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49 Cards in this Set

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Basic Insurance Principles:
Insurance is based on what (2) fundamental Principles?
1. spreading or pooling of risks "loss sharing";
2. Law of Large Numbers.
Explanation of "risk pooling"
By spreading a risk, or sharing a possibility of a loss, a large group of people can substitute a small certain cost for a large unknown risk.
What forms of insurance rely of risk pooling and the law of large numbers?
ALL FORMS: Life, Health, accident, property, and casualty.
These 2 principles form the foundation upon which insurance is based and allow for its successful operation.
Concept of Risk:

what Role insurance play in society, generally?
Insurance replaces the uncertainty of risk with guarantees.
What guarantees?
What does the word "risk" mean?
Uncertainty regarding Loss.

loss associated with risk is characterized by lessening Value.
Ex; the inability to work and earn a living due to disability; OR
loss of a family's income due to the death of the provider.
What are the 2 Classes of Risk?
Speculative risks-a chance for loss & one for gain

pure risks-involve ONLY CHANCE OF LOSS
speculative risk ex; buying a lottery ticked
Pure risk ex; Death
What is the Risk Involved with Life Insurance?
When Death Will occur?
Loss can result id death is Premature OR comes too late!
What is the Risk associate wit Health Insurance?
Unlike life insurance, the risk is not when but IF
- illness or
-disability will occur.
Losses Associated with Health risks include: medical costs and loss of income.
What is the risk involved with an annuity?
The risk is living too long and outlasting one's income!
How do annuities cover the risk of living too long?
Annuities cover the risk by paying a GUARANTEED income to the annuitant for LIFE.
* this is the ONLY method of obtaining a guaranteed income.
What are the Other Factors giving rise or causing Risk?
Concepts of Perils & Hazards
Perils and hazards in conjunction cause Risk.
Distinguish between the concepts of perils and hazards with regards to Causing risk.
Peril- Immediate specific event causing loss and giving rise to a risk.

Hazard- ANY factor that gives rise to the peril.
What are the 3 basic types of hazards (for the purposes of life and health insurance)?
Define and provide examples of the (3) Basic types of hazards:
physical- indiv. characteristics that increase the chance for peril;

moral- tendencies ppl may have increased risk and bear greater chance at loss ( drink, smoke, skydive)

morale- indiv tendencies BUT arise from attitude or state of mind causing indifference in attitude. (mental)
physical-may exist b/c: physical condition, past medical hist, or conditon at birth (blind deaf);

moral- these give rise to more claims in health insurance than death!

morale- the 'indifference" increases chance of injury or death (driving recklessly)
What factors are considered in the Treatment of Risk?

and what is determine?
Treatment varies greatly depending on: , Degree of potential loss, Individual, Situation. (DIS)
Determines "How Risks are Treated"
What are the (4 )Basic Options to Treat Risk?

which method is MOST effective?
Avoidance. AVOID the Risk
Reduction. REDUCE of risk.
Retention. RETAIN the risk.
Transference. TRANSFER the risk.
Transferring the risk is the most effective way to handle risk b/c the loss is borne by another party (no liability)
Explain the Concept of Risk transference and explain
-why Insurance is most common method of transferring risk?
-how this is accomplished?
Though purchasing insurance will NOT eliminate risk of death or DOES relieve the affected party (individual or group) of the losses these risks bring.

This is because Insurance satisfies both economic and emotional needs.
Insurance REPLACES the uncertainty surrounding risk with the assurance of guarantees, AND transfers financial consequences of death, illness, or disability to the insurer.
What are the Rule Elements of Insurable Risk and what main principle is considered?
the following characteristics (elements MUST be evident before a Pure Risk can be insured:

-loss due to chance
-loss must be definite and measurable
-loss must be predictable
Insurance offers one effective way to handle risks, however not ALL risks are insurable
Define "Human Life Value"
-the value today
-of an individual's
-future earnings
-devoted to that individual's
"earning potential' is the sum of one's net future earnings OR

the dollar VALUE of an individual's future earning capacity.
What is the "true significance" of the earning potential concept forming the basis of the purpose and function of insurance?
the true significance of the earning potential extends beyond the individual to those who DEPEND on that individual for their FINANCIAL SECURITY.
What have Life and Health Insurance evolved to Provide?

And How is this accomplished?
"A practical solution to the economic losses associated with:
- Death
through the insurance POLICY.
Define "Insurance Policy"

what (2)basic concepts does insurance lie?
A device to accumulate funds to meet these "losses"
Insurance is base on risk pooling and law of large numbers, the principles which allow insurers to spread risks among thousands of individuals to Predict losses with REASONABLE accuracy.

