Fundamentals of Insurance: Understanding Key Concepts and Terminology

An insurer is a company that provides insurance coverage to individuals or businesses in exchange for payment of premiums. It is not related to banking, car sales, or retail clothing.

Transferring risk involves shifting the potential financial burden of a specific risk from one party to another party through various mechanisms such as insurance policies or leases.

A peril in insurance refers to the specific cause of a loss, such as fire, lightning, or internal explosion. It is important to understand the perils covered by an insurance policy to ensure adequate protection.

Loss refers to a decrease or reduction in quality, quantity, or value, making it the opposite of gaining or maintaining something.

Risk refers to the uncertainty of loss, not the certainty of gain, absence of opportunity, or guarantee of profit.

The FCRA is a federal law in the United States that specifically deals with consumer credit information and privacy protections. It does not govern state laws, local ordinances, or international treaties related to credit reporting.

An alien insurer refers to an insurance company that is based or domiciled in a country other than the United States. This classification is often used in the insurance industry to differentiate between domestic and foreign insurers.

Morale Hazard refers to the risk or danger that arises from an individual's attitude towards safety or security. It involves a lack of concern or carelessness, which can lead to increased chances of accidents or incidents occurring.

An admitted insurer is granted an insurance license to do business in a specific state, allowing them to legally sell insurance products within that jurisdiction.

A domestic insurer is an insurance company that is incorporated in a specific state and conducts its business primarily within that state. This allows them to comply with state regulations and laws governing insurance practices.

A hazard refers to any condition that increases the likelihood or severity of a loss, rather than decreasing it or having no impact at all.

Speculative risk is characterized by the possibility of both gain and loss, making it distinct from pure risk or insurance risk, which involves only the possibility of loss.

Non-admitted insurers are not licensed by the state to sell insurance in the admitted market and can only provide coverage for risks that are not available through admitted insurers.

Stock insurers are companies owned by shareholders, who expect to earn a return on their investment by generating profits. This distinguishes them from mutual insurers, which are owned by policyholders, and other types of insurance companies with different ownership structures.

The principle of indemnity in insurance ensures that the insured is compensated to return them to their pre-loss financial condition, without making a profit. It aims to restore the insured to the same financial position they were in before the loss occurred.

Understanding the different types of authority granted to agents is crucial in determining the responsibilities of both the agent and the insurer.

Pure risk refers to a risk that has only one outcome - loss. This type of risk is typically the only kind that insurance companies will cover as they cannot insure against risks that involve the potential for gain. Pure risk is generally uninsurable as there is no premium that can be charged to offset a guaranteed profit or loss.

A foreign insurer refers to an insurance company that operates in a state or jurisdiction different from where they were originally incorporated.

Reinsurance is a practice where insurers transfer portions of their risk portfolios to other parties to reduce the likelihood of having to pay a large obligation resulting from an insurance claim.

Surplus lines insurers are non-admitted insurers that are able to provide coverage for risks that the standard market cannot cover. They are not registered insurers, government-funded insurers, or insurance agents specializing in specific types of insurance.

A physical hazard refers to an increased risk of loss due to factors related to use, location, or construction. It is important to identify and address physical hazards to prevent accidents and minimize potential damage.

An exclusive agency model involves agents who exclusively represent one insurance company, known as captive agents. This setup restricts them from selling policies from other insurers, distinguishing them from independent agencies.

An insured is someone covered by the insurance policy, whether or not they are specifically named on the policy.

Moral Hazard refers to the increased risk-taking behavior by individuals because they are protected from the consequences of their actions, such as committing insurance fraud to gain monetary benefits.

Adverse Selection refers to the tendency for those at higher risk to be more likely to purchase insurance. This can lead to imbalances in the insurance pool and higher costs for insurers and policyholders.

The Law of Large Numbers states that in order to predict future outcomes accurately, there needs to be a significant number of similar entities to minimize the impact of random variations.