Texas Examination For Life, Accident & Health Insurance / Series 14-54

Front 1

Insurance

Back 1

A contract that indemnifies another against loss, damage, or liability arising from an unknown event.

Front 2

Indemnify

Back 2

To make a person whole by restoring that person to the same financial position that existed before the loss.

Front 3

Insurer

Back 3

The company or organization who provides the life insurance.

Front 4

Insured

Back 4

The person who is covered by the insurance.

Front 5

Policy

Back 5

A legal document, also referred to as a contract of insurance, that defines the agreement between the insurer and the insured.

Front 6

Loss

Back 6

Reduction in the value of an asset.

Front 7

Claim

Back 7

A demand for payment of the insurance benefit to the person named in the policy.

Front 8

Risk

Back 8

Uncertainty of financial loss, or the chance of loss, when more than one outcome is possible.

Front 9

Pure Risk

Back 9

Risk involving only a chance of loss - the loss may or may not happen - but there is no possibility for a gain. The risk associated with an accident is an example of pure risk. Only pure risk is insurable.

Front 10

Speculative Risk

Back 10

A risk that involves an uncertainty of both loss and gain. Examples: betting on horse racing or the stock market. Speculative risk cannot be insured.

Front 11

Peril

Back 11

The immediate specific event causing loss and giving rise to risk. It is the cause of a risk. For example, when a building burns, fire is the peril. When a person dies, death is the peril.

Front 12

Hazard

Back 12

Any factor that gives rise to a peril. For purposes of life insurance, there are three basic types of hazards: physical, moral, and morale.

Front 13

Physical Hazards

Back 13

Those hazards that arise from material, structural, or operational features of a risk situation (slippery floors or unsanitary conditions would be physical hazards).

Front 14

Moral Hazards

Back 14

Hazards that arise from people's morals or values. Filing a false claim is an example of a moral hazard.

Front 15

Morale Hazards

Back 15

Hazards that arise out of human carelessness or irresponsibility. Examples would be failing to take safety precautions.

Front 16

STARR

Back 16

The five methods for dealing with or managing risk. Stands for Sharing, Transfer, Avoidance, Reduction and Retention.

Front 17

Sharing

Back 17

Sometimes, when a risk cannot be avoided and retention would involve too much exposure to loss, we may choose risk sharing as a means of handling the risk. By sharing risk with someone else, an individual also shares potential losses. That is, the individual’s own loss may not be as great if it occurs, but the individual may have to pay a portion of the losses experienced by others.

Front 18

Transfer

Back 18

Risk transfer means transferring the risk of loss to another party, usually an insurance company, that is more willing or able to bear the risk. Some non-insurance transfers of risk occur, such as when one agrees to assume the risk of another under the terms of a written contract.

Front 19

Avoidance

Back 19

As the name implies, this technique deals with risk by avoiding the risk in the first place. This usually means not undertaking an activity that could involve the chance of loss. For example, by never flying, one could eliminate the risk of being in an airplane crash.

Front 20

Reduction

Back 20

Sometimes, when risks cannot be avoided, they can be reduced. Risk reduction can work in one of two ways: it can reduce the chance that a particular loss will occur, or it can reduce the amount of a potential loss if it occurs. For example, installing a smoke alarm in a home would not lesson the possibility of fire, but it would reduce the risk of the loss from the fire.

Front 21

Retention

Back 21

Retention simply means doing nothing about the risk. In other words, people assume or retain the risk and, in effect, become self-insurers. For example, the insured would pay a smaller portion of the loss than the insurer, such as paying a deductible.

Front 22

Subrogation

Back 22

Subrogation entitles one who has paid for another’s loss to take over the other’s right to recourse from the party responsible for the loss. A subrogation clause in an insurance policy gives the insurer the right to sue (for itself or on behalf of the insured) the responsible party. It prevents the insured from collecting from both the insurer and the liable party. Subrogation is never used in life insurance and seldom in health insurance.

Front 23

Limit of Liability

Back 23

The maximum amount the insurer will pay for a specified insured contingency.

