Insurance - ch 2 Flashcards
1
Q
Risk can be divided into 4 categories ?
A
Risk can be divided into four categories: TEST
Pure / Speculative Risk
Subjective / Objective Risk
Fundamental / Particular Risk
Non-financial / Financial Risk
2
Q
- Insurance is a transfer of____________________ from risk exposures.
- Premiums are paid based on _______________ to be paid.
- Premiums are ____________ for similar risk groups
A
- Financial uncertainty
- Expected claims
- pooled
3
Q
The most important types of risk that most individuals need
insurance coverage for include: ?
A
Life insurance
Health insurance
Disability insurance
Property insurance
Personal liability insurance
Long term care insurance
4
Q
4 categories of Risk ?
A
Pure Risk TEST
* Loss or no loss
Speculative Risk
* Profit, loss or no loss
Subjective Risk
* Differs based upon an individual’s PERCEPTION OR FEELING
( feeling) of risk BASED ON PAST
Objective Risk
- MEASURABLE
- Does not depend on an individual’s perception
- EXPECTED - ACTUAL LOSS = OBJECTIVE LOSS
5
Q
Define Pure Risk
Examples of Pure Risk ?
A
Pure risk is the chance of a loss or no loss occurring. TEST
No chance of experiencing a gain.
Examples of PURE RISK
- either your car is in an accident and damaged or it is no.
* Premature death of a primary wage earner
* Prolonged illness or injury of a client or family member
* Inability of the client to work because of sickness or accident
* Wind damage to the personal residence
* Inability of the client to take care of himself in old age
*Legal judgment against the client
6
Q
Define Speculative Risk.
A
Speculative risk is the chance of loss, no loss, or a profit. TEST
Example:
buying a stock or an entrepreneur takes when starting a business.
7
Q
Define a Particular Risk
A
Unique TEST
.
Impact a particular individual, such as death or the inability to work because of a sickness or accident
8
Q
- Subjective risk is the risk that an individual________ based on ______________________and ________________________.
- Individuals perceive risks differently and their behavior in addressing those risks depends upon that_________
- If an individual perceives the subjective risk to be ______ then the individual will take appropriate steps to reduce the subjective risk.
A
- “Perceives “ TEST
their prior experiences and the severity of those experiences. - perception
- high
9
Q
- For an insurer, objective risk is the difference between the _______________________ and ________________.
- As the number of loss exposures (or the pool of insureds) _________________ , objective risk is reduced because the actual results are more likely to approximate expected claims.
- Objective risk varies indirectly with the ____________________________.
The better an insurer is able to manage its objective risk, the more efficiently they can price premiums.
A
- Expected and Actual losses. TEST
- increases
- # of loss exposures in an insured pool.
10
Q
Define Fundemental risk
A
Risk that CAN IMPACT A LARGE NUMBER of individuals at one time, such as war, Flood, earthquake.
Fundamental risks are difficult for insurers to insure, because they can lead to severe financial consequences for the insurance company. Some fundamental risks, such as war or a nuclear hazard, are uninsurable.
11
Q
Pure risks include many of the same risks all individuals are exposed to and the types of risk a planner must evaluate and plan for each client.
a. True b. False
A
A. True
12
Q
Subjective risk is the variation of actual amount of losses that occur over a period of time compared to the expected amount of losses.
a. True b. False
A
B. False
13
Q
The law of large numbers is useful for insurance companies because the larger the insured pool, the more likely actual losses will approach the probability of losses.
a. True b. False
A
A. True
14
Q
- Non-financial risk is a risk that would result in a loss, other than a ______________________.
Example ?
A
- monetary loss.
An example:
Emotional distress a family experiences when a loved one dies.
Life insurance can protect against this financial risk, help the family achieve financial goals and provide a lump-sum amount to pay expenses for the family during the grieving process.
15
Q
Risk is defined into 4 Areas
A
FUNDAMENTAL -large # PURE
like War - Loss, No loss
—————————— ——————————–
PARTICULAR SPECULATIVE
-unique - Loss, No loss, Gain
RISK
DEFINED
NON-FINANCIAL SUBJECTIVE
- perceived, based on prior exp.
———————- ———————————————
FINANCIAL OBJECTIVE
Risk =Expected Risk -Actual Risk
16
Q
- The Law of Large numbers is a principal that states _______________________________________________________.
- The _______exposures the _____likely probable results will equal true results. The Law of Numbers.
- The Law of Large Numbers helps reduce_________________ ?
A
- “that actual outcomes will approach the mean probability as the sample size increases.”
- ” More” “more”
- The Law of Large Numbers helps reduce objective risk
17
Q
The risk management process includes: ?
A
O I E A S I E
- OBJECTIVES - of the risk management program
- IDENTIFYING RISK - to which the individual is exposed
- EVALUATING the identified risks for the probability and severity of the loss
- ALTERNATES for managing the risks
- SELECTING most appropriate alternative for each risk
- IMPLEMENTING the risk management plan selected
- Periodically EVALUATING and reviewing the risk management program
18
Q
Fundamental Risk impacts _______________of people ?
