III IC-29 flashcards

35 cards. Read the term and the definition here. The deck at the top of this page is optional.

Insurable interest

A lawful financial relationship with the subject of insurance such that the insured benefits from its preservation and suffers loss from its destruction. Required at inception for life, at loss for property.

Adverse selection

The tendency of individuals with higher-than-average risk to seek or keep insurance coverage. Insurers counter it with underwriting, exclusions, waiting periods, and experience rating.

Moral hazard

A change in behavior caused by the presence of insurance, such as carelessness or intentional loss creation. It increases the probability or severity of loss and is addressed by deductibles and exclusions.

Law of large numbers

A statistical principle stating that as the number of similar independent exposure units increases, actual loss experience converges toward the expected loss. It underlies pooling and rate stability.

Indemnity principle

The rule that insurance restores the insured to approximately the pre-loss financial position, no better and no worse. It limits property and health recovery but does not apply to life insurance.

McCarran-Ferguson Act

The 1945 federal law that reserves regulation of the business of insurance to the states. Federal antitrust law applies only where states do not regulate the conduct in question.

Risk-based capital

A solvency formula comparing a company's total adjusted capital to its authorized control level. Ratios below set thresholds trigger company or regulatory corrective action.

Certificate of authority

The license a state insurance department issues to an insurer permitting it to transact specified lines of insurance within that state. Operating without one is unauthorized insurance.

Guaranty association

A state-established entity that pays covered claims of insolvent insurers up to statutory limits, funded by assessments on solvent member insurers writing the same lines of business.

NAIC

The National Association of Insurance Commissioners, a voluntary organization of state insurance regulators that drafts model laws and coordinates supervision. It has no direct enforcement authority.

Term life insurance

Pure death benefit protection with no cash value, issued for a stated period. Level, decreasing, increasing, and annually renewable term differ in how face amount or premium changes.

Modified endowment contract

A life policy that fails the 7-pay test because premiums are funded too rapidly. Distributions are taxed last-in first-out, and a 10 percent penalty may apply before age 59 and one-half.

Nonforfeiture options

Choices available when a cash value life policy lapses: cash surrender, reduced paid-up insurance, or extended term insurance. They protect the policyowner's accumulated value.

Variable universal life

Permanent life insurance with flexible premiums and a cash value invested in separate account subaccounts. Cash value is not guaranteed, and the producer needs a securities license.

Universal life insurance

Permanent coverage separating cash value from the cost of insurance. Premiums are flexible and the death benefit is adjustable, subject to sufficient cash value or a no-lapse guarantee.

Coordination of benefits

A provision preventing double recovery when a person has two group health plans. The primary plan pays first, and the secondary plan pays the remaining balance up to its allowed amount.

Elimination period

The waiting period after a disability begins before benefits are payable. Longer elimination periods reduce premium because they eliminate short-term claims.

Birthday rule

The rule determining primary coverage for dependent children of parents with separate group plans: the parent whose birthday falls earlier in the calendar year is primary.

Coinsurance health provision

The percentage split of covered expenses shared by insurer and insured after the deductible, commonly 80/20. An out-of-pocket maximum caps the insured's share.

COBRA continuation

A federal requirement that employers with 20 or more employees offer continued group health coverage for limited periods after a qualifying event, at the beneficiary's expense.

Coinsurance property clause

A commercial property provision requiring a limit at least equal to a stated percentage of value. Payment equals limit carried divided by limit required, multiplied by the loss.

Actual cash value

The settlement basis equal to replacement cost minus depreciation. It reflects the property's value at the time of loss rather than the cost of new replacement.

Claims-made CGL form

A liability form responding to claims first made during the policy period, subject to a retroactive date. It differs from occurrence forms, which respond to when injury occurs.

Business income coverage

Property coverage replacing lost net income and continuing expenses during the period of restoration after a covered loss. It may include extra expense to resume operations quickly.

Substandard risk

An applicant whose risk is higher than average because of health, occupation, or hazard. The insurer may decline, rate up, or issue with an exclusion or modified benefit.

Facultative reinsurance

Reinsurance negotiated separately for each individual risk, allowing the reinsurer to accept or decline. It differs from treaty reinsurance, which covers a defined class automatically.

Combined ratio

The sum of the loss ratio and expense ratio. A combined ratio above 100 percent indicates an underwriting loss; below 100 percent indicates an underwriting profit.

Proof of loss

A formal, often sworn statement by the insured documenting the amount and circumstances of a loss, usually required within a stated period after the loss occurs.

Subrogation

The insurer's right, after paying a claim, to stand in the insured's shoes and pursue the responsible third party. The insured must not impair this right.

Reservation of rights letter

A notice telling the insured that the insurer is investigating or defending a claim under a coverage question while preserving its right to deny coverage later.

Incontestability clause

A provision barring the insurer from contesting a policy for material misrepresentation after it has been in force for a stated period, usually two years, except for nonpayment.

Waiver and estoppel

Waiver is the voluntary relinquishment of a known right. Estoppel prevents a party from asserting a right after conduct that induced the other party to rely on it.

Contract of adhesion

An insurance contract drafted by the insurer and accepted or rejected by the insured. Ambiguities are generally construed against the drafter under the contra proferentem rule.

Rebating

Offering part of the commission or premium to a client as an inducement to purchase insurance. It is prohibited in most states as an unfair trade practice.

Twisting

Misrepresenting an existing policy to induce its replacement. It is an unfair trade practice subject to regulatory penalties and producer license discipline.