Life Agent: Section 1 - Basic Insurance Concepts And Principles

There must be an existence of a sharing of losses by members of the group

An agreement (policy or certificate) whereby, for a set amount of money (the premium), one party (the insurer) agrees to pay the other party (the insured or his or her beneficiary) a set sum (the benefit) upon occurrence of some event)

A social device whereby individuals transfer the financial risk associated with death, illness, injury, or disability to a group of persons, and which involves accumulation of funds by the group from these individuals to meet the uncertainty of financial losses associated with death, illness, injury, or disability.

A contract whereby one undertakes indemnify another against loss, damage, or liability arising from a contingent or unknown event.

A device or instrument that provides the funds to meet uncertainties

A substitution/exchange of a small certain loss (premium) for a large uncertain loss (claim). Layman's definition.

May be referred to as a written instrument, contract, or a policy

A social device that transfers risk from an individual to a group (insurer), thus pooling a large number of individuals (pure risks). Funds to cover the individual losses are raised by collecting premiums in exchange for assuming the losses up to a predetermined limit. Conceptual definition.

Pure

Speculative

Peril

There is no possibility of gain or profit from a pure risk.

Involves the possible outcome of: loss or no loss.

Involves the possibility for either loss or gain.

Only risk that insurance companies accepts

Involves the possibility of either loss or gain.

It is insurable

Not insurable

A hazard

The actual cause of the loss

An immediate specific event causing loss and giving rise to risk

Actual cause of the loss

Anything that increase the chance/likelihood that loss will occur, or the severity of a loss that does occur.

Does not actually case the damage

Moral

Personal

Morale

Physical

Legal

Deals with alcoholism and drug addiction

Associated with mental attitudes, behaviors, ethics and habits

Deals with a person's state of mind

Examples are reckless driving, socializing, paying bills late, etc.

Deals with mental attitudes, behaviors, ethics, and habits

Deals with a person's state of mind.

The larger the number of similar units the more predicable the loss

The larger the group size the better for the insurance company to create prices

Used to predict losses and to establish rates

The insured benefits

Mortality and morbidity tables are based on the law of large numbers

The possibility of a loss

People are exposed to various types on a daily basis

Actual cause of the loss

The type of value (asset) exposed to loss (key employee, breadwinner)

The peril that causes loss

How long the loss lasts

The extant of the potential financial consequences (depletion of savings).

Property

Financial

Liability

Personal (human) and Personnel Loss Exposure

Not all pure risks are equally insurable

All pure risk is equally insurable

The risk is financially within reason, meets all or most of the following criteria, therefore is considered to be reasonable to insure.

Due to chance

Loss can be accidental

Definite, in time, place, and cause. Also measurable in financial terms and chance of loss measurable in frequency and severity.

Must be accidental from insured's viewpoint

Law of large numbers must apply

Creates insured economic hardship

Loss cannot be catastrophic

Loss must be random and independent

Requires the policyowner to face personal risk of loss, have a legitimate financial interest in preserving the life or property, and the insurance applied for does not achieve a potential for a gain

The policyowner or policyholder must establish that they actually have financial interest in the life or property to be insured.

The policyowner or policyholder must only establish interest in the property or life that is already insured

Must be proven with the applicant/policyowner and insured are two different people.

In life insurance you have financial interest in the other person continuing to live

In health insurance you could suffer or be exposed to a financial loss

Lack of insurable interest could be voidable by the other party

No on can be insured without their consent

Lack of insurable interest voids the contract

In life and health, insurable interest must be proven at the time of application

In property and casualty, insurable interest must be proven at the time of application and again at the time of claim but not in the meantime

In property and casualty, the meaning is to restore the insured to the same financial position they occupied prior to the loss.

In life and health, the value of a person's life is represented by their present and future earning power.

To prevent the insured from profiting from a loss

Allows the insured to gain or be in a better position than before the loss

To reduce moral hazards.

To make the insured whole again

Review applications to determine whether or not risks are acceptable

Review applications to determine whether a person is old enough for insurance protection

Reduce adverse selection by eliminating risk that do not meet underwriting standards.

They do risk selection, classify, and rating

Appears whenever an individual has the freedom to buy or not to buy, to choose the amount of plan of insurance, and to continue or to discontinue being insured.

The process by which consumers with the greatest probability of loss are most likely to purchase and maintain insurance in force

When the insurer selects based upon age, sex, and gender

Can accept or decline

Can accept at a higher premium, or with conditions or limitations determined by the underwriter

Based rejections on frequency and severity

Balancing higher risks with lower risks so that the losses average out into the normal range.

Balancing lower risks with higher risks so that the losses average out into the normal range.

They must select a broad base of risks where the average loss (claims) falls within normal range.