Is it difficult to insure ?
Are all insurable with Fundamental Risk ?
A
“large number of individuals at one time “
YES, Difficult to insure for the insurance company
NO, Some are uninsurable
- Some are insurable by a separate policy Particular Risk
19
Q
STEP ONE of Risk the management process ?
3 activities ?
A
- DETERMINING THE OBJECTIVES OF THE RISK MANAGEMENT PROCESS
Risk management objectives
- Establish objectives for each area of Risk
- Cost-effective protection
- Continuing income after a loss
- Work with client’s stated objective
Risk management objectives are typically to protect assets, earning capacity, human life value, and health. Objectives may also include less tangible aspirations such as providing peace of mind or protecting family relationships
20
Q
STEP 2 of Risk Management Process ?
- What are the 3 categories of risk exposures ?
- What are some tools that can help identity Risk Exposures ?
A
- IDENTIFYING THE RISKS TO WHICH THE INDIVIDUAL IS EXPOSED
- Identify all possible pure RISK EXPOSURES of the client.
- Which is primarily a function of the client’s lifecycle position. - The risk exposures for an individual may be subdivided into the following categories.
- Personal risks -
-may cause the loss of income (untimely death, disability, health issues), or cause an increase in the cost of living (disability, health issues). - Property risks
- may cause the loss of property (automobile, home, or other asset). - Liability risks
- may cause financial loss (injury to another or to property for which the client is determined to be financially responsible) - Tools to assist identifying :
checklists, survey forms, questionnaires, or financial statement analysis. These types of systematic approaches help to ensure that the advisor and client avoid overlooking potential risk exposures.
21
Q
STEP 3 of the Risk Management process ?
What are the 3 activities ?
A
- EVALUATING THE IDENTIFIED RISKS FOR THE PROBABILITY AND THE SEVERITY OF THE LOSS
- Analyze the risks
- Analyze each of the risks based on expected loss frequency and loss severity.
- Measure severity
When evaluating risks based on their expected loss frequency, the objective is to determine how often the event is likely to occur. Loss severity measures the dollar magnitude or the absolute dollar amount of the expected financial loss were it to occur. - Identify risk to transfer
22
Q
STEP 4 and 5 of the Risk Management process ?
4 techniques for risk management ?
A planner may use a Matrix to analyze Risk as Follows:
Severity / Frequency Low Frequency High Frequency
_______________________________________________________________________
High Severity ? ?
catastrophic, financial Loss
long term disability
————————————————————————————————–
Low Severity ? ?
Non-cat financial loss
car dented
A
- DETERMINING AND 5. SELECTING THE BEST RISK TEST
MANAGEMENT ALTERNATIVES
4 Techniques for risk management ?
* Risk Reduction
* Risk Transfer
* Risk Avoidance
* Risk Retention
Severity / Frequency Low Frequency High Frequency
_______________________________________________________________________
HIGH Severity Risk Transfer AVOID Risk
catastrophic, financial Loss or share risk “live in torado alley”
long term disability “disability” LTC
“death” ,damage to home”
Use Risk Reduction”
————————————————————————————————–
LOW Severity Retain Risk RETAIN /REDUCE Risk
non-cat financial loss “car dent” “like losing glasses “
23
Q
Risk reduction is the process of reducing the likelihood of a_______________________________________________ .
Examples
HIGH FREQUENCY / LOW SEVERITY ?
A
——-a pure risk that is high in frequency and low in severity.
Examples of risks:
HIGH in frequency and low in severity are: car door dings, the common cold, and damage to inexpensive personal property.
HIGH in frequency and low in severity are risks that should be reduced by taking steps to reduce the likelihood of a loss occurring.
24
Q
Risk reduction can also be used in conjunction with risk transfer (to an insurance company)_________________________ perils to reduce the likelihood of a loss occurring or the severity of a loss as a result of certain perils, which helps to reduce insurance premiums.
For example, a ___________may be provided on a homeowners policy if burglar alarms or a sprinkler system are installed
A
Risk reduction can also be used in conjunction with risk transfer (to an insurance company)
for low frequency high severity
perils to reduce the likelihood of a loss occurring or the severity of a loss as a result of certain perils, which helps to reduce insurance premiums.
discount
25
1. Risk transfer risk transfer involves transferring a ______________________________ to a third party, such as an insurance company.
2. Examples of risks that are low in frequency but high in severity include disability ?
3. These risks do not occur very often, but when they do, there are severe financial consequences that should be ___________________________________.
4, Non-insurance transfers of risk are also available for certain risk exposures and can be accomplished through means such as ____________________________________ .
1. low frequency and high severity risk
2. Examples of risks that are low in frequency but high in severity :
include:
-Disability (or the inability to work),
- Premature death, or
- Damage to a personal residence.
3. Transferred and insured.
4. warranties or hold harmless agreements
26
1. Risk retention is_________________________________
2. Examples of risks that are low in frequency and severity include ____________________________________________________.
