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Intro To Risk Management > Exam 2 Part A > Flashcards

Exam 2 Part A Flashcards

1
Q

Loss Matrix

A
  • Indicated $ amount associated with each combination of:
    1. Risk Management Alternatives
    2. Future States of the World
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2
Q

Tax Examples for Deductions

A
  • Insurance Premium
  • Safety Program
  • Cost of Uninsured Losses

All Tax Deductible

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3
Q

Worry Value

A
  • How much we value uncertainty
  • Cost associated with decision making
  • Cost of anxiety concerning a decision
  • Unique to the decision maker
  • Subjective Risk
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4
Q

Worry Value Equation

A
  • Pmax - P*

- The max above and beyond the P* that a person is willing to pay to reduce uncertainty

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5
Q

Worry Will Increase If:

A
  • If variability of losses increases
  • The level of confidence in the estimate of P* decreases
  • The size of max probable loss increases
  • Probability of max possible loss increases
  • The Financial strength of firm/individual decreases
  • The level of insurance coverage decreases (Assuming all other things are equal)
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6
Q

Principle of Subrogation

A

-The right for an insurer to pursue a third party that caused an insurance loss to the insured. This is done as a means of recovering the amount of the claim paid to the insured for the loss.

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7
Q

Purpose of Subragation

A
  • Hold negligent 3rd parties at fault
  • Control moral hazard
  • Keeps insurance premium rates low
  • Proceeds from subrogation are extra dollars for you and your insurance company
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8
Q

Subrogation Issues

A
  • Insured can not impair insurer’s right to subrogate
  • Insurer can not subrogate against their own insured’s
  • An insurer can keep proceeds from subrogation only after their insured has been fully idemnified
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9
Q

Principle of Utmost Good Faith

A
  • Parties to an insurance contract are held to a high standard of honesty
  • If violated, insurer can avoid the coverage or deny claim
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10
Q

Representation

A
  • Statement made by applicant

- What if statement is false? It is misrepresentation.

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11
Q

When can an insurer deny a claim in representation?

A
  • If material
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12
Q

When can an insurer not deny a claim in representation?

A
  • If not material
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13
Q

Innocent Misrepresentation of Material Fact

A
  • Lack of knowledge as defense? No defense by uninsured

- Applicant speaks at their own risk

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14
Q

If a statement made is an opinion or belief rather than a fact?

A
  • Have you ever had cancer?

- If wrong, insurer must show fraudulent behavior to deny claim

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15
Q

Concealments

A
  • Failure to provide important or relevant information to the insurer
  • Failure to reveal material fact to the risk
  • Must volunteer material facts
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16
Q

Tests of Concealment

A
  • Did the uninsured know of certain fact
  • Was the fact material?
  • Important Issue: Did applicant know the withheld fact was material?
17
Q

Difference between Concealment and Misrepresenation

A
  • Big difference is whether or not you were asked
18
Q

Warranties

A
  • Conditions agreed to by an insured in order to receive insurance
  • Burglar alarm, working sprinkler system
  • Conditions of coverage - insured guarantees
  • Suppose breach of warranty exists; any breach of warranty will void the contract
  • True even if unintentional
19
Q

Insurance

A
  • Pools the risk; risk sharing agreement

- Some collect nothing, others collect replacements

20
Q

Why do people buy insurance?

A
  • What is commodity?

- certainty, safety, peace of mind, security

21
Q

Insurance

A
  • Combines the loss exposures of individuals into a group

- Uses funds paid into by members to pay for losses of anyone with membership in the group

22
Q

How does insurance mechanism work?

A
  • Trade an unknown for a know
  • Unknown loss for a known loss (premium)
  • Involves transfer of Risk
  • From insured to insurer
  • Pooling - share total losses among a group
  • Allows for a decrease in the total amount of uncertainty in a particular situation
23
Q

Insurance Contract Indemnification

A
  • Insurer agrees to indemnify the insured in the event of a loss
24
Q

Full Indemnification

A
  • Place insured in the same financial position as before the loss occurred
25
Q

Forms of Indemnification

A
  • Replace or repair asset
  • Cash - reimburse or pay dollars
  • Provide Services; attorney (liability)
26
Q

How/Why Insurance Company able to accept the risk

A
  • Ability to predict future events; Law of Large Numbers
  • Pool many exposures to loss
  • Obtain accurate group predictions over the years of offering insurance; gain information
  • Insurance Company invests money until they pay claims
  • Individual Risk is still present in the insured

Intro To Risk Management (10 decks)

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