2010 Il Life & Health Insurance Exam Unit 1

Front 1

Insurance

Back 1

• Social device for spreading the chance of
financial loss among a large number of people
• Transfers the risk of loss from insured to insurer
through a legal contract
– Insured pays premium; insurer promises to pay the
insured according to the terms of the contract

Front 2

Risk

Back 2

The possibility that a loss might occur
– Not the loss itself, but the uncertainty of financial loss

Front 3

Pure risk

Back 3

• Chance of loss only
• Can be covered by insurance

Front 4

Speculative risk

Back 4

• Chance of loss or gain
– Examples include gambling or investing
• Cannot be covered by insurance

Front 5

Exposure

Back 5

A condition or situation that presents a possibility
of loss

Front 6

Peril

Back 6

Actual cause of loss
– Common causes of loss include fire, wind, lightning,
accidents, etc.

Front 7

Loss

Back 7

• Basis of claim for indemnity under the provisions
of an insurance policy
• Measured in terms of reduced value of property,
amount of medical and other related expenses,
or amount of claim made against insured

Front 8

Indemnity

Back 8

• Concept of indemnity states that insurance
should restore the insured, in whole or in part,
by payment, repair, or replacement to the
condition present before the loss
– Restore policyholder as close as possible to pre-loss
condition

Front 9

Hazard

Back 9

• A condition that increases the potential chance
of loss or the potential seriousness of the loss

Front 10

Physical hazards

Back 10

– arise from material,
structural, or operational features
– Examples include slippery floors, exposed electrical
wiring, unsanitary conditions, etc.

Front 11

Moral hazards

Back 11

– arise from people’s habits and
values
– Dishonest tendencies or characteristics on the part of
the insured
• Examples – creating a loss situation or filing a
false claim just to collect from the insurance
company

Front 12

Morale hazards –

Back 12

– arise out of human
carelessness or irresponsibility
– Through carelessness or thoughtless action,
individuals increase the possibility of loss
• Examples – not wearing a seat belt or leaving keys
in an unlocked car

Front 13

Legal hazards

Back 13

– arise from court actions
– Created by growing tendency to file lawsuits and of
courts to award enormous sums or require insurance
payments that were not intended

Front 14

Law of Large Numbers

Back 14

– As number of loss exposures increase, difference
between actual and expected results becomes
smaller
– Allows insurance company to predict potential future
losses more accurately

Front 15

The dollar amount of potential risk is determined
by statistics of prior losses

Back 15

– Statistics determine whether risk is insurable
– The analyzing of pure risks to the possibility of loss
and determining how to handle these exposures
– Managing risks is a system of choices available to
individuals, businesses, and insurance companies

Front 16

Methods of Handling Risk (STARR)

Back 16

Sharing, Transfer, Avoidance, Retention, Reduction

Front 17

Insurable Interest

Back 17

Basic rule governing insurance states that
before an individual can benefit from insurance
that individual must have a legitimate interest in
the preservation of the life or property involved
– Person is presumed to have an insurable interest in
• His own life
• The life of a close blood relative or a spouse

Front 18

Insurable Interest (pt. 2)

Back 18

• Insurable interest can also be based upon a
financial loss that will take place
– Example: Partners in business
• Insurable interest must be present at the time of
– The application for life insurance
– The application and the loss for property, casualty,
and health insurance

Front 19

Reinsurance

Back 19

Form of insurance between insurers – “the
insurance company’s insurance company”
– Insurance company determines retention limit and
buys reinsurance for the balance
– Also known as pooling the risk

Front 20

Stock Insurers

Back 20

• Owned by their stockholders, who receive
dividends as stock value or periodic dividend
payments
• Incorporated as a for-profit company
• When organizing, will issue shares of stock to
raise funds
• Issues nonparticipating policies (nonpar)
• Pays taxable dividends to shareholders if a profit
is made
• May issue par policies to compete with mutuals

Front 21

Mutual Insurers

Back 21

Owned by their policyholders, who receive the
dividends directly as end-of-year policy additions
or cash
• Mutuals are incorporated and managed by a
board of directors who do not need an insurance
license
– Policyholders participate in divisible surplus
– Par – participating policies
– Participating dividends are a partial return of
premiums and are not taxable. The dividends are not
guaranteed and are considered an overpayment of
premiums.

Front 22

Nonprofit insurer

Back 22

most mutuals issue nonassessment
policies and would then qualify as a
legal reserve or level premium insurance
company

Front 23

Reciprocal Insurer

Back 23

• Insurance companies made up of policyholders
who insure other policyholders
• Each individual member known as a subscriber
• Reciprocals are managed by an attorney-in-fact

Front 24

Fraternal Insurers

Back 24

Fraternal benefit societies primarily life
insurance carriers that exist as social
organizations
• Usually engage in charitable and benevolent
activities
• Distinguished by fact that membership usually
drawn from those who are a member of a lodge
or fraternal organization

Front 25

Fraternal Insurers (pt. 2)

Back 25

Operate under a special section of the state
insurance code and typically receive some tax
advantages
• Distinctive characteristic of fraternal life
insurance the open contract, which allows
fraternals to assess their certificate holders in
times of financial difficulty

Front 26

Domestic insurer

Back 26

with respect to a particular
state, an insurer that is incorporated, organized,
or domiciled in that state

Front 27

Foreign insurer

Back 27

with respect to a particular
state, an insurer that is incorporated, organized,
or domiciled in another state, district, or territory

Front 28

Alien insurer

Back 28

an insurance company that is
incorporated, organized, or domiciled outside of
the United States

Front 29

Admitted or authorized carriers

Back 29

are carriers
that have been issued a certificate of authority
to transact business in the state

Front 30

Non-admitted or unauthorized carriers

Back 30

are
those that do not qualify for a certificate of
authority in the state or have not applied for one

Front 31

Unauthorized or non-admitted carriers may be
so for various reasons

Back 31

– They may not normally do business in the state
– They may only transact kinds of insurance for which
authorization is not required
– They may not meet state requirements