3. ______________________ are forms of risk retention where the insured is sharing in the first dollar of a financial loss. Risk retention is an appropriate risk management strategy for risks that are low in frequency and low in severity
1. Accepting some or all of the potential loss exposure for risks that are low in frequency and low in severity.
2. minor property damage to a personal residence or personal auto.
3. Deductibles and copayments
27
1. Risk avoidance is a risk management technique used for any risks
____________________________________ .
2. Avoidance can be applied to many pure risks, such as:
* The risk of being injured on a construction site –
* The risk of dying in a private plane crash –
* The risk of getting a DUI –
* The risk of getting into an accident while talking or texting on a cell phone –
1. ,,,,,,that are high in frequency and high in severity. SHOULD BE AVOIDED.
2. Avoidance can be applied to many pure risks, such as:
* The risk of being injured on a construction site – avoid the construction site.
* The risk of dying in a private plane crash – avoid flying in private planes.
* The risk of getting a DUI – avoid drunk driving.
* The risk of getting into an accident while talking or texting on a cell phone – avoid cell phone use while driving
28
Selecting the appropriate risk management technique is the most critical component of the risk management process.
a. True b. False
A. true
29
Risk reduction is the process of avoiding pure risk that is high in frequency and low in severity. a. True b. False
B. false
30
Risk transfer involves transferring a high frequency and high severity risk to a third party, such as an insurance company. a. True b. False
b, FALSE
31
1. That homeowner policy will contain a___________ which is a ___________________ (and helps to reduce the premium for the insurance policy by eliminating the administrative burden of small claims).
2. The homeowner may also have a sprinkler system or fire extinguishers in the house to help reduce the size of the loss should a fire occur. The __________________________________ helps to create a more efficient plan for dealing with risk
1. deductible, which is a partial retention of loss
2. combination of risk management techniques
32
STEP 6 of the risk management process ?
2 activities ?
If a decision is made to retain a risk, the individual must determine whether ____________________________ ?
Implementing the Risk Management Plan
2 Activities :
-Implementation of appropriate risk management solutions
-Plan should reflect identified risks and solutions
,,,,an emergency fund will be used (e.g., pet needs medical care).
33
STEP 7: Risk Management process ?
PERIODICALLY EVALUATING AND REVIEWING
THE RISK MANAGEMENT PROGRAM
- The purpose for periodic evaluation and review is twofold.
- Things change over time, and risk exposures can change as well.
- Errors in judgment regarding the selected alternatives may occur
34
1. Perils are the ____________________.
2. Perils can be the result of ________________?
3. Common Perils ?
4. Perils can be specifically insured (named) in an insurance policy on a “____________” basis where only the specific perils listed in the policy are covered.
Alternatively, a policy can cover perils on an “_______________” basis, which covers all perils unless specifically identified and excluded
1. Perils are the___ immediate cause and reason for a loss occurring."
* Actual cause of a loss, such as:
Fire, wind, tornado, earthquake, burglary & collision
2. Perils can be the result of an accident or sickness.
3. Common perils include:
* Accidental death
* Disability caused by sickness or accident
* Property losses caused by fire, windstorm, tornado, earthquake, burglary, and, collision of an automobile
4. Perils can be specifically insured (named) in an insurance policy on a “named peril” basis where only the specific perils listed in the policy are covered.
Alternatively, a policy can cover perils on an “open perils” basis, which covers all perils unless specifically identified and excluded
35
Hazards are _______________ ?
A hazard does not _______________, but simply ____________
the probability of a loss.
What are the 3 types of hazards:
Hazards are - " specific conditions that increases the likelihood of a loss occurring "
A hazard does not " cause the actual loss" , but simply " increases" the probability of a loss.
There are three types of hazards:
* Moral * Morale * Physical
36
1. Moral hazard is the____________________ ?
2. Examples ?
- Potential for loss caused by the moral character of the insured .
2. Examples :
- File a False claim with the insurance
- Burning down your own house or claiming a theft occurred when it did not are types of moral hazard
37
1. Morale hazard is defined as _____________________?
2. Example :
3. How do insurance companies incentivize against a Morale Hazard ?
1. Indifference to risk due to the fact that the insured has insurance.
TEST
Moral hazard is a character flaw or dishonesty such as burning your own house down.
Morale hazard is the indifference a person has towards loss because of insurance such as leaving the keys in your car and the car running.
2. Lock keys in Car
3. . Deductibles.
With a deductible, the insured pays the first dollars of loss until the deductible is satisfied. Thus, when an insured is considering leaving the keys in the ignition and the car running while they are in a convenience store, the insured may stop and think “do I want to risk paying a $500 or $1,000 deductible if my car is stolen?” Deductibles help to align the best interest of the insurer and the insured to reduce the risk of morale hazard
38
1. Physical Hazard is ___________________
2. Examples :
Physical hazard is a physical condition that increases the likelihood of a loss occurring.
Examples :
wet floors, icy roads or roads with poor lighting. A physical hazard does not actually cause the accident or the loss, it is simply just a condition that increases the probability of a loss occurring
39
Perils can be specifically covered in an insurance policy on a “named peril” basis where only specific perils listed in the policy are covered. a. True b. False
A True
40
Whats are the Requites for an Insurance Risk ?
