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| contract that indemnifies another against loss, damage, or liability arising from an unknown event |
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| means to make a person whole by restoring that person to the same financial position that existed before the loss |
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| contract that indemnifies another against loss, damage, or liability arising from an unknown event |
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| means to make a person whole by restoring that person to the same financial position that existed before the loss |
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| set amount of money paid in insurance policy |
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| the insurance company providing coverage |
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| the person who is covered by the insurance |
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| a legal document referred to as a contract of insurance |
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| reduction in the value of an asset |
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| demand for payment of the insurance benefit to the person named in the policy. |
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| uncertainty of financial loss, or the chance of loss, when more than one outcome is possible. |
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there is only a chance of loss—the loss may or may not happen—and there is no possibility for gain. The risk associated with the chance of an accident is an example of pure risk.
Only pure risk is insurable. |
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| involves both an uncertainty of loss and of gain. Insurance does not protect individuals against losses arising out of speculative risk because these risks are undertaken voluntarily. |
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| 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. |
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| any factor that gives rise to a peril. For purposes of life insurance, there are three basic types of hazards: physical, moral, and morale. |
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| arise from material, structural, or operational features of a risk situation (slippery floors or unsanitary conditions would be physical hazards). |
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| arise from people’s habits and values (filing a false claim is an example of moral hazard). |
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| arise out of human carelessness or irresponsibility (failing to take safety precautions is an example of morale hazard). |
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Share
Transfer
Avoidance
Retention
Reduction |
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| 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. |
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| 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. |
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| 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. |
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| 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. |
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| 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. |
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| using the law of large numbers, insurers are able to predict how many losses will occur in a group. The larger the group, the more predictable the future losses in the group will be for a given period. |
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legitimate interest in the preservation of the life or property insured.
Personal Life
Relative
Business Partner |
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| certain characteristics that make the rate of loss fairly predictable, allowing insurers to adequately prepare for the losses that do occur. The more closely a risk aligns with the following characteristics, the more insurable it is. |
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Large Numbers of Homogenous Units
Loss Must Be Measurable
Loss Must Be Uncertain
Economic Hardship
Exclusion of Catastrophic Perils |
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to make whole again
to help maintain lifestyle |
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Insurance company can sue liable party responsible for insured persons loss
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.
n 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. |
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| the maximum amount the insurer will pay for a specified insured contingency. |
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| he initial amount of a covered loss (or losses) that the insured must absorb before the insurer begins to pay for additional loss amounts. |
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waiting period
the number of days an insured must be disabled before disability income benefits become payable |
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| within a specified coverage range, the insured and insurer will share the allowable expenses |
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| protects the insured against the financial consequences of the direct or consequential loss or damage to property of every kind |
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| 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. |
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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.
premature death |
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| 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. |
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| Accident and health or sickness |
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| insurance protects the insured against financial loss caused by sickness, bodily injury, or accidental death and may include benefits for disability income. |
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| Variable life and variable annuity products |
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| 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. |
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| 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. |
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| What are the 3 major sources of insurance? |
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1. Private commercial Insurers (profit making)
2. Private noncommercial Insurers (nonprofit service organization
3. US Government (special nonprofits |
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| Non Profit Base Insurance |
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| Profits given back to customers by reduction in premiums for subscribers |
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| onsists 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. A stock company is referred to as a non-participating company because policyholders do not participate in dividends resulting from stock ownership. |
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| here are no stockholders; ownership rests with the policyholders, also known as policyowners. They vote for a board of directors that in turn elects or appoints the officers to operate the company. Funds not paid out after paying claims and other operating costs are returned to the policyowners in the form of policy dividends. As such, mutual companies are sometimes referred to as participating companies because the policyowners participate in dividends. |
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| unincorporated groups of people that provide insurance for one another through individual indemnity agreements. Each individual who is a member of the reciprocal is known as a subscriber. Each subscriber is allocated a separate account through which his premiums are paid and earned interest is tracked. If any subscriber should suffer a loss provided for by the reciprocal insurance, each subscriber account would be assessed an equal amount to pay the claim. Administration, underwriting, sales promotion, and claims handling for the reciprocal insurance are handled by an attorney-in-fact. The attorney-in-fact is often controlled and overseen by an advisory committee of subscribers. |
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| 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. |
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| the company transferring the risk |
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| the company assuming the risk |
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Facultative - negotiated on an individual risk basis
Treaty - reinsurance involves an automatic sharing of risks by the ceding company |
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| 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. |
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