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CFP 3/17 > Insurance > Flashcards

Insurance Flashcards

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1
Q

Pure Risk

A

A chance of loss or no loss (insurable risk)
death
auto accident
fire

Subjective- based on individual perception of risk
Objective- measurable and quantifiable (Insurable)

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2
Q

Speculative Risk

A

Chance of Profit, loss or no loss (voluntary, not insurable)

entrepreneurial risk
bringing new product to market
betting

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3
Q

Peril

A

Cause of a loss

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4
Q

Hazard

A

Increases the likelihood of a loss occurring
earthquake fault line
poor maintenance on car
working in a dangerous job

Moral Hazards are character flaws like dishonesty

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5
Q

Risk

A

Probability not possibility that loss will occur

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6
Q

Law of large Numbers

A

Number if units exposed to similar loss increases the predictability of that loss increases

Increase exposures = increases predictive nature

Reduces objective risk

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7
Q

Adverse Selection

A

Tendency of individuals with higher than average risk to purchase or renew policies

Premiums are based on a balance between favorable and unfavorable

Managed through underwriting, denying, raising premiums

Underwriter is ultimately responsible

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8
Q

Insurable Risk

A
  1. Large number of homogeneous (not heterogenous) exposure units
  2. Definite and measurable (Pure, Objective)
  3. Accidental or fortuitous (happening by accident or chance rather than design)
  4. Can’t be catastrophic to insurance co

No moral hazards
Affordable premiums

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9
Q

Self-Insurance

A

Risk retention
Primarily used by large companies
Have large number of similar potential losses for predictability and ability to fund.

Advantages - lower cost
-funds for the program can be invested to
off set costs
Disadvantages - exposure to catastrophic loss
- must duplicate services provided by
insurance co
- may have to pay income tax on reserves
held

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10
Q

Risk control

A

Avoidance - rent don’t buy; no swimming pool

Diversification- duplication of assets or activities in different locations

Reduction - sprinkler, smoke detectors, safety programs, alarm system

Retention - deductibles, coinsurance, self-insurance (HSA)

Transfer(sharing)- Buy Insurance; hedging, Incorporation (HSA) (risk sharing)

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11
Q

Six Steps of Risk Management (DIEDIE)

A
  1. Determine objectives
  2. Identify risks
  3. Evaluate risks (probability of occurrence/potential loss)
  4. Determine alternatives
  5. Implement program
  6. Evaluate, monitor, review

DIEDIE Don’t insure everything!

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12
Q

Guidelines for Risk Management

A

High Severity; Low Frequency - Insure
High Severity; High Frequency - Avoidance
Low Severity ; High Frequency - Retention/ Reduction
Low Severity ; Low Frequency - Retention

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13
Q

Legal Principles of Insurance Contract

A

Principle if Indemnity - Insurance companies seek to reimburse for actual loss. No more; no less. Can’t profit.

Doctrine of insurable interest
Actual cash value

Subrogation - can’t receive compensation from insurer and third party (collect from insurance; can’t collect from third party too!)

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14
Q

Contract Requirements

A
  1. Offer and acceptance (signing application and paying or premium)
  2. Consideration paid (money, services or property)
  3. Legal Capacity - 18; competent; sober (can be voided by incompetent, minor… Minor can contract for necessities.
  4. Lawful purpose
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15
Q

Contract characteristics

A

Unilateral - only one party makes a binding promise (insurer)

Adhesion- accepted as is or not at all (take it or leave it) courts rule in favor of insured)

Waiver Provision - Provision of contract- explains who may alter…accepted as is or not at all.

Aleatory - money exchanged may be unequal. (Small premium, large benefit)

Recission - null from the beginning due to misrepresentation; fraud; concealment; or mistake of material fact.

Reformation- contract is revised to express original intent of both parties

Collateral Source Rule -measure of damage may not be mitigated by payments received from other sources.

Subrogation - insurer take over legal right its insured has against responsible third party (car claim)

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16
Q

Parts of Insurance Contract

A

Declaration Page: specific person, property, or activity being insured.