Requisites for an Insurable Risk:
Large number of homogenous exposure units
Losses must be accidental
Losses must be measurable and determinable
Losses must not pose a catastrophic risk for the insurer
Premiums must be reasonable and affordable
41
1. The law of large numbers tells us _________________________________________________.
2. This is important for an insurance company so that the ______________________________________.
3. If the_________________, the actual losses could vary significantly from the expected losses, which could lead to financial insolvency of the insurer.
1. ,,,, that the more similar the events or exposures, the more likely the actual losses will equal the expected losses. T
2. ,,, actual claims they pay are very close to the probability of total losses.
3. pool of insureds is small,
42
1. The insurance company needs the pool of_________________ to be ____________________
2. This allows the insurance company to more ___________________________________________.
1. ,,," loss exposures" to be "homogeneous (alike)."
2. This allows the insurance company to more accurately predict the loss probability and charge an appropriate premium.
43
Actual losses must be _______________ because ____________________ are based on the probability of a loss occurring based on historical information and claims.
1. " accidental " because " premiums " are based on the probability of a loss occurring based on historical information and claims.
44
A loss exposure that would be financially catastrophic to the insurer is an __________________ risk, which is why an insurer excludes perils such as flood, earthquake, nuclear hazard and acts of war.
" uninsurable risk,
45
As a result, The Terrorism Risk Insurance Act of 2002 was passed to provide a _______________________ for losses arising out of acts of terrorism.
Private insurers are now able to offer coverage for acts of terrorism, with the ________________________________. The Act has been extended through 2027 via various Terrorism Risk Insurance Program Reauthorization Acts.
" federal government “backstop” for losses arising out of acts of terrorism.
" federal government paying 90 percent of losses above a threshold.
46
What are the 5 elements for a Valid Contract ?
M utual Consent TEST
O ffer and Acceptance
P erformance or Delivery
L awful Purpose
L egal Competency of All Part
47
Mutual Consent implies _____________________.
Mutual consent implies that both parties to the contract have a mutual understanding regarding the scope of the contract and they are in agreement as to the terms of the contract.
Typically contracts may be terminated by mutual consent of both parties.
48
Offer and acceptance consist of ___________________.
Offer and acceptance consists of one party making an offer to purchase a good or service and the acceptance is when consideration is received.
-Consideration can be in the form of a cash payment or providing a service
49
With insurance there is also a temporary binder or a____________?
“conditional acceptance.”
50
Conditional acceptance is used to provide _______________ for life insurance between the time of application and the time the policy is issued,
but the coverage is conditional on the _____________________________________________ for the policy.
,,,"temporary coverage"
"applicant paying the first premium payment and meeting the underwriting standards "
51
In order for a contract to be enforceable, the party to a contract must perform _______________under the contract
,," A Duty "
52
1. Legal Competence of All Parties When entering into a contract, both parties must be _________________ Otherwise, the contract is unenforceable.
2. Legal competence includes the following situations:
2 situations ,,,,
" legally competent"
2. *Minors -
In most states, a minor is under the age of 18. If a minor enters into a contract, the minor can void the contract at any time. If one party can void a contract at any time, there really is not an enforceable contract.
*Lacking Sound Mind -
A person lacking a sound mind does not have the capacity to understand the purpose and terms of the contract. Therefore, the contract lacks a meeting of the minds or mutual consent. Examples of persons lacking sound mind include a person who is drunk, mentally handicapped, or under the influence of drugs.
53
The Principle is Indemnity has 3 points.
The Principle of Indemnity: "made whole" TEST
* Insured is only entitled to compensation to the extent of the
insured’s financial loss.
* Insured cannot make money from insurance contract.
* Subrogation Clause
If the insurer pays a claim, only the insurer can then sue the
responsible party.
54
The Principle of Insurable Interest has 3 points
The Principle of Insurable Interest:
* Insured must have a financial loss resulting from damage,
loss, or destruction.
* Property and Liability Insurance: The insured must have an
insurable interest at the time of policy inception and at the time
of loss.
* Life Insurance: Only needs an insurable interest at the time
of policy inception
55
Parol evidence rule, which provides that “_______________.”
Any oral agreements prior to writing the contract have been incorporated into the written contract. Oral agreements that are not reflected in the written contract ________________.
“what is written prevails.”
" are not valid "
56
A subrogation clause in an insurance policy requires that the insured _________________________________ if the insurer has already indemnified the insured.
A subrogation clause entitles the __________________________________ for any claims paid to the insured.
"relinquish a claim against a negligent third party"
" the insurer to seek a claim against a negligent third party "
57
Life Insurance An insurable interest for life insurance need only exist _____________________________.
A life insurance policy is not _____________ policy.
It instead pays the face value of the policy based on the “value” of the amount of insurance purchased. Some people refer to this as a “modified” indemnity policy or an “agreed to value” policy.
