Insurance Flashcards
Law of Large Numbers
as the number of independent events increases, the likelihood increases that the actual results will be close to the expected results
the insurer needs a large number of similar (homogenenous) exposure unit
Principles of Risk and Insurance definition
Risk: a condition with a possibility of loss (a situation where an exposure of loss exists)
Examples: starting a business, owning real estate
Peril: the cause of a loss which insurance covers economic lss from certain perils
ex: fire, collision, windstorm, theft
Hazard: The condition that may create or increase the chance of loss arising from a given peril
Ex: home by a river, land on a earthquake fault line
Adverse Selection
Must be the same proportion of good and bad risks in the group insured as there were in the one from which the basic statistics were taken.
Morbidity: incidence and severity of sickness and accidents in a well defined class of persons
Morbidity Table: a statistical table showing the probable rate of death at each age, usually expressed as so many per thousand
Insurable Risks
large number of homogeneous exposure units
loss must be definite and measurable
must be accidental
must not be catastrophic (for the ins co)
Methods to avoid/reduce Loss
Avoidance: (do not drive, do not purchase property - rent it)
Diversification: duplication of assets or activities at difference locations
Transference: purchase insurance
Retention: recognizes that the risk exists and assumes losses (deductible, co-insurance, self-insurance)
Risk reduction: (sprinkler system, safety programs, smoke detectors)
Guidelines for Risk Managment
High loss severity and low loss frequency - suitable risk transfer
High loss severity and high loss frequency - suitable avoidance
Low loss severity and high loss frequency - suitable retention and reduction
Low loss severity and low loss frequency - suitable retention
Insurable Interest
PropertyCasualty: At inception AND at time of loss/claim
Life: at inception but NOT at time of loss/claim
Contract Requirements
Must be an agreement preceded by offer and an acceptance byt eh one t whom the offer is made
must be consideration) - Money
the principal must have legal capacity to execute contracts: adult,competent, not intoxicated
must be lawful
Contract Characteristics
Unilateral: one one of the parties to an insurance contract makes a binding promise that if broken breaches the contract
Adhesion - accepted “as is”
Waiver provision: only president, vp, secretary, etc. may alter contract
Aleatory: Outcome affected by chance with the amount of dollars given up is typically unequal (example: gambling contract)
Collateral source rule: legal principle applicable in the area of tort liability hold that the plaintiff’s measure of damage should be mitigated by payments received from sources other than the tortfeasor.
Parts of the Insurance Contract
Declarations: - factual statements that identify the specific person, property, or actively being insured and the parties to the transaction; They are not pre-printed, but specialized for individual contracts.
Definitions: explains key policy terms
Insuring Agreements: spells out the basic promises of the insurance company
Exclusions: spells out circumstances when the insurer will not pay
Conditions: spells out the detail the duties and rights of both parties
Negligences
attractive nuisances (swimming pool, vacant lot)
negligence per se - school zone
strict liability - product liability
absolute liability (keeping of wild animals) -workers comp
vicarious liability - respondent superior (principals responsible for their agents)
Defenses
assumption of risk (skiing, rock climbing)
contributory (being drunk)
comparative (20% negligent B is 80%)
Last clear chance (road rage)
approaches to calculating Life Insurance Need (2 methods)
Capital utilization approach: uses annuitization to provide needed incme but leaves no money at the end of planned-for period (PV of future need)
Capital needs approach (retention): uses interest only, so the original capital is still left at the end of income period (capital retention or interest only)
Participating vs. Non-participating
Participating: pays annual dividend to the policyholder, charges larger premiums with excess (willful overcharge), can be issued by stock insurance companies -
Non-participating: company retains the gains for its shareholder
Insurance Rating Service/Category
AM BEST = A++ to F
Standard & Poor = AAA to CCC
Moody’s = Aaa to C
Weiss = A+ to F
Homeowner’s - Coverage A
Covers dwelling and any structures attached to the dwelling such as a garage, decks, or fences and material sand supplies located on the next to the residence premises for construction, repair or alteration of the dwelling or other structures on the residence premises
NOTE = the land is specifically excluded from coverage
Homeowner’s Coverage B
Other structures are set apart from the dwelling by a clear space
Ex: outdoor swimming pool, detached garage, fences, patios, detached living space
Homeowner’s Coverage C
Personal Property is covered while anywhere in the world. Policy normally has special internal limits of liability.