Definitions: Key terms

Insuring Agreements: Basic promises of the insurance co

Exclusions: when the insurer will not pay

Conditions: duties of both parties in detail

17
Q

Warrenty

A

Promise made by insured to insurer

18
Q

Representation

A

Statements made by insured to insurer during application

Misrepresenting age is not a material misrepresentation.

19
Q

Waiver

A

When a party relinquishes a known right

20
Q

Estoppel

A

When a party is denied assertion of a right they might otherwise be entitled to

21
Q

Parole Evidence Rule

A

Once a contract is in written form all previous and prior understandings may not contradict the written contract.

22
Q

Superannuation

A

Risk that an individual will out live assets

23
Q

Tort

A

Wrongful act other than a breach of contract

Intentional Tort - Deliberate; Infringement of rights (slander, libel, assult)

Unintentional Tort - Negligence/ carelessness

Attractive nuisance - pool
Negligence per se - violation of a statute (failing to stop at cross walk)
Strict Liability - product liability (faulty tires)
Absolute Liability - keeping wild animals; workers comp
Vicarious Liability - Principle Responsible for Agents respondeat superior

24
Q

Contributory neglagence

A

Negligence on behalf of the injured party that defeats the claim. Jaywalking, drunk driving…

25
Q

Comparative negligence

A

Any degree of negligence by injured party that doesn’t defeat the claim but used to mitigate damages.

26
Q

Last Clear Chance

A

Immediately prior to incident had a chance to prevent and failed to seize opportunity. Road Rage.

27
Q

Expressed Authority

A

Given through agency or written agreement

insurer is responsible for acts of agents

28
Q

Implied Authority

A

Authority perceived by the public

delivering of insurance contract and accepting premium

insurer is still responsible even if client is misled

29
Q

Apparent Authority

A

insured believes agent has authority to act on behalf of insurer when none exists

inferred based on business card, signs etc

example agent says insured can pay premium late but is wrong

30
Q

Insurance Rating Agency

A

AM Best A++ - F (and detailed historical data)
Moody’s Aaa-Caa
S&P AAA-CCC
Weiss- A+-F

31
Q

National Association of Insurance Commissioners (NAIC)

A

Provides watch list of insurance companies

Ratios measure financial health of insurance co

NO regulatory power, is involved with accrediting office of state

32
Q

Participating / Nonparticipating

A

Participating - Larger premiums..pays tax free dividend

Nonparticipating - company retains gains

33
Q

Underwriting

A

Selecting and classifying exposures (law of large #’s and homogeneity)

  1. Application
  2. Information from agent to broker
  3. Investigations
  4. Information bureaus
  5. Physical exam and inspection
34
Q

Loss Adjustment

A

Adjuster investigates loss

Determines liability and amount to be paid

  1. Notice of loss
  2. Investigation
  3. Proof of loss - insured signs
  4. Payment or denial
35
Q

Stop Loss Coverage

A

Used by small companies. Sell insure up to a certain amount and acquire insurance for larger amounts.

AKA:
Partially self-funded plan or cash flow plan

36
Q

Business Owners Policy BOP

A 
Small to medium sized business
real property
contents
liability
medical

Profession liability is excluded
Premium IS deductible

37
Q

Other Business Insurances

A

Commercial Umbrella Policy - exclude E&O, malpractice, and professional mistake…premium is deductible

Professional Liability - failure to use care and degree of skill required. Premium is deductible

Malpractice Insurance - standard of conduct results in bodily injury

Errors and Omissions E&O - standard of conduct results in property damage. Includes loss of $ (lawyers, stock brokers, CFP) Protects directors and officers of companies

38
Q

Workers Compensation

A

Absolute Liability- Exception to rule that there can be no liability without fault.

Employer can deduct premium cost. Worker does not pay.

Covers:

  • Medical bills without time or money limit no deductible or co insurance
  • Disability with very short waiting periods
  • Death benefits to family members
  • Rehab

Taxation - tax free

39
Q

Unemployment

A

determined by previous earnings
26 weeks
39 weeks during periods of high unemployment
taxable

CFP 3/17 (48 decks)

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