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BAIC > BAIC 1 - Insurance and Insurance Policies > Flashcards

BAIC 1 - Insurance and Insurance Policies Flashcards

1
Q

4 Risk Management Techniques

A
  1. Avoidance - prevent a risk from happening (don’t purchase a home….)
  2. Retention - acceptance of a risk (do nothing, self-insurance)
  3. Control - Loss prevention (sprinklers)
  4. Transfer - Another party accepts the risk
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2
Q

Criteria for insurable risk

A
  1. Calculable, not subject to change
  2. Accidental
  3. Insurable Interest
  4. Part of a large homogeneous group
  5. Risks must be independent loss (does not occur at the same time within the entire group)
  6. Coverage provided at a reasonable cost to insured and insurer
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3
Q

Peril (Definition)

A

Cause of loss

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4
Q

Two types of risk

A

Speculative Risk, Pure Risk

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5
Q

4 Types of hazards

A
  1. Moral - intentional or exaggerated (fraud)
  2. Morale/attitudinal - carelessness
  3. Legal - laws and precedents
  4. Physical - unsafe conditions
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6
Q

Difference between short-tailed and long-tailed

A

Short-tailed: payments are quickly completed and claim quickly closed
Long-tailed: claim that can stretch into years

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7
Q

Regulator (Definition)

A

Any government agency with the authority to approve or disapprove the actions of a business and to issue general rules for business

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8
Q

Indemnification/Principle of Indemnity

A

Compensation for loss, injury, or damage suffered
The insurer agrees to pay no more than the actual amount of the loss (Insured should not profit from a covered loss under a policy)

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9
Q

Insurable Interest

A

When loss of or damage to something would cause the party with the interest to suffer financial loss or another tangible deprivation

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10
Q

Hazard

A

Condition that increases frequency or severity of a loss

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11
Q

Liability

A

A burden imposed by law, due to being ‘at fault’ for an event, usually requiring payment to those negatively impacted

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12
Q

Definition of Insurance

A

Coverage by a contract that binds one party (the insurer) to indemnify (make whole) another party (the insured) against a specified loss in return for premiums paid

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13
Q

Parts of an insurance policy

A

Declarations - unique information on insured
Exclusions - what losses will not be covered
Conditions - rules insured and insurer agree to observe
Insuring Agreement - States insurer’s obligation to indemnify insured and which perils
Definitions - define terms used in the policy
Endorsements or Riders - attachments that add, delete, change, or replace something already printed in the policy

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14
Q

Distinguishing characteristics of an insurance policy

A 
Contract of adhesion
Utmost good faith
Indemnity
Fortuitous losses
Exchange of unequal amounts
Conditional
Nontransferable
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15
Q

Preprinted vs Manuscript Policy

A

Preprinted- Ready-made, off the shelf policy developed for use with many different insureds
Manuscript - Developed to meet a unique coverage; generally a one-of-a-kind policy

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16
Q

Multiline vs. Monoline Policy

A

Monoline - one line of business

Multiline - package coverage for multiple lines of business

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17
Q

First Party Coverage vs. Third Party Coverage

A

First Party - Covers policyholders property (auto physical damage, auto no fault coverage (PIP), Medical payments)
Third Party - Liability Coverage purchased by policyholder as protection against possible lawsuits filed by third party

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18
Q

What is a coverage trigger

A

Event that determines when coverage under a policy applies

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19
Q

Occurrence Basis Coverage vs. Claims-Made Basis Coverage

A

Occurrence - Triggered by the incidence of the event

Claims-Made - Triggered by the reporting of the claim

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20
Q

What is a policy limit

A

Maximum amount payable by insurer to insured for any losses covered by policy

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21
Q

Policy Limit Considerations

A 
Current Value (property lines)
Replacement cost (property lines)
Risk Tolerance (Liability lines)
Affordability (liability lines)
Inflation rates (both)
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22
Q

Reasons for policy limit

A
  1. Clarify insurer’s obligation to policyholder
  2. Reduce premium
  3. Allow Policyholder to choose amount of coverage
  4. Decrease risk of insurance company insolvency
23
Q 
Policy Limits:
Automobile Liability
Automobile PD
Homeowners
Property
CGL
Boiler and Machinery
Workers Compensation
A

Automobile Liability - Single (BI and PD combined) or Split (Per claimant BI/per occurrence BI/Per Occurence PD ex: $10k/$20k/$50k); Financial Responsibility Limit (Minimum amount required by state law)
Automobile PD - Actual Cash Value vs. Replacement Cost vs. Stated Amount (Coverage limited by the inherent value)
Homeowners: Coverage sub-limits
Property - Per specific item
CGL - per occurrence; aggregate
Boiler and Machinery - per object
Workers Compensation - No limit

24
Q

What is a deductible?

A

Portion of the covered loss that is not paid by insurance

25
Q

Reason for a deductible?

