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94 Cards in this Set
- Front
- Back
risk
ch.1 |
uncertainty concerning the occurrence of loss
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Objective risk
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the relative variation of actual loss from expected loss
(it can be statistically calculated using dispersion, like standard deviations) |
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Subjective risk
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defined as uncertainty based on a person's mental condition or state of mind (high subjective risk often results in conservative behavior)
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chance of loss
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probability that an event will occur
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objective probability
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refers to the long-run relative frequency of an event assuming an infinite number of observations and no change in the underlying conditions
(can be determined by deductive or inductive reasoning) |
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subjective probability
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the individual's personal estimate of the chance of loss
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peril
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the cause of loss
(a collision in an auto accident) |
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hazard
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condition that increases the chance of loss
-physical -moral -morale -legal |
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physical hazard
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condition that increases the chance of loss (icey roads)
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moral hazard
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dishonesty (faking accidents, inflatin claim amounts)
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morale hazard
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carelessness (leaving keys in car)
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Legal Hazard
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characteristic of the legal system (large damage awards in liability lawsuits)
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speculative risk
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which both profit or loss are possible (gambling)
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pure risk
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ther are only the possiblilites of loss or no loss (earthquake)
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fundamental risk
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entire economy or large numbers of persons or groups (hurrican) entire population
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particular risk
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affects only the individual(car theft)
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enterprise risk
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all major risks faced by a business firm, which include: pure risk, speculative, strtegic, operational risk and finacial risk
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personal risk
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involve possibility of a loss or reducton in income, extra expenses or depletion of finacial assets: premature death of bread bringer, involuntary unemployment, poor health
type of pure risk |
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property risk
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possilility of losses associated with the destruction or theft of property
type of pure risk |
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direct loss
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financial loss that relsults from the physical damage, destruction, or theft (fire damage)
type of pure risk |
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indirect loss
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indirectly from the occurrence of a direct physical damage (lost profit due to inability to perate after a fire)
type of pure risk |
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liability risk
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involve possibility of being held liable for bodily injury or property damage to someone else
liability=fault type of pure risk |
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Burden of Risk on Society
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1. In the absence of insurance, individuals would have to maintain a lare emergency funds
2. the risk of liability law suits would discourage innovation, depriving ppl of goods and services 3. risk causes worry and fear |
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*Methods of handling risk
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- Avoidance- avoiding risk
- Loss control- controling how much loss there is - retention - noninsurance transfers - insurance |
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Loss control
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Loss prevention- refers to activites to reduce frequency of losses
Loss reduction- activities to reduce the severity of losses |
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retention
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- an individual or firm retains all or part of a loss
- loss retention my be active or passive |
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noninsurance transfers
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a risk may be transfered to another party through contracts, hedging, or incorporation
ex. purchasing a service contract for a new tv (incase something happens) |
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insurance
Ch. 2 |
the pooling of fortuitous losses by transfer of suck risks to insurers, who agree to indemnify insureds for such losses, to provide other pecuniary benefits on their occurrence, or to render services connected with the risk
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basic characteristics of insurance
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- Pooling of losses
- Payment of fortuitous losses - Risk transfer - Indemnification |
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pooling of losses
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spreading losses incurred bythe few over the entire group (based on law of large numbers)
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payment of fortuitous losses
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insurance pays for losses that are unforeseen, unexpected, and occur as a result of chance
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risk transfer
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pure risk is transferred from the insured to the insurer, who typically is in a stronger finacial postion
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indemnification
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insured is restored to his or her approximate finacial position prior to the occurrence of the loss
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Requirements of an Insurable risk
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- Large number of exposure units (predict average loss)
- Accidental and unitentional loss (control moral hazard, assure randomness) - Determinable and measurable loss (facilitate loss adjustment or beable to determine if loss is covered) - No catastrophic loss (allow pooling technique to work; managed by dispersing coverage over large geo area, using reinsurance) -calculable chance of loss (statistical losses calculated; establish adequate premium) - Affordable premium Most personal, property and liability resks can be insured -speculative risks (market,finactial, production and political risks) are difficult to insure |
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adverse selection
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the tendency of persons w/ a higher that avg. chance of loss to seek insurance at avg rates
