General Insurance Concepts Lecture Notes

Introduction to Insurance

• Instructor: Chris, Insurance Exam Guide
• Focus: Concepts important for life and health insurance exams

Definition of Insurance

• Insurance: A way to handle risk by transferring it
• Risk: Potential for loss
  • Life insurance covers potential loss of life
  • Health insurance covers potential loss of health

Handling Risk

• Five Ways to Handle Risk:
  1. Avoid: Unrealistic long-term strategy; life inherently has risks.
  2. Reduce: Sensible precautionary measures.
  3. Retain: Self-insurance; costly for individuals.
  4. Transfer: Core of insurance; transferring risk to an insurance company.
  5. Share/Pool: Group pooling resources to handle risk (e.g., small businesses, church groups).

Concepts of Hazard

• Hazards: Conditions that increase the chance of loss.
  • Physical Hazards: Chronic illnesses, obesity, smoking.
  • Moral Hazards: Lying, illegal behavior.
  • Morale Hazards: Carelessness, indifference.

Loss, Peril, and Risk

• Loss: Unintentional decrease in value due to a peril
• Peril: Cause of loss (e.g., storms)
• Risk: Potential for loss

Types of Risk

• Speculative Risk: Possible loss or gain; not insurable
• Pure Risk: Only loss can occur; insurable (e.g., injury, illness, death)

Elements of Insurable Risk

• Criteria for Insurable Risk:
  1. Due to Chance: Outside the control of the insured.
  2. Definite and Measurable: Specific time, place, and amount.
  3. Predictable: Use of statistics for average frequency and severity.
  4. Not Catastrophic: Insurers use reinsurance or exclusions.
  5. Large in Number/Common: Law of large numbers for predictability.
  6. Randomly Selected: Balanced number of good and poor risks.

Adverse Selection

• Adverse Selection: Tendency of high-risk individuals to seek insurance.

Insurance Contracts

• Four Elements:
  1. Consideration: Exchange of value (insurer pays, insured pays premium).
  2. Legal Purpose: Cannot violate laws or insure illegal activities.
  3. Offer and Acceptance: Application and premium payment offers; insurer accepts.
  4. Competent Parties: Must be of legal age and sound mind.

Features of Insurance Contracts

• Adhesion: Insurer writes, insured adheres to terms.
• Aleatory: Unequal exchange; small premium, large payout.
• Unilateral: Only insurer is legally obligated.
• Conditional: Conditions must be met for benefits to be paid.
• Indemnity Contracts: Restore insured to original value, no profit.
• Valued Contracts: Pay a stated amount for loss (e.g., life insurance).

Good Faith and Misrepresentation

• Utmost Good Faith: Honesty in the contract.
• Warranties and Representations: Guaranteed truths versus believed truths.
• Concealment and Fraud: Hiding information or intentional misrepresentation.

Reasonable Expectations and Fiduciary Responsibility

• Reasonable Expectations: Policy should meet reasonable coverage expectations.
• Fiduciary Responsibility: Agents must handle money responsibly.

Waiver and Estoppel

• Waiver: Giving up a right (e.g., not requiring medical exams).
• Estoppel: Prevents reclaiming a waived right.

Parol Evidence Rule

• Parol Evidence: Oral evidence cannot change a written contract.

Subrogation

• Subrogation: Insurer can pursue compensation from third parties responsible for loss.

Insurance Agent Authority

• Three Types of Authority:
  1. Express: Written authority (e.g., collect premiums)
  2. Implied: Not written, but necessary duties.
  3. Apparent: Customer perception based on agent's appearance and branding.

Conclusion

• Comprehensive coverage of general insurance concepts, critical for exam preparation.