Life insurance policies usually use the term face amount to refer to the maximum liability of the insurer for a death claim.

Health and disability policies are more likely to specify a maximum benefit amount or period instead of a limit of liability. Basic medical insurance often has a maximum benefit amount (such as $10,000), and major medical insurance usually has a lifetime maximum benefit (such as $1 million).

Front 24

Deductible

Back 24

The initial amount of a covered loss (or losses) that the insured must absorb before the insurer begins to pay for additional loss amounts.

Front 25

Elimination Period

Back 25

In disability insurance, the number of days an insured must be disabled before disability income benefits become payable.

Front 26

Coinsurance

Back 26

Commonly found in medical insurance. It means that within a specified coverage range, the insured and insurer will share the allowable expenses. It is usually expressed in percentages (e.g., 20–80%).

Front 27

Property Insurance

Back 27

Protects the insured against the financial consequences of the direct or consequential loss or damage to property of every kind. Property insurance policies cover the risk of damage or loss to property, which is defined as building, equipment, stock, or contents.

Front 28

Casualty Insurance

Back 28

Protects the insured against the financial consequences of legal liability, including that for death, injury, disability, or damage to real or personal property. Casualty insurance contracts include automobile policies, general liability policies, workers’ compensation coverage, crime insurance, surety (bonding), boiler and machinery coverages, and many others.

Front 29

Life Insurance

Back 29

insurance coverage on human lives, including endowments and annuities, and may include benefits in the event of accidental death or dismemberment and benefits for disability. It is designed to protect against the risk of premature death, which exposes a family or a business to certain financial risks, such as burial expenses, paying debts, loss of family income, and business profits.

Front 30

Annuity

Back 30

Provides guaranteed income for the life of an annuitant. Annuities are designed to protect against the risk of living too long—that is, outliving one’s financial resources during retirement.

Front 31

Accident and health or sickness insurance.

Back 31

Protects the insured against financial loss caused by sickness, bodily injury, or accidental death and may include benefits for disability income. It may reimburse the insured for actual medical expenses incurred as a result of an accident or illness (hospitalization insurance), or it may provide protection for loss of income experienced by the insured during periods of disability resulting from accident or sickness (i.e., disability income insurance). Health insurance can be written on either an individual or group basis and may include medical expense, hospital indemnity, major medical, hospital, surgical, disability, cancer, accident, dental expenses, eyeglasses, prescription medication, and other health-related expenses.

Front 32

Variable life and variable annuity products

Back 32

Include insurance coverage provided under variable life insurance contracts and variable annuities. Variable products carry investment risk—that is, the insured may lose money because of a decrease in the price of the securities underlying the policy. For this reason, individuals selling such products are required to carry a securities license as well as an insurance license.

Front 33

Credit

Back 33

A limited line of insurance protecting the insured, who is usually a creditor, against the financial consequences should a debtor be unable to pay debts as a result of illness or death.

Front 34

Stock Insurance Company

Back 34

Consists of stockholders, also known as shareholders, who own shares in the company. Stockholders select the board of directors, and the board elects the officers who conduct the daily operations of the business.

Front 35

Non-Participating Stock Company

Back 35

A stock company where policyholders do not participate in dividends resulting from stock ownership.

Front 36

Policy Dividends

Back 36

Funds not paid out after paying claims and other operating costs that are returned to the policyowners.

Front 37

Participating Companies

Back 37

Mutual companies where policyowners participate in dividends.

Front 38

Reciprocal Insurer

Back 38

Unincorporated groups of people that provide insurance for one another through individual indemnity agreements.

Front 39

Subscriber

Back 39

Each individual who is a member of the reciprocal.

Front 40

Fraternal Benefit Societies

Back 40

Primarily life insurance carriers that exist as social organizations and usually engage in charitable and benevolent activities. Fraternals are distinguished by the fact that their membership is usually drawn from those who are also members of a lodge or fraternal organization. They operate under a special section of the state insurance code and receive some income tax advantages. One distinctive characteristic of fraternal life insurance is the open contract, which allows fraternals to assess their certificateholders (charge additional, unscheduled premiums) in times of financial difficulty.