A
  1. Limit creation of small claims and save expenses
  2. Reduce claim payments for large losses
  3. Decrease amount of premium that must be charged for coverage
  4. Encourage loss control on the part of policyholder
26
Q

Fixed Dollar Deductible

A

Amount to be paid by insured for each claim ($0 deductible is also known as full coverage)

27
Q

Fixed Percentage Deductible

A

Amount paid by insured is set at a fixed percentage of either the loss amount or the Amount of Insurance (AOI) purchased

28
Q

Time Deductible

A

Amount of time that insured must wait before indemnification may begin (sometimes called elimination period)

  • common in workers comp and rental reimbursement coverages
  • usually explicitly stated in the insurance policy
29
Q

Disappearing Deductible

A

Amount paid by insured decreases as size of loss increases

30
Q 
Disappearing Deductible example
Suppose d = $1,000 and D = $3,000. What is the deductible amount (ded) when:
1.Loss = $500?
2.Loss = $4,500?
3.Loss = $2,000?
4.Loss = $1,500?
A
  1. $500
  2. $0
  3. $500
  4. $750
31
Q

Franchise Deductible

A

Insured collects full on the claim when it exceeds the deductible, but nothing when the loss is less (also named cliff disappearing deductible because it is like disappearing deductible where d=D)

32
Q

Aggregate Deductible

A

Limit to total amount paid by insured for deductibles on multiple losses

33
Q

Exposure and Exposure base

A

Exposure - Measure of the amount of risk covered by the insurance policy
Exposure Base - Choice of units for measuring exposure

34
Q

Desirable properties for an exposure base

A
  1. Accurate measure of exposure to loss (proportional, continuous)
  2. Practical (easy to determine
  3. Difficult to manipulate
  4. Responsive to change
35
Q 
Exposure base for: 
Automobile 
Homeowners 
CGL
Boiler and Machinery
A

Automobile - Car-Years, Car-Months
Homeowners - Amount of Insurance, house-years
CGL - Gross sales, payroll
Boiler and Machinery - number of objects

36
Q

Premium (definition)

A

Amount policyholder pays to be covered by insurance

37
Q

4 Components of Premium

A
  1. Loss Cost - Portion of premium that provides for payment of claims to policyholders and other claims-related expenses (includes LAE, does not include profit margins)
  2. Taxes, Licenses and Fees (state premium tax, licensing and renewal fees, guaranty fund…)
  3. Other Expenses (commissions and salaries, overhead/property)
  4. Profit and Contingency Provision - Profit: added to expected cash outflows to provide insurer with an expected total return to cover cost of capital; Contingency: helps develop a windfall in case the actual losses and expenses exceed expected losses and expenses
38
Q

ISO’s scope of premium

A

ISO develops only the loss cost portion of the premium due to desire of the regulators and the public for the market for insurance to remain competitive

39
Q

Loss Cost Multiplier (LCM)

A

A multiplicative factor that an ISO customer might have calculated in order to convert ISO loss costs to a full rate, which they will charge their policyholders (Different customers will use different LCM)

40
Q

What does ISO have to do with the LCM?

A

Because ISO files only loss costs with regulators, each customer desiring to use LCM on top of ISO LC would need to make their own independent LCM filings with the states where they do business

41
Q

Premium at Present Rates (PPR)

A

Premium that would have been charged for a set of insurance policies if the current rates had been in effect at the time

42
Q

Loss Costs at Current Level

A

The premium that would be charged for a set of policies if the current loss costs had been in effect at the time, and if in addition there was no money collected for any other portion of the insurance rate, except the loss cost
**The equivalent of PPR for the work done at ISO is LCCL because ISO deals solely with the loss cost portion

43
Q

Loss Adjustment Expense (ALAE and ULAE)

A

Loss Adjustment Expense - Additional expenses that can be incurred during a loss settlement
Allocated LAE - Claims settlement costs directly assignable to specific claims (more significant in liability than in property insurance)
Unallocated LAE - Costs associated with the claims settlement function not directly assignable to specific claims

44
Q

New Definition of ALAE and ULAE

A

Defense and Cost Containment (DCC) - Expenses that vary with the amount of loss (legal defense fees, cost of expert witnesses)
Adjusting and Other (AAO) - Expenses that vary with the number of claims oro that do not vary with amount of loss or number of claims (adjustors’ fees, general claim overhead)

45
Q

Ways for insurers to reduce losses

A
  1. Salvage - insurer is paid if a wrecker can salvage parts of damaged property which insurer has replaced for policyholder (Property)
  2. Subrogation - insurer pays the insured for their loss and the right to sue the liable party is subrogated to the insurer (Liability)
46
Q

Liability vs. Property Loss Valuation

A

Liability - Settlement amount out of court, court awarded by judge or jury
Property - Partial Loss (cost of repair), Total Loss (Replacement Cost or Actual Cash Value)

47
Q

Replacement Cost

A

Cost to replace property with property of like kind and quality at current prices; often used with homes and items that could need rebuilding

48
Q

Actual Cash Value (ACV)

A

Multiple Interpretations

  • Replacement Cost minus depreciation, where depreciation is calculated by formula or schedule
  • Fair Market Value (if a market exists)
  • Broad Evidence Rule - determined by considering a ll relevant factors (use, obsolescence, inflationary trends)
49
Q

Frequency (ratio)

A

Number of Claims / Units of Exposure

50
Q

Severity (Ratio)

A

Dollars of Losses / Number of Claims

51
Q

Pure Premium (Ratio)

A

Dollars of Losses / Units of Exposure

52
Q

Loss Ratio

A

Dollars of Losses / Dollars of Premium

53
Q

Average Rate (Ratio)

A

Dollars of Premium / Units of Exposure

BAIC (6 decks)

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