LOMA 280 cheat sheet

Risk is uncertainty about loss; pure risk involves only loss or no loss, while speculative risk involves gain or loss and is generally not insurable.

Insurable risk characteristics: large number of similar exposure units, accidental and unintentional losses, measurable and determinable losses, losses not catastrophic to the insurer, and premiums that are affordable.

Law of large numbers: as the number of independent similar exposure units increases, actual loss experience tends toward expected loss experience, improving predictability.

Adverse selection is the tendency of higher-than-average risk applicants to seek insurance; underwriting and risk classification control it.

Moral hazard is increased loss probability or severity caused by insured behavior; morale hazard is carelessness or indifference caused by the presence of insurance.

Indemnity principle: insurance restores the insured to approximately the pre-loss financial position, no better and no worse; valued policies and replacement-cost coverage are exceptions.

Utmost good faith requires honest disclosure; a material fact is one that would affect an insurer's decision to accept or rate a risk.

Insurable interest: a financial or legally recognized relationship with the subject matter such that loss causes genuine economic detriment; timing requirements vary by line.

Elements of a valid insurance contract: offer and acceptance, consideration (premium and promise to pay), legal purpose, and competent parties; insurance contracts are contracts of adhesion.

Aleatory contract: performance depends on chance, so premiums and benefits are unequal; unilateral contract: only the insurer makes an enforceable promise once premium is paid.

Principle of subrogation transfers the insured's right of recovery against a third party to the insurer after payment, preventing double recovery.

Principle of contribution: when multiple policies cover the same loss, each pays its share so the insured does not profit; pro rata and equal shares are common methods.

Utmost good faith concepts: representations are statements believed true, warranties are conditions guaranteed true, and concealment is intentional failure to disclose a material fact.

Waiver is voluntary relinquishment of a known right; estoppel prevents a party from asserting a right after conduct that induced reliance by the other party.

Agency law: the producer acts for the insurer, and acts within actual, implied, or apparent authority bind the insurer; the insurer is responsible for its agents' authorized acts.

Regulation: state insurance departments enforce licensing, market conduct, solvency, rate approval, and policy form filing; the McCarran-Ferguson Act leaves insurance regulation primarily to the states.

Stock insurers are owned by shareholders; mutual insurers are owned by policyholders and often issue nonparticipating or participating policies.

Reciprocal exchanges are unincorporated groups of subscribers who insure each other through an attorney-in-fact; fraternal benefit societies are nonprofit organizations for members.

Reinsurance transfers risk from a ceding insurer to a reinsurer; cession is the amount transferred, and retention is the amount kept.

Types of reinsurance: treaty (automatic for defined classes) versus facultative (case by case); pro rata (quota share, surplus share) versus excess of loss.

Distribution systems include career agents, independent agents, brokers, direct response, and group/worksite marketing; each affects ownership of expirations and service expectations.

Functional operations: underwriting selects and classifies risk; actuarial develops rates; claims investigates and settles; marketing distributes; investments support solvency.

Rate components: rate = expected loss cost + expense loading + risk/profit margin; gross premium equals rate times number of exposure units.

Financial solvency measures include assets, liabilities, surplus, reserves, and risk-based capital; reserves are liabilities for future obligations, not cash set aside.

Licensing: producers must hold a license in the state where they transact business; nonresident licensing is commonly available through reciprocity.

Unfair trade practices include misrepresentation, twisting, rebating, false advertising, unfair claim settlement, boycott, coercion, and intimidation.

Twisting is inducing a policyholder to lapse or surrender a policy through misrepresentation; rebating is offering an inducement not stated in the policy.

Fiduciary duty: premiums collected on behalf of an insurer are held in trust; commingling or misappropriation can lead to license suspension or revocation.

Producer authority: express, implied, and apparent authority; a producer may not bind coverage beyond granted authority, and commissions are paid by the insurer.

State guaranty associations protect policyholders of insolvent insurers, subject to coverage limits and state rules; they are not a substitute for solvency regulation.

Privacy and information practices regulate collection, use, and disclosure of personal information, including notices and opt-out or opt-in rights.

Continuing education, appointment/termination notices, recordkeeping, and advertising rules are common compliance obligations for licensed producers.