Front 41

Lloyd's of London

Back 41

Lloyd’s of London is not an insurance company, but it provides a meeting place and clerical services to its members who actually transact the business of insurance. Members are individually liable and responsible for the contracts of insurance into which they enter.

Front 42

Reinsurers

Back 42

Reinsurers make up a specialized branch of the insurance industry that insures insurers. Reinsurance is an arrangement by which an insurance company trans fers a portion of a risk it has assumed to another insurer. Usually, reinsurance takes place to limit the loss any one insurer would face should a very large claim become payable. The company transferring the risk is called the ceding company; the company assuming the risk is the reinsurer.

Front 43

Facultative Reinsurance

Back 43

Negotiated on an individual risk basis. The reinsurer retains the right to accept or reject each risk, so there must be an offer and acceptance on each reinsurance contract.

Front 44

Treaty Reinsurance

Back 44

Involves the automatic sharing of risks by the ceding company.

Front 45

Excess and Surplus Lines

Back 45

Excess and surplus lines is the name given to insurance for which there is no market through the original producer or that is not available through authorized carriers in the state where the risk arises or is located. Such business must be placed through a licensed excess or surplus lines broker, who will attempt to place it with an unauthorized carrier.

Front 46

Risk Retention Groups

Back 46

Risk retention groups are composed of members who are engaged in similar businesses or activities. The group’s primary activity consists of assuming and spreading all, or a portion, of the liability exposure of its members. These groups may only provide liability insurance, not workers’ compensation or personal lines insurance. RRGs are regulated by the state where they are domiciled but can transact insurance in any other state without further regulation or the requirement to participate in the state guaranty fund.

Front 47

Self-Insurance

Back 47

Self-insurance is a means of retaining risk. Some businesses intentionally self-insure all or a portion of specified risks. Frequently, self-insurers set aside reserve funds to cover losses and purchase excess insurance to cover large losses or aggregate losses above a given level.

Front 48

The United States Government as Insurer

Back 48

The federal government provides a wide variety of insurance benefits through various programs. These include Social Security benefits, military life insurance benefits, federal employee compensation benefits, and various retirement benefit programs. It also provides, supports, or subsidizes a number of insurance programs designed to cover catastrophic risks, including insurance for war risks, nuclear energy liability, flood, and crop losses.

Front 49

Domestic Insurers

Back 49

A company is a domestic insurer in the state in which it is incorporated.

Front 50

Foreign Insurers

Back 50

A foreign insurer is licensed to conduct business in states (the District of Columbia or other US territories) other than the one in which it is incorporated.

Front 51

Alien Insurers

Back 51

Alien insurers are companies incorporated in a country other than the United States, the District of Columbia, or any US territorial possession.

Front 52

Independent Insurance Agents

Back 52

People who sell the insurance products of several companies and work for themselves or other agents. The independent agent owns the expirations of the policies he sells, meaning the individual may place that business with another insurer upon renewal if in the best interest of the client.

Front 53

Exclusive or Captive Agents

Back 53

People who represent only one company. These agents are sometimes referred to as career agents working from career agencies. Most often, these captive or career agents are compensated by commissions.

Front 54

General Agents or Managing General Agents (MGA's)

Back 54

People who hire, train, and supervise other career agents within a specific geographical area. The MGA is compensated by commissions earned on business sold by herself as well as an overriding commission (overrides) on the business produced by the other agents managed by the general agent. An MGA has field underwriting and binding authority only in property and casualty insurance.

Front 55

Direct Writing Companies

Back 55

People who usually pay salaries to employees whose job function is to sell the company’s insurance products. Technically, these salaried employees do not function as agents. Commissions are usually not paid and the insurer owns all of the business produced.

Front 56

Producers

Back 56

Producers may function as agents, representing the insurance company, or as brokers, representing the potential insured.

Producers acting as agents are not only categorized by their function in the industry but also by the line of insurance they sell.

Many states have replaced separate agent and broker licenses with a single producer license.

Front 57

Actuaries

Back 57

Mathematicians who study and compile statistical data regarding exposure and risks for insurance companies.