Insurance & Benefits

Question 1

Define risk.

Answer 1

• uncertainty about financial loss

Question 2

What are 2 types of risk?

Answer 2

• Speculative risk

- pure risk

Question 3

What is speculative risk?

Answer 3

• win, lose, or no change
• risk is taken on by choice
• normally not insurable

Question 4

What is pure risk?

Answer 4

• events beyond one’s control
• outcome=loss
• insurance covers pure risk
• allows for protection against loss, but does not allow for possibility of gain

Question 5

What are 4 types of risk management techniques?

Answer 5

• risk avoidance
• loss control
• risk retention
• risk transfer

Question 6

What is risk avoidance?

Answer 6

• elimination (of source of risk)
• substitution (of a thing)
• separation (of things)

Question 7

What is loss control?

Answer 7

• reduce the possibility of a loss, or reduce the size/scale of a loss
• loss prevention= before the fact (stop something from happening)
• loss reduction= after the fact (once a loss has occurred, reduce the size/severity of the loss)

Question 8

What is risk retention?

Answer 8

• “self-insure” against certain types of risks
• high frequency, low severity losses
• losses that are so unlikely to occur that one would not be likely to spend money to insure against that risk

Question 9

What is risk transfer?

Answer 9

• non-insurance transfer- liability waiver

- insurance transfer

Question 10

Describe risk pooling.

Answer 10

• group sharing of losses= transfer risk from one to everyone in a group/pool
• applies to all insurance, not just group insurance

Question 11

Describe the law of large numbers.

Answer 11

• using probability and large numbers of people, that which is unpredictable for an individual, becomes predictable for the group

Question 12

What is insurance?

Answer 12

• the undertaking by one party to protect another party against loss or liability
• in the event of a loss, one party promises to pay a sum of to the other party

Question 13

What are the characteristics of insurable risk? (must have all these characteristics to be insurable)

Answer 13

• must be a chance event
• loss must be definite (in time and in the amount of money)
  - contract of indemnity- covers actual amount of loss
  - valued contract- amount payable is fixed and known
• loss must be significant
• rate of loss must be predictable
• the loss must not be too large for the insurer to bear

Question 14

What is the purpose of life insurance?

Answer 14

• death benefit (non-taxable)
• last expenses
• mortgage fund
• dependency period income
• emergency fund
• education fund
• spousal income

Question 15

What are the advantages of group insurance?

Answer 15

• all employees covered
• low cost
• efficient premium collection
• wide range of options

Question 16

Discuss group insurance.

Answer 16

• duration of coverage- 1 yr renewable
• waiver of premium
• conversion privilege
• pre-existing conditions
• non-medical evidence max
• benefit schedule

Question 17

Discuss AD&D.

Answer 17

• insurance for accidental death/injury
• lump-sum payment in event of death
• pct. of death benefit for injury
• “meat charts”
• excludes: war, terrorism, and other

Question 18

Discuss Dependent life.

Answer 18

• lump-sum benefit on death of spouse/child
• one election, or independent options
• coverage in flat dollar amounts
• usually on a contributory basis
• premiums taxed, benefits tax-free

Question 19

What is survivor income?

Answer 19

• rare
• monthly payments to dependents
• benefits either flat amount or pct. of pay
• different amounts for spouse/children
• coverage usually on contributory basis
• remarriage clause (don’t get payment until you remarry)

Question 20

What are some operational issues with insurance?

Answer 20

• exclusions and limitations (military services)
  - law requires they be clearly written and specific
  - courts adopt narrowest, most restrictive interpretation
• underwriting
  - designed to help categorize, properly price or eliminate serious risk cases
  - ensures fair treatment of policy holders and beneficiaries

Question 21

What is the equation for group life underwriting?

Answer 21

premiums= claims paid+retention (+refund)

Question 22

What does retention cover?

Answer 22

• taxes, commissions, contingency

- operating expenses of insurance carrier, profit

Question 23

What happens to the refund?

Answer 23

• excess amount is refunded to the employer, if experience rated
• amount is usually rolled over into next contract

Question 24

List the types of underwriting methods.

Answer 24

• fully pooled
• fully experience rated
• experience rated with pooling limit
• experience rated with annual stop-loss
• non-insured death benefits

Question 25

Describe fully pooled.

Answer 25

• not experience-rated
• claims, costs allocated to pool
• premiums based on experience of policy holders with similar characteristics
• at year-end no premium is returned, even if experience is lower than expected

Question 26

Describe fully experience rated.

Answer 26

• underwritten on plan’s past experience

- claims, costs charged to policy, rest refunded

Question 27

What are some issues and developments?

Answer 27

• client asset management focus
• critical illness insurance
• asset management and performance
• environmental factors

Question 28

What is critical illness insurance?

Answer 28

• insurance for specified medical condition
• lump sum payout upon diagnosis
• design options
• coverage
• taxations

Question 29

What are living benefits?

Answer 29

• compassionate assistance
• payment of life insurance proceeds to terminally ill individuals
• like a loan
• interest is charged
• limited to percentage of value of policy

Question 30

What are some problems with insurance?

Answer 30

• fraud
• on application
• in making claims (false claims)
• in details of claims
• conspiracy to defraud