Property specifically excluded the following: animals,birds, fish, motor vehicles/aircraft, property of roomers or boarders, property in an apartment rented to others
Sections of Homeowner’s Policy
Section I (Coverage: A, B, C, D) A= Dwelling and attached structures B = structures separated from dwelling (detached garage) C - contents and personal property D - loss of use
Section II (Coverage: E, F)
E - Liability
F- medical payments
Perils Covered Basic Form
The policy lists the perils covered
WHARVES/FLT
windstorm,hail, aircraft, riot, vandalism, vehicles, explosion, smoke, fire, lightning, theft
Perils Covered Broad Form
The policy lists the perils covered
Basic plus RAF
Rupture of a system, Artificially generated electricity, Falling objects, Freezing of plumbing
Exclusions
Open WIF
8 general exclusion that apply to all of the homeowners forms - ordinance of law, power failure, earth movement (earthquake) , neglect, nuclear hazard, war, intentional loss, flood
Homeowner’s Forms of Coverage
HO-1 - Dwelling HO-2 - Home HO-3 - Home HO-3/15 - (home)/HO-5 HO-8 (older home) HO-4 (renters) HO-6 (condo owner)
Replacement Cost Coverage
Replacement costXcoinsurnace = insurance required
Insurance carried/Insurance Required X loss - deductible = amount paid by insurance
Actual Cash Value = ACV
When losses are settled on a replacement cost basis, no deduction is made for depreciation. Under ACV, losses are settled under replacement cost less depreciation. For exam purposes, the dwelling (structure) will be covered under replacement cost coverage and personal property (contents) on an actual cash value basis
Auto Insurance Policy Parts
Part A - Liability (limited to third parties)
Part B - medical payments
Part C - uninsured motorists
Part D - damage to the covered auto
Personal Auto Policy = PAP
can be written on eligible vehicles owned and leases by an individual or by a husband or wife living in the same household.
vehicle rented to others as a public or livery conveyance is not eligible and must be insured under a commercial policy.
eligible vehicles include private passenger automobiles such as cars, vans, and sport utility vehicles.
vans and pickups are ineligible for coverage if they are used for transportation or delivery of god and materials.
Part A - Liability Coverage definition
Provides protection agains judgments and covered exposures resulting from bodily injury and property damage liability deemed to have been caused by the insured (BI/PD)
Part B - medical payments Med-Pay definition and coverage
Provides payments for the reasonable and necessary medical expenses of an insured as a result of an automobile accident
only expenses for medical services rendered within 3 years of the date of an accident are covered
Covered for Med Pay
named insured, spouse, and any family member occupying auto or when struck by a pedestrian
any other person who is injured while occupying covered auto
Part C - Uninsured motorist Coverage UM
insurer agrees to pay compensatory damages that an insured is legally entitled to recover from the owner or operator of an uninsured motor vehicle because of bodily injury. The coverage applies to claims for medical expenses, lost wages, and pain/suffering but does not include punitive or exemplary damages. Insured for uninsured motorist coverage as follows:
Named Insured and any family member
Any other person who occupies a covered auto
Any person who is entitled to recover damages due to injury to a person described above
Special NOTE! UM is liability protection, not medical payments
Part D
Coverage: Damage to your Auto
Collision: Defined as “the upset of your covered auto or its impact with another vehicle or object”
Other than collision: breakage of glass, or loss caused by the following: falling objects, fire, theft, explosion, earthquake, hail, water flood riot or civil commotion windstorm, contact with birds or animals.
Towing: is covered under collision and other than collision
Umbrella Liability Insurance
For exam, almost always a correct answer, since it is a smart coverage
Provides liability coverage (BI/PD) for catastrophic legal claims or judgments
Requirement policy owner to carry certain underlying coverage or specified minimum amounts
Note: Professional acts are specifically Excluded
