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Nebraska Life and Health Insurance
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What is Insurance? ✔✔a contract in which 1 party (insurance company) agrees to indemnify (make whole) the insured party against loss, damage, or a liability arising from an unknown event.
What is life insurance? ✔✔a policy that protects survivors from losses suffered after an insured's death
What does insurance do? ✔✔transfers the risk of loss from an individual or business entity to an insurance company which spreads out costs of unexpected losses to many individuals
What is risk? ✔✔uncertainty or chance of a loss occurring
Pure risk ✔✔refers to sutuations that can only result in a loss or no change, no opportunity for financial gain
What type of risk do insurance companies accept? ✔✔pure risk
Speculative risk ✔✔involves opportunity for loss or gain
Hazard ✔✔conditions or situation that increase probability of an insured loss occurring
Physical hazard ✔✔individual characteristics that increase the chances of the cause of loss
Example of a physical hazard ✔✔past medical history, existing conditions, (blindness)
Moral hazard ✔✔tendencise towards increased risk. moral hazards inclove evaluating character of insured
example of moral hazard ✔✔applicants who may lie on an application for insurance or in the past have submitted fraudulent claims against an insurer
Morale hazard ✔✔similar to moral hazards, except that they arise from a state of mind that causes indifference to loss, such as carelessness
What are factors considered in determining rates for life insurance? ✔✔age of insured, medical history, occupation, sex
Homogeneous ✔✔large # of units having the same or similar exposure to loss
Avoidance (method of handling risk) ✔✔eliminating exposure to a loss
Example of avoidance ✔✔avoid being killed in an airplane crash by not riding on airplanes (not practical)
Retention (method of handling risk) ✔✔is planned assumption of risk by insured through use of deductibles, co-payments, or self-insurance
What is the purpose of retention? ✔✔1. to reduce expenses, increase cash flow
- to increase control of claim reserving and claims settlements
- to fund losses that cannon be insured
Sharing (method of handling risk) ✔✔method of dealing with risk for a group of individual persons or businesses with the same or similar exposure to loss to share the loss that occurs within that group
What is a formal risk sharing agreement? ✔✔A reciprocal insurance exchange
Reciprocal ✔✔insurance resulting from an interchange of reciprocal agreements of indemnity among persons known as subscribers
Risk Retention Group (RRG) ✔✔is a liability insurance company owned by its members.
What is the purpose of a risk retention group? ✔✔assume and spread all or part of the liability to a group of members.
What can an RRG do? ✔✔may re-insure another RRG's liability as long as the members of the 2nd group are engaged in the same or similar business or industry
Risk Purchasing Group ✔✔an entity which offers insurance to groups of like businesses with similar exposure to risk
Foreign insureres ✔✔insurance company that is incorporated in another state or territorial possession. (company chartered in CA would be a foreign company in NY)
Alien insurers ✔✔insurance company incorporated outside the United States
Independent Agency System/ American Agency System (types of marketing arrangements ✔✔- independent agent represents several companies
-nonexclusive agency
-commissions on personal sales
-business renewal with any company
Exclusive Agency System/Captive Agents (types of marketing arrangements) ✔✔-1 agents represents 1 company
-exclusive agency
-commissions on personal sales
-renewals placed with appointing insurer
General Agency System (types of marketing arrangements) ✔✔-General Agent-entrepreneur represents 1 company
-exclusive agency
-compensation and commissions
-appoints subagents
Managerial System (types of marketing arrangements) ✔✔-branch manager
-salaried
-agents can be employees or independent agents
Direct Response Marketing System (types of marketing arrangements) ✔✔-no agents
-advertise directly to consumers
-consumers apply directly to company
Financial Status (Independent Rating Services) ✔✔financial strength based on prior claims, experience, investment earnings, levels of reserves, and management.
Insurance companies financial integrity are published by: ✔✔-AM Best
Apparent authority ✔✔authority is the appearance or the assumption of authority based on the actions, words, or deeds, or the principal or because of circumstances the principal created.
Fiduciary responsibility ✔✔although agents act for insurers they are legally obligated to treat applicants and insureds in an ethical manner because an agent handles funds of an insured
Market conduct ✔✔describes the way companies and producers should conduct their business, it is a code of ethics.
Some market conduct regulations include, but are not limited to: ✔✔-conflict of interest
-a request of a gift or loan as a condition to complete business
-supplying confidential information
Contract ✔✔is an agreement between 2 or more parties enforceable by law
Elements of a legal contract ✔✔1. agreement
- consideration
- competent parties
- legal purpose
Offer and Acceptance ✔✔offer by one party, other part must accept this offer in exact terms.
Offer and Acceptance in insurance ✔✔In insurance the offer is made when submitting the application, acceptance is when underwriter approves the application and issues a policy.
Consideration ✔✔the binding force in ant contract, considers is something of value that each party gives to the other
Competent parties ✔✔must be capable of entering in to a contract in the eyes of the law
Legal prupose ✔✔the purpose of the contract must be legal and not against public policy
Contract of Adhesion ✔✔prepared by insurer, accepted or rejected by insured. Insurance policies are not drawn up through negotiations
Definite and measurable ✔✔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
Statistically predictable ✔✔insurers must be able to estimate the average frequency and severity of future losses and set appropriate premium rates
Not catastrophic ✔✔Insurers need to be reasonably certain their losses will not exceed specific limits
Randomly selected and large loss exposure ✔✔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.
Law of large numbers ✔✔states that the larger the number of people with a similar exposure to loss, the more predictable actual losses will be.
Adverse selection ✔✔the insuring of risks that are more prone to losses than the average risk. Poor risks seek insurance or file claims to a greater extent that better risks.
How do insurance companies protect themselves from adverse selection? ✔✔by refusing coverage or charging higher rates
Private insurers ✔✔companies funded by premiums
Government insurers ✔✔funded with taxes, serve national and state social purposes.
Stock Companies ✔✔owned by stockholders who provide capital necessary to establish and operate the insurance company who share in profits and losses
Mutual Companies ✔✔owned by policy owners and issue participating policies. Policy owners are entitled to dividends, which are a return of excess premiums making them nontaxable
Dividends ✔✔generated when premiums and earnings combined exceed the actual cost of providing coverage creating a surplus, not guaranteed
non-participating policy ✔✔do not share in profits or losses, does not pay dividends, except taxable dividends are paid to stockholders.
must be able to rely on the relevant information. Insured is expected to provide accurate information on the application for insurance and the insurer must clearly and truthfully describe policy features and benefits and must not conceal or mislead insured
Representations ✔✔are statements believed to be true to the best of one's knowledge, but are not guaranteed to be true
Misrepresentations ✔✔untrue statements on the application and could void the contract
Material misrepresentation ✔✔is a statement that, if discovered would alter the underwriting decision of the insurance company. If material misrepresentations are intentional they are fraudulent
Warranty ✔✔is an absolutely true statement upon which the validity of the insurance policy depends
Concealment ✔✔is the legal term for the intentional withhold of information of a material fact that is crucial in making a decision
Fraud ✔✔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.
Waiver ✔✔is the voluntary act of relinquishing a legal right, claim, or privlege
Estoppel ✔✔is a legal process that can be used to prevent a party to a contract from reasserting a right or privilege after that right or privilege has been waived. Estoppel is a legal consequence of a waiver
