Chapter 1 General Insurance

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Reduction

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The attempt to lessen the possibility or severity of a loss. Actions such as installing smoke detectors in our homes, having an annual physical to detect health problems early, or perhaps making a change in our lifestyles

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Transfer

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The most effective way to handle risk, so that the loss is borne by another party is by

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Due to chance; Definite and measurable; Statistically predictable; Not catastrophic; and Randomly selected and large loss exposure

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what are the 5 characteristics Insurable risks involve?

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Due to chance

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a loss that is outside the insured’s control.

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Definite and measurable

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a loss that is specific as to the cause, time, place and amount. An insurer must be able to determine how much the benefit will be and when it becomes payable.

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Statistically predicatable

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Insurers must be able to estimate the average frequency and severity of future losses and set appropriate premium rates. (In life and health insurance, the use of mortality tables and morbidity tables allows the insurer to project losses based on statistics.)

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Not catastrophic

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Insurers need to be reasonably certain their losses will not exceed specific limits. That is why insurance policies usually exclude coverage for loss caused by war or nuclear events: There is no statistical data that allows for the development of rates that would be necessary to cover losses from events of this nature.

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Randomly selected and large loss exposure

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There must be a sufficiently large pool of the insured that represents a random selection of risks in terms of age, gender, occupation, health and economic status, and geographic location.

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Insurer

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any person or company engaged as the principal party in the business of entering into insurance contracts.

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the government programs are funded with taxes and serve national and state social purposes, while private policies are funded by premiums.

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The Major difference between government and private insurance is?

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Ownership; Authority to transact business; Location (domicile); Marketing and distribution systems; or Rating (financial strength)

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Private insurance companies can be classified in 5 ways, what are they?

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Stock companies, ans mutual companies

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The 2 common types of ownership are?

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Stock companies

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owned by the stockholders who provide the capital necessary to establish and operate the insurance company and who share in any profits or losses. Officers are elected by the stockholders and manage stock insurance companies. Traditionally, it issues nonparticipating policies

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Nonparticipating policies

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When policy owners do not share in profits or losses.It does not pay dividends to policyowners; however, taxable dividends are paid to stockholders.

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Mutual companies

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owned by the policyowners and issue participating policies

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Participating policies

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policyowners are entitled to dividends, which, in the case of mutual companies, are a return of excess premiums and are therefore nontaxable.

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An admitted or authorized insurer

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an insurance company that has qualified and has received a Certificate of Authority from the Department of Insurance to transact insurance in the state.

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A nonadmitted or nonauthorized insurer

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an insurance company that has not applied, or has applied and been denied, a Certificate of Authority and may not transact insurance.

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location of incorporation (domicile)

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Insurance companies are classified according to their?

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A domestic insurer

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an insurance company that is incorporated in this state. In most cases, the company's home office is in the state in which it was formed - the company's domicile.

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Foreign insurer

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an insurance company that is incorporated in another state or territorial possession (such as Puerto Rico, Guam or American Samoa).

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Alien insurer

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an insurance company that is incorporated outside the United States.

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Principal insurer

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An agent/producer is an individual licensed to sell, solicit or negotiate insurance contracts on behalf of who?

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The law of agency

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This defines the relationship between the principal and the agent/producer: the acts of the agent/producer within the scope of authority are deemed to be the acts of the insurer

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1.An agent represents the insurer, not the insured

2.Any knowledge of the agent is presumed to be knowledge of the insurer

3.If the agent is working within the conditions of his/her contract, the insurer is fully responsible

4.When the insured submits payment to the agent, it is the same as submitting a payment to the insurer

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In the relationship within the law of agency it is given that?

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Authority and powers of producers

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The agency contract details that the authority an agent has within his/her company.

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Express, implied, and apparent

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The 3 types of agent authority are?

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Express authority

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is the authority a principal intends to grant to an agent by means of the agent’s contract. It is the authority that is written in the contract.

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Implied authortiy

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is authority that is not expressed or written into the contract, but which the agent is assumed to have in order to transact the business of insurance for the principal. it's incidental to and derives from express authority since not every single detail of an agent’s authority can be spelled out in the written contract.

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Apparent (perceived) authority

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This authority is the appearance or the assumption of authority based on the actions, words, or deeds of the principal or because of circumstances the principal created. For example, if an agent uses insurer's stationary when soliciting coverage, an applicant may believe that the agent is authorized to transact insurance on behalf of the insurer.

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Fiduciary

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someone in a position of trust.

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Market conduct

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This describes the way companies and producers should conduct their business

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Code of ethics

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When Producers must adhere to certain established procedures, and failure to comply will result in penalties is known as following what?

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1. Conflict of interest

2. A request of a gift or loan as a condition to complete business

3. Supplying confidential information

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What are 3 market conduct regulations that are included?

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Contracts

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agreements between two or more parties enforceable by law.

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1. Agreement - offer and acceptance2. Consideration3. Competent parties4. Legal purpose

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In order for insurance contracts to be legally binding, they must have 4 essential elements:

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Offer

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In insurance, the applicant usually makes this when submitting the application.

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Acceptance

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This takes place when an insurer’s underwriter approves the application and issues a policy.

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Consideration

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This is the binding force in any contract. It is something of value that each party gives to the other. The part of the insured is the payment of premium and the representations made in the application, and the part of the insurer is the promise to pay in the event of loss.

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Competent parties

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The parties to a contract must be capable of entering into a contract in the eyes of the law. Generally, this requires that both parties be of legal age, mentally competent to understand the contract, and not under the influence of drugs or alcohol.

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Legal purpose

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The purpose of the contract must be this and not against public policy. To ensure this of a Life Insurance policy, for example, it must have both: insurable interest and consent. A contract without this is considered void, and cannot be enforced by any party.

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Contract of adhesion

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This contract is prepared by one of the parties (insurer) and accepted or rejected by the other party (insured)

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Aleatory

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Insurance contracts are this, which means there is an exchange of unequal amounts or values.

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Personal contract

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an insurance contract is generally this kind of contract, because it is between the insurance company and an individual

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Unilateral contract

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In this contract only one of the parties to the contract is legally bound to do anything

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Conditional contract

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This contract requires that certain conditions must be met by the policyowner and the company in order for the contract to be executed, and before each party fulfills its obligations.

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Indemnity (reimbursement)

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This is a provision in an insurance policy that states that in the event of loss, an insured or a beneficiary is permitted to collect only to the extent of the financial loss, and is not allowed to gain financially because of the existence of an insurance contract.

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Representations

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These are statements believed to be true to the best of one's knowledge, but they are not guaranteed to be true.

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Misrepresentations

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Untrue statements on the application are considered this and could void the contract.

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Material misrepresentations

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This is is a statement that, if discovered, would alter the underwriting decision of the insurance company. Furthermore, if these are intentional, they are considered fraud.

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Warranty

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This is an absolutely true statement upon which the validity of the insurance policy depends. Breach of this can be considered grounds for voiding the policy or a return of premium.

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Concealment

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This is the legal term for the intentional withholding of information of a material fact that is crucial in making a decision.

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Concealment

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In insurance, this is the withholding of information by the applicant that will result in an imprecise underwriting decision.

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Fraud

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This is the intentional misrepresentation or intentional concealment of a material fact used to induce another party to make or refrain from making a contract, or to deceive or cheat a party. this is grounds for voiding an insurance contract.