Insurance Flashcards
Risk
The probability of a loss
Peril
The cause of the loss (examples: hurricane, tornado, flood, fire, etc.)
Hazard
Something that increases the potential for a loss (oily shop raising garage near space heater, candles by a curtain, etc.)
Relationship between risk, peril and hazard
One type of risk is possible loss to home. Peril could be fire - this is what actually causes the loss. And hazard increases potential loss such as oily rags by space heater.
Static Risk
Earthquake, flood, etc. Other things besides changes in the economy. Tendency to occur with regularity and can be insured.
Dynamic risk
Generally NOT insurable. Results from economic changes like inflation.
Pure risk
Only the chance of loss, NO chance of gain, pure risks are insurable, example: fire.
Speculative Risk
Gambling. Both chance of loss and chance of gain. NOT insurable.
Risk management process:
- Identify & establish risk management goals.
- Gather pertinent data to determine risk exposures
- Analyze & evaluate info to identify risk exposure
- Develop risk management plan
- Communicate the recommendations
- Implement recommendations
- Monitor recommendations for needed changes
What amount of income is generally used for risk mitigation?
Average of at least 10%
4 basic methods of handling risk in two groups of risk control & risk financing
Risk control:
1. Avoidance ( don’t drive)
2. Reduction (seat belts)
Risk financing:
1. Risk retention (you keep the risk)
2. Risk transfer ( insurance)
Where in the risk matrix is insurance used
High severity and low frequency
Self insurance
Business use of risk retention. It is really not insurance. Large businesses ( but not many can) Requirements are:
1. Enough homogenous exposure units to make risk predictable
2. Adequate funds to cover losses
3. Ability to administer
4. Able to manage investments
Underwriting
The process of evaluating exposure:
1. Is risk insurable
2. Practical
3. How priced
Elements of insurable risk
- Large number of homogeneous exposure units to make losses reasonably predictable
- Loss is definite and measurable
- Loss is accidentally
- Loss must NOT be catastrophic to the company
Law of large numbers
Must be a reasonably large # of similar losses so insurers can reasonably make assumptions- predict.
Insurable interest
Party suffers a financial loss if the insured loss occurs. Some relationships exist that causes financial/ emotional suffering if loss occurs.
Actual cash value (ACV)
Replacement cost minus depreciation
Policy limits or face value
Maximum amount that will be paid when a loss occurs.
Subrogation
The right of an insurance company that has paid for a loss to recover its payments…say from another insurance company. Prevents the insured from collecting twice for the same loss.
Brokers
Represent many insurance companies. An agent of the insurance buyer.
Insurance agent
Generally have an obligation to: insurers, individuals, the public, the state.
Types:
1. Independent agents: represent several insurance companies.
2. Captive agents: sell propert & liability insurance for companies known as direct writers. Represents just one company.
3. Career agents: agent in a general agency or branch. Can be captive or not.
4. Producing general agents:
National Association of Insurance Commissioners (NAIC)
Composed of state insurance commissioners from all 50 states. 1989. Model laws created …no power to force usage.
Aleatory contract
Outcome controlled by chance and the dollars that change hands are ofter substantially unequal amounts.
Contract of adhesion
Prepared by one party and either accepted or rejected. No negotiations. Insurance is this way.
Insurance contracts are conditional
Insurance company pays on the condition of a covered loss occurring.
Indemnity
Insureds are restored to the financial position before the loss. (no profit from a loss, just reimbursed for the loss)
Collateral source rule
If others cause you a loss, they are obligated to pay for your loss and their liability is not reduced just because you had insurance. One circumstances where indemnity does not apply.
Unilateral and bilateral
Unilateral: if one party can enforce the contract. Insurance is unilateral. The company must, but the insurance co can’t make a person pay premiums.
Bilateral: when either party in a contract can enforce the contract.
Mistepresentation
False statement made
Warranty
Statement by the applicant that all they say is true
Concealment
Intentional withholding of material info.
