Insurance Flashcards
Pure Risk
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)
Speculative Risk
Chance of Profit, loss or no loss (voluntary, not insurable)
entrepreneurial risk
bringing new product to market
betting
Peril
Cause of a loss
Hazard
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
Risk
Probability not possibility that loss will occur
Law of large Numbers
Number if units exposed to similar loss increases the predictability of that loss increases
Increase exposures = increases predictive nature
Reduces objective risk
Adverse Selection
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
Insurable Risk
- Large number of homogeneous (not heterogenous) exposure units
- Definite and measurable (Pure, Objective)
- Accidental or fortuitous (happening by accident or chance rather than design)
- Can’t be catastrophic to insurance co
No moral hazards
Affordable premiums
Self-Insurance
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
Risk control
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)
Six Steps of Risk Management (DIEDIE)
- Determine objectives
- Identify risks
- Evaluate risks (probability of occurrence/potential loss)
- Determine alternatives
- Implement program
- Evaluate, monitor, review
DIEDIE Don’t insure everything!
Guidelines for Risk Management
High Severity; Low Frequency - Insure
High Severity; High Frequency - Avoidance
Low Severity ; High Frequency - Retention/ Reduction
Low Severity ; Low Frequency - Retention
Legal Principles of Insurance Contract
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!)
Contract Requirements
- Offer and acceptance (signing application and paying or premium)
- Consideration paid (money, services or property)
- Legal Capacity - 18; competent; sober (can be voided by incompetent, minor… Minor can contract for necessities.
- Lawful purpose
Contract characteristics
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)
Parts of Insurance Contract
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
Warrenty
Promise made by insured to insurer
Representation
Statements made by insured to insurer during application
Misrepresenting age is not a material misrepresentation.
Waiver
When a party relinquishes a known right
Estoppel
When a party is denied assertion of a right they might otherwise be entitled to
Parole Evidence Rule
Once a contract is in written form all previous and prior understandings may not contradict the written contract.
Superannuation
Risk that an individual will out live assets
Tort
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
Contributory neglagence
Negligence on behalf of the injured party that defeats the claim. Jaywalking, drunk driving…
Comparative negligence
Any degree of negligence by injured party that doesn’t defeat the claim but used to mitigate damages.
Last Clear Chance
Immediately prior to incident had a chance to prevent and failed to seize opportunity. Road Rage.
Expressed Authority
Given through agency or written agreement
insurer is responsible for acts of agents
Implied Authority
Authority perceived by the public
delivering of insurance contract and accepting premium
insurer is still responsible even if client is misled
Apparent Authority
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
Insurance Rating Agency
AM Best A++ - F (and detailed historical data)
Moody’s Aaa-Caa
S&P AAA-CCC
Weiss- A+-F
National Association of Insurance Commissioners (NAIC)
Provides watch list of insurance companies
Ratios measure financial health of insurance co
NO regulatory power, is involved with accrediting office of state
Participating / Nonparticipating
Participating - Larger premiums..pays tax free dividend
Nonparticipating - company retains gains
Underwriting
Selecting and classifying exposures (law of large #’s and homogeneity)
- Application
- Information from agent to broker
- Investigations
- Information bureaus
- Physical exam and inspection
Loss Adjustment
Adjuster investigates loss
Determines liability and amount to be paid
- Notice of loss
- Investigation
- Proof of loss - insured signs
- Payment or denial
Stop Loss Coverage
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
Business Owners Policy BOP
Small to medium sized business real property contents liability medical
Profession liability is excluded
Premium IS deductible
Other Business Insurances
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
Workers Compensation
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
Unemployment
determined by previous earnings
26 weeks
39 weeks during periods of high unemployment
taxable
