Note: This Module contains useful foundational general information relative to insurance and the insurance industry that is not specifically listed in the content outline found in the North Carolina Insurance Licensing Examination Candidates Guide.
A. Insurance - Definition and Purpose
Insurance is an agreement in which an individual or business makes regular payments, known as a premium, to an authorized insurance company and the insurance company promises to pay monetary compensation if the individual is injured or dies, if property is damaged, lost or stolen or if an individual or business becomes liable for damages.
The purpose of insurance is to restore the insured to the financial position
that existed before the loss occurred. This is known as the
principle of indemnity. The Dictionary of Insurance Terms
defines indemnity as
compensation for loss. You may see the
B. Factors Needed to be an Insurable Risk
To create a viable insurance contract, an insurance company must determine if the risk is insurable. Insurable risks meet the following criteria:
- There must be a large number of similar exposures.
- Without a large number of similar exposures, the insurer cannot accurately predict the probability of the loss. The more insured persons with similar characteristics such as age, sex, body build and health, the more accurately the insurance company can predict losses.
- The potential loss must be significant in scope.
- If the loss occurred, it would cause an economic hardship for the insured. The death of the main wage earner in a family would be significant because it would create financial hardship for the remaining family members.
- The potential loss must be measurable.
- The amount and frequency of a potential loss must be statistically predictable.
- The potential loss must be accidental.
- A loss must be uncertain, unforeseen and unintentional. An auto accident is always a possibility when driving a car, but the event would be unintended and unforeseen.
- Some may argue that because death is a certainty, Life Insurance defies the definition, but the time of a person's death cannot be known in advance so it would fall into the category of unknown, unforeseen or uncertain.
- The potential loss must be non-catastrophic.
- Unless a specialized insurance policy is purchased, catastrophic events such as floods, nuclear disasters and war are not insurable risks because claims from such events could cause insolvency for the insurer.
C. Insurers Classification by Domicile
Insurance companies are categorized according to their place of domicile. Essentially, the North Carolina Insurance Code defines insurers by the following three (3) categories:
- Domestic Insurers
- are organized under the laws of the same state in which they are domiciled. An insurance company formed under the laws of North Carolina and doing business in North Carolina is a Domestic company.
- Foreign Insurers
- are formed under the laws of a different state from the one in which
they are doing business. An insurance company formed under the laws of New
York but doing business in North Carolina is considered a
Foreign Insurerin North Carolina.
- Alien Insurers
- are formed under the laws of another country from the one in which they are doing business. An insurance company formed under the laws of Canada but doing business in North Carolina is considered an Alien insurer in North Carolina.
Note: All insurers offering products and services in North Carolina must be admitted insurers. An admitted insurer is one that has been issued a Certificate of Authority from the North Carolina Department of Insurance (NCDOI). This certificate allows the insurer to legally operate within the state.