Insurance Flashcards
What is adverse selection?
Underwriter attempts to manage adverse selection and weed out or manage those that need assistance.
What is insurance?
Used as a protection against financial loss.
Used only to protect against pure risks
Involves the transfer of loss and the sharing of loss with others
Is land cost included in the severity of loss?
No. Land and cost of building is $1,000,000 but $250k to build. max insurable risk is $250k
What are the causes of insured losses?
Perils
Hazards
If an underwriter was charged with managing profit, what would be his best tool?
Managing adverse selection. Going back and looking and folks usage of credit and risk factor.
Distinguish peril and hazard.
Peril is the cause
Hazard is the condition the creates or increases the likelihood of a loss occurring, then there is the Moral, Morale and Physical
What is an insurable risk?
CHAD - not catastrophic (to insurer), Homogeneous exposure units, Accidental, and measurable and Determinable.
What are the elements of a contract for insurance purposes?
A legal contract requires COALL –> Competent Parties, Offer and Acceptance, Legal consideration, and Lawful purpose
What are the principles of Insurance Contracts?
Indemnity
Subrogation
An insured must have and emotional or financial hardship resulting from danger, loss, or destruction.
What is difference between void and voidable?
Void: Lacked COALL
Voidable: allows one of the parties to cancel the contract
What are the three Principle of Utmost Good Faith?
Warranty
you don’t do something you agree to do
Representation
you say you don’t smoke, but you do
Concealment
silent to a fact material to the risk being insured
When must an insurable interest exist for a property insurance claim?
At the policy inception and time of loss
What distinguishes insurance contracts?
Adhesion
Aleatory
Unilateral
Conditional
What are the types of authority?
Express
The written agreement (the customer wouldn’t see this, the customer is about implied)
Implied
Everything looks like he has authority
Apparent
When the other thinks he has authority but there is no such authority
What are the important features of insurance contracts?
Conditions
Declarations
Exclusions
Riders and Endorsements
What is Actual Cash Value?
Replacement value minus deprecation.
Don’t forget about the deductible when questions ask about how much cash is given.
What are examples of perils that reduce the ability to earn?
Dying too soon
Living too long
Disability
What is the NAIC and do they have any regulatory power?
Provides a watch list of insurance companies based upon financial ratio analysis which measure the financial health of an insurance company.
States regulate insurance.
What are the six steps to risk management?
DIEDIE
Determine the objectives
Identify the risks
Evaluate the identified risks as to probability of occurrence and potential loss
Determine alternatives for managing risks
Implement the program
Evaluate, monitor and review
When does an insurable interest exist for a life insurance claim?
At the policy inception only.
What is the promise being made in the insurance contract?
That the insurer will pay the claim.
What is the coinsurance formula?
[insurance/ (percentreplacement)]damage
How might severity of loss be described?
The potential size or amount of loss.
What are some reasons for Life Insurance?
Income replacement
Income for readjustment period after the death of a loved one
Financial support for children or dependent parents
To fund education after the death of a loved one
Paying off debts
Income for surviving spouse
What is term life insurance?
Provides the highest benefit, with the lowest premiums and is simply a pure death benefit policy.
What are some types of term life insurance?
Annual Renewable Term
Level Term
Decreasing Term
What are some types of whole life insurance?
Ordinary Life
Limited Pay Life
Variable Life
CAWL
When might whole life insurance be more appropriate?
Anyone with lifetime or permanent needs
Estate Planning purposes to provide liquidity
Insured has a need for investment like performance
What are the five dividend options as they relate to dividends within a whole life policy? May also see the word “participating” - this only means gets dividends.
CRAP-O - Cash option, reduce premiums, Accumulate at Interest, Paid up additions, and Term (one year)
What are the settlement options for life insurance?
Lump Sum Payment
Interest Only
Annuity Fixed Life Income Fixed Period Life income with period curtain Joint and last survivor income
What are some life insurance nonforfeiture options?
Cash Surrender Value
Accumulated Cash Value less surrender charges
Reduced Paid up Insurance
Receives cash value with smaller face amount
Extended Term Insurance
Get insurance that is paid up for a term
What is Universal Life Insurance?
Insured can adjust premiums, face value and cash value
Insured does not direct the investment portion
Cash value can be used to actually pay the policy premiums
Universal A - Death Benefit increases after cash value hits a certain amount
Universal B - Death Benefit increases along with cash value
Variable - with investment options
Should a client who is risk adverse explore “variable” options with their life insurance?
Unlikely. Must match the clients’ risk tolerance with products suggested. This may mean that some options are eliminated.
What are the types of annuities?
Immediate - purchased with one lump sum
Deferred Annuity
Flexible Premium Deferred Annuity (FPDA)
Single Premium Deferred Annuity (SPDA)
Fixed
Variable
Equity Indexed Annuity