Enforceability of a contract
- Offer and acceptance
- Consideration
- Legal object ( purpose of contract must be legal)
- Competent parties ( if minor the contract is avoidable by the minor)
- Legal form (such as state law requires that real property have a title)
Void & avoidable contracts
- Void - is not enforceable, lacks one or more requirements
- Voidable - where one party has the option of voiding the contract, but the other is bound
Parol evidence rule
When parties put agreement in writing that is what is looked at, not things before. Except modifications ( evidence of oral modification in written form is fine)
Doctrine of waiver
Someone by owner actions has relinquished right. ABC insurance co accepts a policy that doesn’t meet its underwriting criteria. It is a good policy.
Recision
Contract assumed to have never existed.
Reformation
Original contract not accutlrate, so seek to change writing to reflect original intent
Tort
When someone causes physical, emotional or financial harm to another. The person who commits a tort is a tortfeasor. Torts can be unintentional or intentional. Torts are civil.
Negligence
- A duty is owed ( drive safely)
- Duty is breached ( rear end a car)
3.actual damages ( broke taillightsand caused bumper) - Proximate cause( ununteruptedsequence of events person texting and then rear ended)
Attractive nuisance
Something about the property that is likely to attract and possibly injur children ( pool)
Negligence per se
Duty of care is by statutes. Can be a statute to protect any class of people. Elements of tort still must be proved. Speeding in a school zone and hit child. Guilty of negligence per se.
Absolute liability
Held responsible for any damage even without negligence. Activities that are extra hazardous (keeping wild animals blasting) also know as strict liability.
Vicarious liability
Someone liable for others actions ( child, employee)
Contributory negligenc
Negligence on the part of injured party contributes to injury, it absolve other party of liability. This strict approach isn’t used much and has been replaced with comparative negligence.
Comparative negligence
Reduces defendants liability by some portion based on injured parties contribution to issue. % to blame
Party immidiately prior to accident had a last clear chance to prevent injury but did not.
Moral hazzard
Result of client being unethical….lie to get insurance or a claim
Morale hazzard
Indifference
Leave car unlocked because it’s ok it insured
Adverse selection
People with higher risk more likely to buy insurance
Morbidity and mortality
Mornbidity…loosing health through illness or injury
Mortality ..incidence of death
Commercial Package Policy ( CPP)
A CPP features lower policy premiums than the combined premiums of several policies, each covering one type of risk exposures.
2 types of compulsory coverage
- When buy home with mortgage must have nome structural coverage.
- Car insurance to protect other drivers against their negligent acts
Casualty and liability are synonymous
Yes
Risk, peril, hazard
Risk is the possibility of a loss
Peril is the direct cause of the loss
Hazard increases the likelihood of the loss occurring
Basic coverage ( 12 perils)
Fire
Lightning
Windstorm
Hail
Riot ir civil commotion
Aircraft
Vehicles
Smoke
Vandalism or malicious mischief
Theft
Volcanic eruption
Broad coverage ( includes basic plus these 6 more perils)
Falling objects
Weight of ice, snow or sleet
Accidentally discharge or overflow of water or steam
Sudden and accidentally damage from an artificial generate electricity current
Sudden and accident tearing apart, cracking, burning or building of steam, got water, air conditioning, or automatic sprinkle system or of a household appliance.
Freezing of plumbing, heating, air conditioning, or auto sprinkler system or of a household’ appliances
Open perils coverage
Increased protection to protect against all perils except those specific excluded from coverage. Most comprehensive type and most expensive.
Perils excluded from most homeowners policies
Earthquake
Flood
Negligence
War or nuclear hazards
Power failure
Intentional loss ( burning down your own house)
Homeowners (HO) policy sections
Section I: covers property losses
Section II: covers liability losses
Section I is divided into 4 sections A through D
A - insured the dwelling and other attached structures. Also, there is some coverage on landscaping.
