Insurance -- General Insurance Concepts (1)

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Insurance

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a public device for distributing the risk of a financial loss among a large number of people, thereby reducing the financial impact of an individual loss

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Premium

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The amount of money paid by the insured in exchange for insurance coverage

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RIsk

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the possibility or uncertainty of loss -- NOT the ACTUAL loss

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What are the 2 types of risk

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Speculative and Pure risk

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What is speculative risk?

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offers the chance for loss as well as the opportunity to gain -- not generally insurable

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What is pure risk?

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involves only the possibilty for loss -- the is the types of risk that ER will accept

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What is a peril?

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the cause of a loss

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Examples of perils.

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Fire - a house burns down --fire is the peril
Accidents - a person runs a red light and hits another person -- the collision was the peril

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hazard

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the condition or source that increases the severity of the peril

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What are the 3 types of hazards?

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Physical
Moral
Morale

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What is a physical hazard?

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physical source that causes accident
Examples - slippery floor

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What is a moral hazard?

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occur as a result of an individuals decision to do something wrong
Example - faking an accident to claim insurance money

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What is a morale hazard?

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individuals careless actions
Example - someone talking on a cellphone while driving

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Risk Management

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methods used to deal with uncertainty of loss

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HOw can a individual / business manage risk?

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risk avoidance , risk reduction, risk retention, risk sharing, risk transfer

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risk avoidance

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do not take the risk

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risk reduction

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use risk control techniques to leesen severity of possible risk
Example - installing a fire alarn system

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risk retention

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choosing to be financially responsible for risk
Example - purchasing insurance

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risk transfer

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purchasing insurance --you are trnasferring the risk

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Law of Large Numbers

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a method used by the insurance company to derive risk statistics to more accurately predict future losses

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Insurable interest

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before an individual can directly benefit from life insurance the person must be subject to economic loss as the result of the death of the insured
**for life insurance, this must exist at the time of application

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To be insurable, the risk must be a :

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1. predictable loss
2. Chance occurrence
3. CANT be catastrophic
4. Measurable and definitive
5. financial hardship
6. Affordable premiums

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Principle of Indemnity

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insurance should help restore the individual to the financial condition that existed prior to the loss

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Limit of Liabilty

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places a value on the max amount an insurer will pay for a claim under an insurance policy

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coinsurance

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sharing of claims expenses between the ED and ER

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Deductibles

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initial amount that an ED must pay for a covered loss (typically range between 250-1000)

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Adverse Selection

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insuring of risks that ar emore prone to losses than the average risks

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Four basic lines of insurance

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1. property
2. casualty
3. life
4.health & disability

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Mono line v. multi line company

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mono write one line of life insurance and multi writes more than one

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Types of Insurere include:

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Stock insurer
mutual insurer
fraternal benefit society
reciprocal
assessment
risk retention groups
Lloyds

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Reinsurers

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form of risk sharing whereby one insurance company is paid a premium by another and agrees to share in the risks of the ceding company
** protects ER's from catastrophic losses

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Two types of reinsurance agreement:

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facultative - insurance is purchased case by case as new applicants are submitted
automatic - referred to as "treaty agreements" because terms are negotiated in advance

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Service Groups

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BCBS

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Domicile

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domestic, foreign or alien companies must always be licensed in each state in which they transcat business

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Domestic Insurer

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company that is incorporated in the same state where it is doing business

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Foriegn Insurer

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company that is incorporated in a state other than where it is doing business

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alien insurers

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compnay that is incorporated in a country other then where it does business

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Certificate of Authority

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ER must apply for this in order to do business in a certain state

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Managing General Agency System (MGA)

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personal producing general agency system recruits, trains, hires, supervises other producers though a contractual agreement with an ER
primary responsibilities:
1. to sell insurnace
2. to build and supervise a sales force of producers in which the MGA recieves and ovveride commission

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brokers

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independent producers who sell insuranc through many different insurance companies