Note: This Module contains useful
foundational general information relative to insurance and the
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 terms “indemnity,” “indemnify,” and
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
- 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
- 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
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
Insurance companies are categorized
according to their place of domicile. Essentially, the North
Carolina Insurance Code defines insurers by the following three
- 1. Domestic Insurers
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
- 2. Foreign Insurers
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 Insurer” in North Carolina.
- 3. 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.
Ask Your Instructor
YOU HAVE COMPLETED THE READING PORTION OF THIS MODULE.
YOUR NEXT STEP IS TO TAKE THE
SAMPLE TEST. YOU MAY ACCESS THE MODULE 2 MATERIAL WHEN YOU HAVE OBTAINED
A PASSING SCORE OF AT LEAST 80% ON THE TEST.