" at the inception of the policy "
" Indemnity policy "
58
To purchase life insurance, the owner of the policy must have an ___________________ in that person’s life.
An _________________exists for a person to purchase life insurance on their own life and name either themselves or someone else as the beneficiary.
" insurable interest "
" insurable interest "
An insurable interest also typically exists for close family relationships and may also exist for business relationships
59
The principle of utmost good faith requires that the insurer and insured act in a manner that is forthcoming with all information about the risks being considered during the underwriting process.
The insured and the insurer follow 3 legal doctrines during the application and throughout the life of the policy
The Principle of Utmost Good Faith 3 legall doctrines
1. Representation
- Statements made by the insured to the insurer during the
application process
- Must be “material” misrepresentation to void insurance
contract. Age is not material
2. Warranty
-A promise made by the insured to the insurer
-A breach of warranty is grounds for avoidance
3. Concealment
-When an insured is silent about a fact that is material to the
risk being considered
60
5 distinguishing characteristic of Insurance Contracts ?
5 DISTINGUISHING CHARACTERISTICS OF TEST
INSURANCE CONTRACTS
1. Adhesion
* Take it or leave it.
* Insured-NO opportunity to negotiate the terms of the contract
2. Aleatory
* Money exchanged may be unequal
* Small premium, may receive large benefit
3. Unilateral
* Only one promise made by the insurer; which is to pay in the
event of a loss.
* The insured in not legally obligated to make premium payments.
4. Conditional
* Insured must pay the premium to receive the benefit/promise to
pay.
5. Personal
* Property insurance policies are a contract between the insurer
and the insured.
61
Property insurance policies cannot be assigned to a third party without the consent of the insurer.
a. True b. False
A. TRUE
62
The insured is not legally obligated to make a premium payment.
a. True b. False
A. TRue
63
LAW OF AGENCY
Agent - Legal representative of the insurer
Examples Include:
* General Agent
* Independent Agent
64
The law of agency describes ____________________________behalf of a principal.
A principal, such as an insurance company, hires ___________to act on the principal’s behalf and enter into agreements on behalf of the principal. The authority that an agent possesses is the result of express, implied, and/or apparent authority.
" the relationship & authority an agent possesses when acting on "
" agent (insurance agent) " . The authority that an agent possesses is the result of express, implied, and/or apparent authority.
65
3 Types of Authority with an Agency ?
AGENCY RELATIONSHIP AND TYPES OF AUTHORITY
1. Express Authority
* Written document
* The insurer is responsible for the acts of an agent
2. Implied Authority
* Authority the public perceives
* Agent accepts premium payments
Examples: * Signs on the door * Business cards on the desk
3. Apparent Authority
* Authority that the public perceives due to business cards, sign on
the wall and letterhead but no authority actually exists.
66
Express authority is the agency agreement, which specifically outlines the duties, responsibilities, and scope of authority that the agent can act upon.
a. True b. False
A. True
67
Apparent authority is when the third party believes implied or express authority exists, but no authority actually exists.
a. True b. False
A. True
68
What is a waiver ?
Relinquishing a known legal right.
A waiver is relinquishing a known legal right. If an insurer waives a legal right, it may not deny paying a claim based on the insured violating or breaching that right.
69
What is Estoppel ?
Through a legal process, you are denied a right you might otherwise be entitled to under the law.
- Through the legal doctrine of “estoppel,” the principal will not be able to deny the insured an insurance contract.
- Estoppel applies when one party relies on information from another party and that information causes harm to the party who relied on the information. The party who made the statements can be estopped from denying the statements.
70
2 types of Insurance companies ?
1. Stock Insurers
* A stock insurer is an insurance company that issues stock and is
owned by shareholders with the intent of earning a profit.
2. Mutual Company Insurers
* A mutual company is an insurance company that is owned by the
policyholders, not shareholders.
71
What is an Agent ?
Does agents have the ability to bind with Insurer ?
What is a Broker ?
Can a Broker sell from different insurance companies ?
Agents - legal representatives of an insurer and act on behalf
of an insurer.
- Agents have the authority to bind the insurer to an individual. T
Brokers - legal representatives of an insured and act in the
best interest of the insured.
- Can sell insurance polices from any one of a number of different insurance companies. Since the broker does not represent the insurer, they may not bind an insurer
72
An agent may immediately issue a ____________ on an auto policy over the telephone.
" temporary binder " on an auto policy over the telephone.
A temporary binder is temporary insurance coverage until the insurance company issues the permanent policy. However, an insurance agent may not immediately bind an insurer when selling a life insurance policy. The insurer must approve the life insurance application before coverage is issued.
73
What is Reinsurance ?
REINSURANCE -
* Insurance company transfers some or all of the risk to other insurance companies.
- Ceding company - transfers the Risk
- Reinsurer - assumes the Risk
* Reduce catastrophic financial risk
74
Some typical Insurance Policy Provisions
Policy Provisions Most insurance contracts are generally designed with similar provisions, including:
* Definitions of terms used in the contract
* Declarations
* Description of what is insured
* Perils covered
* Exclusions
* Conditions
75
Definitions for a Insurance Policy
Declarations
Description of what is insured
Definitions:
* Lists key words, phrases or terms used throughout the insurance
contract.
