Insurance: Chapter 2 Flashcards
What opportunities provide ways to manage personal risk?
- Death
- Disability
- Poor Health
- Unemployment
- Superannuation (risk of outliving individuals or couples money)
What 3 properties are examples in which risks and costs can be managed?
- Real
- Personal
- