Chapter 12: Insurance Concepts Flashcards
Why do property and casualty insurance contracts typically pay little or no benefit in the event of flooding or other natural disasters?
Insurance is designed to deal with specific risks, which are risks that affect only one or a few people at a given time. Flooding, for example, is a fundamental risk that would affect a large group of people all at once.
What type of risk management technique is insurance?
Risk transfer
What are all forms of risk management?
- Risk transfer (insurance), transferring risk of loss to someone else
- Risk acceptance, simply accepting that a loss is possible and dealing with the consequences
- Risk control, taking steps to reduce the likelihood of a loss (quitting smoking, changing jobs to a less risky one, etc.)
- Risk reduction, reducing the consequences of a loss (wearing a seatbelt for example)
- Risk segregation, spreading possible losses across a number of venues (diversification of investments for example)
How is insurance in Canada legislated and regulated?
Legislated and regulated at the provincial level with each province having their own Insurance Act. At the Federal level, the Insurance Companies Act deals primarily with the structure of insurance companies and their reserves.
What do the Uniform Acts do?
Uniform Life Insurance Act and Uniform A&S Act represent the similar body of legislation concerning areas such as beneficiary designations and the payment of claims.
Which factors outside of the insurance acts have a heavy influence on the typical structure of insurance contracts?
Common Law and Contract Law.
What is key to an insurer’s viability?
The calculation of premiums and the selection of appropriate risks.
Why would one driver pay more insurance than another (such as a young driver paying more than an older driver)?
This is not a rating. Instead, these two individuals are being insured in different pools.
What is the only exclusion common to life insurance contracts in Canada?
Suicide in the first 2 years.
Since auto insurance is a statutory right, how do auto insurers handle the highest risk insureds?
They cannot be declined insurance. Instead, most auto insurers belong to some sort of a facility insurer who takes on the highest risk insurers on some sort of an industry-wide pooling basis.
What is the Contra Proferentem rule?
The drafter of an insurance contract (insurance company) will face consequences if a lack of clarity creates a dispute in the contract. The insurer must provide absolute clarity in its policy wordings.
Are insurance companies required to maintain reserves, or is this optional?
They are required to maintain reserves as a consumer protection measure.
How does an insurance company realize profit from their reserves?
When the reserves perform well due to good investment performance or low claims experience (or a combination of both).
What is the consideration in the case of an insurance contract?
The initial premium.
There are up to 3 parties to an insurance contract. What are those 3 parties?
The insurer
The insured
The life insured
What is the difference between the insured and the life insured?
The insured (policy owner, contract owner, applicant) is the party who deals with the insurer to acquire and then own an insurance policy. The life insured is the person whose life is being insured. It is when a covered event happens to this person that a claim will be paid.
How does a mutual insurance company differ from other insurers?
Rather than share capital, it is owned by its policy holders (such as Equitable Life).
Why is an insurance contract a unilateral contract?
The onus is put on only one party (the insurance company) to act a certain way with respect to the contract. The insurer has all the obligations, the insured has none.
What are the 3 sets of considerations for dealing with false representations?
- Mistake
- Misrepresentation
- Fraud
What must an insured have in order to set up an insurance contract?
Insurable interest towards the property or life being insured.
What is a fraternal benefits society?
Provide a range of member benefits, usually perform works of public service, and operate as not-for-profit entities (such as Faith Life Financial).
What happens if the insurable interest relationship later changes?
Generally does not change the potential for a claim to be paid. (Except in the case of property and casualty insurance where their must be insurable interest at the time of purchase and the time of claim).
What are two common scenarios where one party would take out insurance on the life of another?
Businesses insuring the lives of employees
Parents ensuring the lives of their children
What happens if a mistake is made on a life insurance application?
If the mistake is on the age or gender of the life insured, the premium/amount of benefit will be retroactively adjusted to match the amount of premium paid. Other mistakes are not specifically addressed in the Insurance Acts, it is up to the insurer to determine how to handle the mistake. Usually, insurers will work with the client to “make the situation right”.
What is the difference between misrepresentation and fraud?