Declarations
* Lists insured, covered property and amount of coverage
premiums, terms and administrative items.
Description of what is Insured:
* Life or health insurance policies list the name of the insured.
* Property and casualty policies list the address of the property.
76
Exclusions
Perils Covered
Conditions
examples of conditions
Exclusions:
* Outlines specifically what will not be covered
May exclude perils such as war and flood
Perils Covered
* Named peril basis where specific perils are listed as covered in
the policy, or
* Open peril basis covers all risks of loss not specifically excluded.
Exclusion example:
Private Hospital Room when a semi private will do
Cash
Conditions
* Details the duties and rights of the insured and insurer
If the policy conditions are violated, the insurer may refuse to pay the full amount of the claim.
Examples of conditions include: * Notifying the insurer in the event of a loss * Filing of a police report in the event of a theft * Cooperating with the insurer after a loss * Taking appropriate steps to reduce further damage after a loss
77
Other Provisions of Insurance policy
Other Provisions:
* Errors in Age or Sex
Death benefit is recalculated
* Suicide Exclusion
Applies to the first two years of the policy
* Payment of Benefits
Outlines beneficiary instructions
* Grace Period
Typical grace period is 31-60 days
78
Riders and endorsements of Insurance policy
Riders and Endorsements:
* Written additions to an insurance contract
* Typically require additional premium
* Make it possible to customize an insurance contract
* Take precedence over conflicting terms in policy
79
What is underwriting ?
What is Adverse Selection ?
Underwriting
* Classifies applicants into risk pools, selecting insureds and
assigning a premium
Adverse Selection
* The tendency of higher-than-average risks to purchase or renew
insurance policies
80
An underwriter groups risks into ______________ and assigns a premium or class rate to all members of the class, such that the premium is expected to cover all claims, operating expenses, and produce a profit.
" similar classes "
81
What are deductibles ?
What are co-payments ??
Deductibles
* Amount insured pays before benefits start
Copayments
* In addition to deductible
* Flat dollar or percent of loss
Coinsurance – Health Insurance
* Cost sharing between insured and insurer
82
Property insurance, coinsurance defines the ____________________ and ______________________+ in order to achieve equity in rating. Coinsurance in property insurance encourages insureds to cover their property to at least a stated percentage of the property’s value, or else suffer a financial penalty
" percentage of financial responsibility the insured " and " insurer "
83
1. Coinsurance: Property Insurance
* Requires the insured to maintain _________________________ otherwise the insured must be a coinsurer and
proportionately share in a loss.
2. The coinsurance formula is ?
3. The purpose of coinsurance in a property insurance policy is to encourage the insured to___________________________________. Otherwise the insured will become a coinsurer and proportionately share in any loss
1. Coinsurance: Property Insurance -
" stated percentage of minimum coverage "
2. The coinsurance formula is
Amount of Insurance Carried
__________________________ x Covered Loss - Deductible =$ Insurer pays
Amount of Coinsurance Required
3. " maintain a stated percentage of minimum coverage."
84
Coinsurance for Property Example:
* Todd owns a house with a replacement value of $300,000. He
purchased $200,000 of homeowners insurance with a coinsurance
requirement of 80% and a $500 deductible. Todd experiences a
$100,000 loss, what will the insurance company pay?
Amount of Insurance Carried
__________________________ x Covered Loss - Deductible =$ Insurer pays
Amount of Coinsurance Required
$200,000
--------------------------- x $100,000 = $83,333 - =$500 = $82,833
80% x $300,000
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The maximum amount the insurer will pay is up to the________________________________________________________________, even though the coinsurance formula may result in a percentage greater than 100 percent.
" covered loss or the face value of the policy or policy limits, less any deductible "
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Coinsurance for Property Example:
* Todd owns a house with a replacement value of $300,000. He
purchased $200,000 of homeowners insurance with a coinsurance
requirement of 80% and a $500 deductible. Todd experiences a
$100,000 loss, what will the insurance company pay (from previous
slide)?
* What if instead Todd purchased $240,000 of coverage. How much
will the insurance company pay?
$240,000
-------------------------- x $100,000 = $100,000 -$500 = $99,500
80% x $ 300,000
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3 Ways to value property for insurance policies ?
VALUING PROPERTY FOR LOSS TEST
* Replacement Cost (RC) - Current cost of replacing property with
new materials of like kind. Used to value damage to a HOME
under a property insurance policy.
* Actual Cash Value (ACV)
Replacement cost, less depreciation.
Used to value the amount of coverage for a personal auto or
personal property in a homeowners policy or business property
policy
* Agreed Upon Value (AUV)
Determined jointly by insured and insurer
Typically jewelry, art, furs, and collectibles are covered using
appraised or agreed upon value;
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The insurance industry is highly regulated by three levels of state government, which are: ??
