:
morganatayers
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