B - covers starch structures (sheds, fences)
C - general persons property
D - loss of use coverage
Coverage A limit on dweling determines the others b,c,and d
Section II includes two sections E and F
E - comprehend liability
F - medical payments to others.
Forms of HO insurance
HO-2: Broadway form (named perils)
HO-3: Special form (open perils) most common
HO-4: content broad form (for tenants or renters) just person liability and content coverage and loss of use.
HO-5: comprehend form (open perils) Best coverage all open perils
HO-6: Unit owner forms (for condo owners)
HO-8: modified for special risks ( older history homes)
Inland marine insurance
Protection for persona’s property that is in transit or that can be transported. Usually open perils coverage.
Also called inland Marine floater, persona property floater,
Used to cover valuable persons’ property.
Coins rance penalty formula or partial loss formula
(amount of insurance /amount of insurable required x loss) - deductable
Actual cash value (ACV)
Replacement cost minus depreciation /
25/50/10
Liability for bodily injury is $25k per person/ $50k per accident/ with $10k for prop damage. State requirements are low. Some states permit a single limit.
Auto, physical damage coverage two types
- Damage by collision - hit something
- Comprehensive other than collision- fire, wind, hail, vandalism
When do collision and comprehensive auto insurance pay?
- Collision- pays for damage to covered vehicle when insured is at fault
- Comprehensive- pays when insured is not at fault
Business insurance monoline form
Insurance policy that covers only one type or a very limited number of loss ( boiler insurance)
CPP commercial package policy (large companies) and BOP business owners policy ( small businesses)
Coinsurance requirement
80%
Malpractice
For docs ( obgyn and anestisiologist)
A doctor starting his own practice needs what to protect against BUSINESS related liability risk?
Malpractice insurance and a business owners policy
Which type of HO insurance is for condo owners?
HO-6
Which form of HO policy offers the highest level of building and personal property coverage?
HO-5
Personal liability umbrella policy (PLUP)
Is for those with substantial underlying liability insurance, provides additional coverage to the underlying policy, has drop down limitations that will apply in most cases
Standard coverage for an umbrella policy is?
$1M. ( however additional amounts can be optained)
Under an HO-3 policy what is coverage under B ( not attached shed)
10% of what the home is insured for will cover unattached sheds, fences, etc
The term casualty in property & casualty stands for
Casualty is synonymous with liability
Basic coverage
Protects against financial loss due to 12 perils: fire, lightning, windstorm, hail,riot or civil commotion,aircraft,vehicles,smoke,vandalism, explosion,theft,Volcano eruption
Formula for covered damage
- Insurance required is 80%
- Cuuent insurance ÷ insurance required
- (That number × loss incurred) - deductible
Key employee life insurance
Policy premiums are NOT tax deductible
Policy death benefits received by co are generally tax free
Policy is owned by company
Policy is applied for by company
Employee’s medical expense reimbursements from a group medical insurance policy are NOT taxable to the employee if the employer paid the premium for coverage. Reimbursements are taxable to the extent they exceed expenses incurred.
If an employer pays for LTC insurance, the premiums are tax deductible to the employer & NON TAXABLE income to the employee.
COBRA - consolidatedomnibus budget reconciliation Act of 1985
Applies only to employers with 20 or more employees
Current health insurance extended at group rates
Cafeteria plans must include a cash option
Cafeteria plans must include a cash option that is taxed as ordinary income.
Prepaid legal services plan can include:
Preparation of wills
Bankruptcy assistance
Divorse services
If structured properly, a VEBA permits acceleration of employers’ tax deduction in funding future benefits. A useful vehicle for non retirement benefits.
Life and DI are less common in self funded plans.
Self funded plans are normally medical or STD because they are relatively predictable.