* legislative
* judicial
* executive or State Insurance Commissioners
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ACV EXAMPLE
* Kevin buys a plasma television for $10,000. Three years later it’s
stolen and it’s 60% depreciated. The same plasma television is now
selling for $6,000; how much does Kevin receive?
Replacement Cost $6,000
Less: Depreciation (3,600)
Cash to Insured $2,400 (less any deductible)
* He should endorse the policy for replacement cost so that he will
receive a new plasma television.
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How is Insurance Industry regulated ?
Regulation at the state level, not federal level
* Legislative Branch
-Provides for licensing of agents
-Passes laws & regulations regulate how companies do business
- Defines how insurance is sold, controls how insurance
-Protects consumer rights by passing consumer protection laws
* Judicial Branch
Rules on constitutionality of laws passed by legislative branch
* Executive or State Insurance Commissioner
Administers, interprets and enforces insurance law
91
What is the National Association of Insurance Commissioners ?
Who serves on the NAIC ?
What do they do ?
Goals for the NAIC ?
National Association of Insurance Commissioners
THEY DO NOT HAVE REGULATORY AUTHORITY
* State insurance commissioners serve on NAIC
* Provides a watch list of insurance companies
* Issues model legislation
The goals of the NAIC are to:
* Protect the public
* Promote competition
* Promote fair treatment of insurance consumers
* Promote the solvency of insurance companies
* Support and improve state regulation of insurance
92
What are the 4 Insurance Rate Regulations rules ?
Prior Approval Law
- insurance company must file the rate
increase request with the State’s Insurance Commissioner’s office. The rate increase will either be approved, disapproved, or modified
File and Use Law
- Allow a company to file the rate increase with the State Insurance Commissioner’s office and immediately start rate increase. State insurance commissioner may later deny the rate increase in which case the insurance company must rebate the premiums paid under the denied rate.
Use and File Law
Permits an insurer to increase rates, but they must file the rate increase within a specific time period, as determined by state law. Both the “file and use” and “use and file” laws avoid any delays associated with the rate increases being approved, as they allow the insurer to implement rate increases quickly.
Open Competition
Open competition laws allow insurers to set their own rates, and the State presumes that supply and demand will determine the appropriate rates for various insurance products. The open competition approach assumes that fair competition among insurers will result in efficient premium prices.
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What are the rating agencies for the insurance industry ?
A.M. Best’s
* Highest: A++ to A/A-
* Lowest: C/C- to D
Moody’s
* Highest: Aaa to Aa2
* Lowest: B1 to Caa
Also others :
Fitch
Standard and Poor’s
Weiss
Rating agencies rate insurance companies on their financial health and ability to pay claim
94
Does the NAIC have a regulatory power ?
NO regulatory power
but it does issue model legislation to address problems within the insurance industry.
95
Who developed the Risk based Capital test?
What is the RISK BASED CAPITAL TEST ?
Developed by the NAIC.
Risk-based capital measures how much capital is invested and the riskiness of the investments. The more risky the investments, the more capital the insurer is required to maintain. If the insurer does not maintain adequate capital, then regulatory action may be required. Regulatory action may include the state seizing, rehabilitating, or liquidating the company.
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1. A client’s ____________________________ will be a factor in determining which types of loss exposures he or she is willing to assume in their entirety or retain partially via deductibles and waiting periods.
2. Determining which risks are essential to transfer to an insurance company will be largely based on______________________ "
1. " subjective risk assessment "
2. " frequency and severity "
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General Guidelines for Insurance Policy Selection
* Recognize that cost is a constraint for most clients.
* A client’s subjective risk assessment (risk tolerance) will be a factor in determining which types of loss exposures he or she is willing to assume in their entirety or retain partially via deductibles and waiting periods. Determining which risks are essential to transfer to an insurance company will be largely based on frequency and severity; however, the client’s psychological assessment of the risk will vary from person to person and situation to situation and will impact insurance decisions.
* Insure first and to high limits against risks that could be catastrophic to the client. Examples include loss of income to family due to death or disability of a “breadwinner;” loss of income or accumulated assets due to medical expenses associated with illness, accident, or long-term care; loss of accumulated assets a
* Obtain an adequate amount of replacement cost property insurance on principal assets (e.g., the home, auto, or jewelry).
* Use group coverages (such as those offered by an employer) and social insurance (such as Social Security) as a foundation and individual policies to fill in gaps in types and amounts of coverage.
* Ensure that retained risks via deductibles, coinsurance, waiting periods, or the decision to self-insure align with assets (e.g., emergency funds) or disposable income available to cover the losses.
* Avoid limited policies and highly restrictive policy provisions.
* Shop for the best pricing among reputable and financially strong insurers.
* Purchase home and auto insurance from the same insurer to receive discounts on premiums for both policies.
* Insurance premiums can be reduced through actions such as installation of fire extinguishers and smoke and burglar alarms, maintenance of a good driving record, cessation of smoking, and increasing the insured’s credit score.
98
Parol Evidence Rule - States that “_________________ " .
“what is written prevails.”
Oral agreements that are not reflected in the written contract are not valid.