- if not controlled by underwirting, can result in higher than expected loss levels (skewed data) |
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life insurance
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pays death benefits to beneficiaries when the insured dies
private insurance |
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health insurance
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covers medical expenses because of sickness or injury
private insurance |
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disability plans
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pay income benefits
private insurance |
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property insurance
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indemnifies prop owners against the loss or damage of real or personal property
private insurance |
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liability insurance
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covers the insured leagal liability arising out of property damage or bodily injury to others
priv insur |
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casualty insurance
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insurance that covers whatever is not covered by fire, marine, and life insurance
priv insur |
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personal lines
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coverage that insure the real estate and personal property of individuals and families or provide protection against legal liability
ex. homeowner insurance, umbrella liability insur |
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commercial lines
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property and casualty coverages for business firms, nonprofit org, and govt agencies
ex. fire insurance, gerneral liability insur, commercial mulit-peril insur. |
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risk management
ch.3 |
process that identifies loss exposures
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loss exposure
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any situation or circumstance in which a loss is possible, regardless of whether a loss occurs (the potential for loss
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*Pre-loss objectives
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1. prepare for potential losses in the most economical way
2. reduction of anxiety 3. meet any legal obligations imposed |
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*Post-loss objectives
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1.ensure survival of the firm
2.continue operations 3. stablize earnings 4. maintain growth 5. minimize effect that a loss will have on society |
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*Risk Management Process
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1. Identify potential losses (most important step; if you dont identify the problem you cant fix it)
2. Evaluate potential losses 3. select the appropriate risk management technique 4. implement and monitor the risk management program 5. (added) adjust based on results |
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Identify loss exposures (through)
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1. questionares
2. physical inspection 3. flow charts 4. finacial statments 5 historical loss data |
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analyzing loss exposure (through)
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estimate...
-loss frequency- probable # of losses that may occur -loss severity- probable size of loss that may occur loss severity is more important Max possible loss- worse loss that could happen over the firms life Max probable loss- worse loss that likely to happen (partial fire loss rather than total destruction) |
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Risk control
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technique that provides for the funding of losses
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RM technique; Methods of risk control
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avoidance, loss prevention, loss reduction
avoidance - certain loss exposure is never aquired or any existing loss is stopped b/c of risk loss prevention- measures that reduce the frequency of same loss from happening loss reduction- measure that reduces the severit of a loss thats occuring |
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RM technique; Methods of risk financing
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retention, non-insurance transfers, comercial insurance
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retention
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the firm retains part or all of the losses that can result from a given loss
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Retention used in RM program Under these conditions:
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1. No other method of treatment is available
2. the worst possible loss is not serious (the damage will not bankrupt company) 3. Losses are highly predictable |
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retention level
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the dollar amount of losses that the firm will retain
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Retention level conditions:
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1. a financially strong firm caan have a higher retention level than one with weaker financial position
2. a company can determine the max retention as a % of the firms net worth |
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methods for paying retained losses:
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1. Current net income:
-losses treated as current expense 2. Unfunded reserve: -losses deducted from bookkeeping account 3. funded reserve: -losses taken from liquid fund 4. credit line: - funds borrowed to pay losses as they occur |
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captive insurer
(retention) |
insurer owned by a parent firm for the pupose of insuring the parent firm's loss exposures
ex. captives in the Caribbean, -premiums paid to a captive may be taxdeductible |
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Captive insurer reasons:
(retention) |
1. parent firm diffucult obtaining insurance
2. lower costs that regualar insurance 3. easier access to a reinsurer 4. formation of a profit center |
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self-insurance
(retention) |
form of planned retention
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risk retention group
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group captive that can write any type of liability coverage except: employer liability, workers comp, personal lines
emplyers, trade groups, govt units... form retention groups |
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advantages of retention
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- save money
- lower expenses - encourage loss prevention - increase cash flow |
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disadvantages of retention
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-possible higher losses
- higher expense - higher taxes |
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Non-insurance transfer
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method other than insurance, which a pure risk and its potetial financial consequences are transfered to another party
ex. contract, leases, hold harmless clauses |
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Non-insurance transfer advantages
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- transfers some losses that are not insurable
- save money - transfer loss to someone in better positon to control losses |
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Non-insurance transfer disadvantages
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- contract language may be ambiguous, transfer may fail
- if other party fails to pay, firm still responsible for losses - insurers may not give credit for transfers |
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Deductible
(insurance) |
a provision by which a specified amount is subtracted from the loss payment otherwise payable to the insured.