Formula for amount of taxable income to be on group term life insurance
(Amount of coverage minus $50k) divided by $1,000 times the cost per thousand and perhaps times 12 if annual amount
Key employee in a discriminatory policy
Employee pays taxes on 100%
Difference between most and traditional health insurance arrangements
HMOs- provide both health care services and health care financing
Traditional- provide only the financing
Section 125 plan
A cafeteria plan with various tax-free benefits funded through salary reductions elected by employees each year.
HSA funds may be used to pay Medicare premiums
HRAs, health reimbursements accounts
Only employer contributions allowed.
If an employee deducts expense in a prior year, reimbursements for those expenses in a subsequent year is subject to tax.
COBRA
Requires employers with more than 20 employees to include
Normally HSA (health saving account) funds cannot be used to pay insurance premiums. LTC is the exception. HSA funds can purchase LTC without penalty.
Workers Comp
An employer gives up right to sue
Negligence does not matter
Periodically payments
Funded through premiums paid solely by the employer.
For group life to be non discriminatory, the same formula for coverage must be applied to all employees.
STD
Normally provides a weekly benefit up to 52 weeks
Workers comp is paid
From the employer to the state
Auto physical damage collision vs comprehensive
Generally, collision is if insured hits something or is overturned. Often eliminated in older cars. Collision covers whether or not the insurers is at fault. ( rear-ended, broken mirror, hitting a pole).
Comprehensive pays when insurers is not at fault. Something other than collision ( hail, fire, wind, vandalism, theft, falling objects, glass, contact with a bird or animal) so hitting a deer is comprehensive.
Any payments, including death distributions, from a non-qualified annuity are taxed as ordinary income excluding the basis. There is NO 10% penalty on a death benefit.
Death benefit option B
Benefit equals face amount plus cash value
Homeowners Coverage E
Protects insured homeowners & all family members against liability for bodily injury & property damage that may occur on premise. Only pays when insured is a fault. ( broken steps)
Homeowners insurance coverage F
Pays necessary medical expenses of others resulting from bodily injury resulting from insured activities, premises, or animals. Pays up to$1,000 per person per occurrence. Automatically Pays regardless of fault.
Annuity taxation
Withdrawals taxed as ordinary income until all earnings withdrawn ( LIFO rules) After earnings have been withdrawn, additional withdrawals contactable return of principal/ original investment.
Exclusion ratio
Once annuitized payments are part return of principal ( tax excluded) and return of interest (taxable). Each payment adjusted by exclusion ratio.
Exclusion ratio formula
Provifes the non-taxable amount of payment.
Payment times ( purchase amount or principal divided by payment times 12 months times number of years)
page 146 of text book
Equity-indexed annuities are the most conservative. They offer some potential for gain and no risk of loss.
noncancelable DI
Noncancelable DI provides the most security. The insurance co guarantees the renewal of the policy for a stated period without any increase in future premiums.
Risk classifications
Static and dynamic risk
Static risk (earthquakes, floods) result from factors other than changes in the economy. Tend to occur with regularity, and can be insured.
Dynamic risk result of changes in the economy. (Inflation) insurance doesn’t cover dynamic risk.
Fundamental & particular risks
Fundamental risks affect a large group of people. ( recessions and earthqueke)
Particular risks affect individuals or small group of people.
HO-15
Provides open perils coverage for personal property owned, used, or worn by the insured.
Universal life insurance allows policyowners to adjust
Premiums, death benefit and cash value
Medigap A is the least comprehensive and least expensive
In DI the elimination period serves the purpose similar to that of a deductible.
The first 20 days in a facility are fully paid by Medicare
VA benefits eligibility requirements
Service in active military and no dishonorable discharge
24 months continuous service or full period of active duty
Training doesn’t qualify
Criteria that must be met by group life insurance plan to meet nobdiscrimination test
Plan benefits a nondiscriminatory class of employees, at least 70% of all employees benefit from the plan, and at least 85% of participants are not key employees.
Short term DI provides coverage for up to 2 years
Under a HO policy, the limit on personal property ( coverage C) is typically 50% of the amount of coverage on the dweling.
