PA Life Health License

• Transfers the risk of loss from insured to insurerthrough a legal contract
• Insured pays premium
• Insurer promises to pay the insured according to the terms of the contract

• The possibility that a loss might occur
• Not the loss itself, but the uncertainty of financial loss

• 1) Pure risk
• • Chance of loss only
• • Can be covered by insurance
• 2) Speculative risk
• • Chance of loss or gain (like gambling or investing)
• • Cannot be covered by insurance

An unintentional decline in or disappearance invalue

A condition or situation that presents apossibility of loss

• Actual cause of loss
• Common causes of loss include fire, wind, lightning,accidents, etc.

is a contract that indemnifies another against loss, damage, or liability arising from an unknown event.

means to make a person whole by restoring that person to the same financial position that existed before the loss.

means that 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.

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. For example, betting at the race track and investing in the stock market are examples of uninsurable risk.

is any factor that gives rise to a peril. For purposes of life insurance, there are three basic types of hazards: physical, moral, and morale.

arise from material, structural, or operational features of a risk situation (slippery floors or unsanitary conditions would be physical hazards).

arise from people’s habits and values (filing a false claim is an example of moral hazard).

arise out of human carelessness or irresponsibility (failing to take safety precautions is an example of morale hazard).

(STARR)

• Sharing
• Transfer
• Avoidance
• Reduction
• Retention

Sometimes, 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.

Risk transfer means 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.

• As the name implies, this technique deals with risk by avoiding the risk in the first place. This usually means 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.

Sometimes, when risks cannot be avoided, they can be reduced. Risk reduction can work in one of two ways: it can 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.

Retention simply means doing nothing about the risk. In other words, 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.

• – As number of loss exposures increases, difference between actual and expected results becomes smaller
• – Allows insurance company to predict potential future losses more accurately

• Loss must be (CANHAM)
• – Calculable
• – Affordable
• – Non-catastrophic
• – Homogenous exposures
• – Accidental
• – Measurable

—prior loss statistics are available

—premiums must be affordable to the average consumer

—no earthquakes, war, terrorism

—similar exposures

—not intentional

—number and dollar amounts

• – Example
• • People living near earthquake fault lines are likely to want earthquake insurance as compared to the average
• • The insurance company does NOT want an adverse selection
• • Underwriters are responsible for protecting the insurer against adverse selection

• Basic rule governing insurance states that before an individual can benefit from insurance, that individual must have a legitimate interest in the preservation of the life or property involved
• – Person is presumed to have an insurable interest
• • Own life
• • A close blood relative
• • Spouse

• Insurable interest can also be based upon a financial loss that will take place
• – Example: partners in business
• • Insurable interest must be present at the time of application only
• • Must have the insured’s written consent

• Form of insurance between insurers—“the insurance company’s insurance company”
• – Insurance company determines retention limit and buys reinsurance for the balance
• – Also known as “pooling the risk”

• • Owned by their stockholders
• – Incorporated as for-profit company
• • Dividends = surplus
• – Not guaranteed
• – Paid to the stockholders (owners of company)
• – Taxable
• • Issues nonparticipating policies (nonpar policies)
• • May issue par policies to compete with mutuals

• • Owned by their policyholders
• – Managed by a board of directors
• • Dividends = refund of premiums/overcharge
• – Not taxable
• – Not guaranteed
• – Paid to the policyholders (owners of company)
• • Issues participating policies (PAR policies)

• • Insurance companies made up of policyholders who insure other policyholders
• • Each individual member known as a subscriber
• • Reciprocals are managed by an attorney-infact

• • Must have existence of membership criteria
• – Religious denomination or social club
• • Created as a benefit for their members

• • Insures unique, one-of-a-kind risks
• – Pro-athlete or actress will have a body part insured
• • A group of underwriters form a Lloyd’s plan
• • Not rate regulated

• Business organizations that set up their own reserves for the purpose of insuring themselves

• • Mutual insurance company owned by the policyowners of the same business group
• • Only companies within the same business, occupation, or profession (i.e., doctors, dentists, or engineers) group qualify
• • May reinsure another risk retention group as long as they have a similar liability
• • Must be approved by the commissioner and have a certificate of authority

• Federal programs
• State programs
• Social insurance

• – Social Security = Old Age, Survivors, and Disability Insurance (OASDI) program
• – Medicare
• – Medicaid
• – Military programs

• – Unemployment insurance
• – Workers’ compensation benefits
• – State-run medical expense insurance
• plans

• – Participation is mandatory and automatic for all eligible citizens
• – Benefits are not provided under a contract or policy but are prescribed by law. Individuals do not elect changes to the benefit plan. Changes to the benefit
• structure and provisions are made by changes to the law.
• – Social insurance seeks to be adequate, meeting the needs of the public

• Domestic insurer
• Foreign insurer
• Alien insurer

An insurer that is incorporated, organized, or domiciled in this state

An insurer that is incorporated, organized, or domiciled in another state

An insurer that is incorporated, organized, or domiciled outside the US

Carriers that have been issued a certificate of authority to transact business in the state

• Carriers that do not qualify for a certificate of authority in the state or have not applied for one
• -Unauthorized carriers can only transact surplus lines business through a properly licensed surplus lines producer
• • Unauthorized or non-admitted carriers may be so for various reasons
• – They may not normally do business in this state
• – They may only transact kinds of insurance for which authorization is not required
• – They may not meet state requirements

• - Captive or exclusive agents/producers
• – Direct writer
• – Direct response
• – Independent agent/producers

• • Insurer contracts with independent agents to represent and sell for only that insurance company
• – Typically paid on a commission basis
• • Insurance company owns and controls all accounts, policy records, and renewals

• • Direct writing agent is an employee of the company
• – May be paid a salary, commission, or both
• • Insurance company owns and controls all accounts, policy records, and renewals

• • This system does not use agents, but instead solicits through direct mail or telemarketing
• • Insurance company owns and controls all accounts, policy records, and renewals

• • Independent contractor who contracts with several different companies to represent and sell insurance for those companies
• – Receives only commission
• • Agent owns and controls the accounts, policy records, and renewals