-used to eliminate small claims and administrative expense adjusting these claims |
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excess insurance
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a plan which the insurer does not participate in the loss until the actual loss exceeds the amount a firm has decided to retain.
- used when insured has retention limit before inurance kicks in |
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manuscirpt policy
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specially tailored insurance policy written for a firm
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advantages of insurance
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- firm is indemnified for losses
- uncertainty is reduced - insurers can provide other RM services -premiums are taxdeductible |
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disadvantages of insurance
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-premiums may be costly
- negotiations of contracts takes time and effort - reisk manager may become lax in exercising loss control |
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Benifits of Risk Management implement:
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-objectives are attainable
- red. firms cost of risk - red. pure loss exposures allowed -society benefits b/c both direct and indirect losses are reduced |
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Cost of risk
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1. premiums you pay
2. loss you retain 3. outsid risk man services 4. fiancial guarantees 5. administrative costs 6. taxes and fees |
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Personal Risk Management
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identification of pure risks faced by an individual or family, and to the selection of the most appropriate technique for treating such risks
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consolidation
ch. 5 |
# of firms in financial service has declined over time b/c of mergers and aquisitions
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convergence
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finacial instiutions can now sell wider variety of finacial products that they counldn't before
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types of private insurers
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stock
mutual reciprocal exchanges lloyd's of london blue cross blue sheild health maintenance organizations (HMO) |
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stock insurer
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corporation owned by stock holders
obj: - stockholders elect board - stockholders bear all loss - insurer cannot issure assessable policy |
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mutual insurer
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corp owned by the policyowner
- owner elects board for effective management control |
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Lloyd's of London
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not an insurer, but society of memebers who underwrite insurance syndicates (doesnt actually write insurance)
- own syndicates that insure client |
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reciprocal exchange
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unincorporated mutual providing "no frills" coverage
(circular insurance, everyone insurse each other) |
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Blue cross Blue shield
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orgnized nonprit, community oriented plans
- cross- for hospital services - shield- for doctors fees -sponsor HMO's and PPOs |
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Agent
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someone who leagally represents the principal and has the authority to act on the principal's behalf
-property and casualty agent has the power to bind the insurer *life insurance agent normally does not |
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Agent authority maybe
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EXPRESSED
- specified powers agent recived from insurer IMPLIED - agent has power to preform all incidental acts necessary to exercise the powers that are given APPARENT - authority public reasonably believes the agent possesses based on the actions of the principal |
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Broker
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someone who legally represents the insured and:
- solicits applications - paid a commission - cannot bind the insurer |
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surplus lines broker
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licened to place business with a nonadmitted insurer (outside the state
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agentcy building system
(life insurance) |
system which insurer builds its own agency force by recreiting, financing, training and supervising new agents
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nonbuilding agency system
(life insurance) |
marketing system which insurer sells it product through established agents (who dont recruit other agents)
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direct response system
(life insurance) |
insurance is sold directly to customers w/out the serices of an agent (via: tv,mail,radio)
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Independent agency
(prop and liability) |
business firm that usually represents several unrelated insurers
- agents paid on commission - agency owns expiration and renewal rights to bus. |
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exclusive agency system
(prop and liability) |
agent represents only one insurer or group of insurers under common ownership
- agents dont own expirations or renewal - agents get lower commissions |
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direct writer
(prop and liability) |
insurer which salesperson is employee of the insurer not an independent contractor
- employees paid salary |
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direct response
(prop and liability) |
insurer sells directly to the comsumer by television or other media
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