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The risk that individuals oF HIGHER than average risk will seek out or purchase insurance policies is called?
a. Peril.
b. Hazard.
c. Law of Large Numbers.
d. Adverse Selection.
Adverse Selection TEST
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INSURABLE INTEREST
A risk that is ideally situated to be an insured risk meets the following requirements:
A risk that is ideally situated to be an INSURED RISK TEST
meets the following requirements:
C A M H A M
C alculable
A FFORDABLE
N ON-CATASTROPHIC
H OMOGENEOUS
A CCIDENTAL
M EASURABLE
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INSURABLE INTEREST
INSURABLE INTEREST TEST
PROPERTY - at inception and at time of loss
LIFE INSURANCE - at inception only
Insured must suffer a financial loss if a covered peril occurs, otherwise no insurance can be offered.
Insurable interest aligned with the principle of indemnity, which both limit the insured from experiencing a gain using insurance.
102
WARRANTY
WARRANTY TEST
Promise made by the insured that is part of the insurance contract. The warranty can be a promise to perform or take a certain action.
Warranty can be promise by the insured to NOT DO something.
Breach = allows nsurer to void the insurance contract and not pay any claims.
"Breach of warranty is when the insured does not do something that they agreed to do such as agreeing to install a home alarm security system when a house is being built, then failing to do so"
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REPRESENTATION
REPRESENTATION TEST
Statement made by the applicant during the insurance application process.
Oral statement or information disclosed on an insurance application such as age, gender, occupation, marital status, and family medical history.
Misrepresentation during application process can lead to the insurer VOIDING THE CONTRACT
--- -- in order for the contract to be voidable, the misrepresentations must BE MATERIAL and the insurer must have RELIED on the misrepresentation to issue the policy.
104
CONCEALMENT
CONCEALMENT TEST
Insured intentionally silent regarding a material fact during the application process.
Insurer has right to void insurance contract based on material concealments by the insured.
In order for the insurer to void a contract or avoid paying a claim because of concealment, the insurer must prove that the insured knew the concealed fact was material.
" When the insured is silent to a fact that is material to the risk being insured, what has occurred " -concealment
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A tree falls on Jesse’s house damaging his room and crushing his refrigerator. The roof damage is valued at $15,000. He purchased the refrigerator 10 years ago for $2,000. A similar new refrigerator costs $1,900 today. The actual cash value of the refrigerator is now $200.
If Jesse has replacement cost for the roof but actual cash value for the refrigerator, his insurance company will pay $15,000 for the roof and $200 for the refrigerator less any applicable deductible.
roof damage $15,000 valued at
Refrigerator $2,000 bought 10 years ago
a similar refrigerator today = $1,900
The actual cash value of the refrigerator now $200
If Jesse has replacement cost for the roof but actual cash value for the refrigerator, his insurance company will pay $15,000 for the roof and $200 for the refrigerator less any applicable deductible.
_______________________________________________________________
However, if Jesse has replacement cost for both the roof and refrigerator, Jesse will receive $15,000 to repair the roof and $1,900 to purchase a new refrigerator, less any deductible
106
Three years ago Mayiah purchased a new car for $30,000. Yesterday, she was in an accident and her car was totaled. Her car had depreciated by $12,000 over the three years she owned the car.
The actual cash value of the car was $18,000
($30,000 - $12,000), which is how much the insurer will pay Mayiah for her loss, less any deductible.
107
A peril is proximate cause of a loss. A hazard is a condition that creates or increases the likelihood of a loss occurring
A peril is proximate cause of a loss. A hazard is a condition that creates or increases the likelihood of a loss occurring
108
Which of the following statements regarding the characteristics of an insurance contract is false?
a. they are a contract of adhesion, which means the insured must accept it or leave it.
b. They are aleatory contracts, which means amounts exchanged may be unequal.
C. They are unilateral, meaning there is only one promise, which is a promise by the insured to pay the premium.
D. The contracts are conditional, which means the terms are under the condition that premiums are paid.
They are unilateral, meaning there is only one promise, which is a promise by the insured to pay the premium.
Rationale
The promise is by the insurer to pay if a loss occurs
109
Cate is an inquisitive person and wants an explanation of the legal characteristics of an insurance contract. All of the following statements are correct,
An insurance contract is a contract of ADHENSION where the insured accepts the contract as written.
An insurance contract is UNILATERIAL , where only one party agrees to a legally enforceable promise.
An insurance contract is CONDITIONAL in terms of claim payment if certain conditions are met by the insured.
110
A subrogation clause means that:
iNsured cannot indemnify himself from both TEST
the insurance company and a negligent third party for the same claim.
Rationale
The insurance company can collect against a negligent third party after paying the claim to their insured
111
identify which concept applies to each of the following descriptions (in order) as it pertains to insurance contracts:
1. The value exchanged between parties may not be equal
2. The wording of insurance contracts is non-negotiable
3. Insurance contracts may be canceled if payment is not received
4. Only one of the parties to the contract is bound by a promise
B. Aleatory - Adhesion - Conditional - Unilateral
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