"Both pure risks and speculative risks ARE insurable?
Buying Insurance is a method of dealing with or "Treatment of the Risk." Under which method does this action comply?
"Transferring Risk" (the most effective)

Describe the FUNCTION of Insurance:
It spreads financial risk over a large group to minimize the loss to any one individual.
What are the (3) Main Types of Insurers (Generally):
Private insurers
Government insurers
What is the Hierarchy of Insurance Organizations:
-Private v. Government
-Many Categories of Insurance Providers?
-Insurance Plans
-Insurance Procedures
Define the Term "Reinsurers"

What actually occurs?
Context of occurrence?
A specialized branch of the insurance industry where because they insure insurers. (2 companies sharing risk).

Usually takes place to LIMIT Loss any one insurer would face should a very large claim become payable.
Rationale: To enable a company to meet certain objectives (favorable underwriting, mortality results, etc.

* The company TRANSFERRING the risk - ceding,

the one assuming the risk =reinsurer
Generally describe the entity "Lloyd's of London:
An Association of Individuals and companies that individually underwrite insurance, (like NYSE)
What is the primary purpose of a Risk Retention Group?
(RRG) A mutual insurance company formed to insure people in the same business, occupation, or profession.
"State Guaranty Associations or funds" General Rule:
All states have established these to -support insurers
-protect consumers in the event and insurer becomes "insolvent".
Generally there is a required % per policy for benefits to be paid in the event the company is unable to pay it's claims. Funded by insurance companies by assessment.
What is the purpose for regulation of the insurance industry?
To promote the public welfare, the insurance industry is regulated by a number of authorities.
What authorities are involved with the regulation of the insurance industry?
- States & their Departments of Insurance;

-NAIC and model legislation;

-the Federal Government through the application of antitrust laws and the Fair Credit Reporting Act.
An insurance company organized and headquartered in Florida can be described as what type of company in Florida?

See Note
Question to Ask:

Where is the Home Office Located?

The NAIC is empowered to prosecute and punish criminal violators in the insurance industry?

*The National Governmen tCANNOT regulate State matters.
A licensed agent, legally represents which interested party in an insurance transaction?
The Insurer- The Company

When money exchanges hands in the process of enrollment, the agent working for a company acts as the insurer.
In addition to the State, the organization that regulates variable life and variable annuities is the:
Securities and Exchange Commission (SEC)

In Florida, properly licensed and appointed agents MAY act as brokers in insurance transactions, in which case they MAY legally Represent:

The Applicant AND

the Insured
Only B/C it does not state that he is working for,

or being being paid by the company
Distinguishing Characteristics Unique to Insurance Contracts include:

(ooh nicca uvee)!!
U. Unilateral

N. Not Personal
I. Insurable Interest
C. Conditional
A. Aleatory
A. Adhesion

U. Utmost good Faith
V. Valued or
I. Indemnity
Think of Dave and his Character making me sayyyy owee! And we wanna binding in down the aisle:
What are the Elements Associated with ALL Legal Contracts?
Issue Checklist:

Legal Purpose
Competent Parties
These general elements + The Characteristics of Insurance Contracts= Elements of and Insurance Contract!
The Authority that an insurer gives its agents by means of the agents contract is known as ...
Express Authority (written)

* Consider parole evidence Rule
An insurance contract is prepared by one party, the insurer, rather than the negotiation between the contracting parties. The Characteristic of Insurance contracts described here is:
the insurance contract is a contract of ADHESION

Is the following statement regarding "insurable interest" Correct:

A policy obtained by a person without an insurable interest can be enforced.
NO. This does not represent a true contract or one that has taken effect.
The term "Conditional" is a distinguishing characteristic of an insurance contract.

Because a condition requires the completion of some act not generally required by ALL other contract types.
Ex; One MUST supply a death certificate prior to insuring a life insurance policy.
What is the majority Rule in most states re; "utmost good faith" in insurance contracts?
General Rule: Most state insurance Laws consider statements made in an application for an insurance policy to be representations, not warranties.

* note*
Significance her is The truth is not GUARANTEED!
Explain the general requirement of the Parol Evidence Rule:
A Written contract CANNOT be changed by oral evidence.
A change would require and Amendment (which is in writing)
"Legal Consideration" in insurance law is defined as:

Money paid.
The payment of the initial premium
An "insurable interest" MUST exist ___________ with life and health contracts?
Rule: At the Inception of the policy.

This is necessary so that the Underwriters may perform their job duties: review and make a determination.
"Waiver" can be defined as:
the voluntary relinquishment of a known right.

"waive goodbye"
What is the term that is now ILLEGAL to use when discussing insurance in the state of FL and forbidden to use?
"vanishing premium"