In misrepresentation, the client has offered up an incorrect response to a question or failed to disclose some relevant information. This may have been deliberate or may have been innocent. Insurer can only deny claims on the basis of a misrepresentation during the contestability period.
Fraud is more serious. If the insured deliberately lied about something or withheld information in order to gain an advantage with respect to the contract. Most often argued with respect to smoking status or recreational drug use. The contract can be voidable at any point.
What is a common reinstatement period for life and accident & sickness contracts?
Two years.
What must be done to reinstate a life/accident & sickness policy that has lapsed?
Pay missed premiums and provide updated underwriting evidence.
What is the usual grace period of an insurance policy?
Usually 30-days. Since premiums are paid 1 month in advance, this allows for 60 days between the date when the last premium was paid to the date when the policy would lapse.
When does CSV in a life insurance policy typically start to accrue? Why?
When would CSV start to accrue earlier?
After 8-10 years because the insurer has substantial expenses associated with initially placing a policy. CSV could start to accrue earlier if large deposits are paid up front.
In which ways can a policy’s CSV be accessed?
- Complete surrender of policy
- Partial surrender of policy
- Policy loan
- Withdrawal
- Non-forfeiture provisions
What is a partial surrender and on which policies can a partial surrender be completed?
A partial surrender allows a policyowner to reduce, on a proportional basis, the amount of death benefit payable as well as the premiums. At the same time, the policyowner would receive a proportional amount of the CSV. This can be done on some whole life policies.
When might a CSV withdrawal be an option for policyowners? How does this differ from a partial surrender?
Typically only allowed when extra deposits gave been made in the past. Different as it does not result in a proportional reduction of the death benefit.
What are 3 non-forfeiture provisions?
- Automatic premium loan (APL)
- Reduced paid up insurance (RPU)
- Extended term insurance (ETI)
How does an APL work?
An automatic premium loan is the first step an insurer will take in the event of premiums missed on a policy with a CSV. This creates a policy loan that will pay the missed premium on the policy, typically for short-term situations. Policy would lapse once the CSV is all used up.
How does reduced paid up insurance work?
RPU is a permanent solution to an inability to pay premiums. It converts the policy from a larger face amount to a smaller one and no more premiums are required. This decision is normally irreversible.
What is extended term insurance?
A non-forfeiture provision that allows a policy to stay in force despite an inability to continue premium payments. The policy would become a term policy while retaining its original face value. The policy would remain in force for a term determined by the amount of CSV.
Which type of insurance policies are normally issued for one-year terms?
Homeowners’ insurance, auto insurance, disability insurance, and group insurance.
What does it mean if a policy is non-cancellable, guaranteed renewable?
Insurer promises the renewal will be available for some period, coverage and premiums are not subject to any potential changes.
How does an optionally renewable insurance contract differ from a guaranteed renewable insurance contract?
Slightly more restrictive towards the insured than guaranteed renewable contacts. Premiums are typically les as a result.
Which types of insurance contracts are often commercial/cancellable? What does this mean?
Most property and casualty contracts and group insurance contracts. The insurer sets a number of conditions under which they will not renew.
When can cancellable disability contracts have premiums adjusted?
Based on the experience of a class of insureds.
Which 3 sets of risk do auto insurance normally provide protection against?
- Liability risk
- Collision risk
- Personal injury risk
When might it not be practical to cover collision risk on a vehicle?
For an older vehicle.
What are endorsements under an auto insurance policy?
Extend coverage to circumstances not normally covered under the auto policy or increase the possible number of claims that can be submitted. Some can control premiums by reducing the available amount of coverage.
What are the standard coverages in a homeowner’s policy? (8)
- Dwelling building
- Detached structures
- Personal property
- Additional living expenses
- Personal legal liability
- Voluntary medical payments
- Voluntary payment for damage to property
- Voluntary compensation for residence employees
In a standard homeowner’s policy, how much is usually covered for contents?
Normally around 60% of the dwelling building amount, but can be more.
What is the purpose of Voluntary Medical Payments in a standard homeowner’s policy?
Without creating legal liability, a homeowner can claim up to $5K in voluntary medical payments for somebody injured by or on the insured’s property (or by the insured themselves).
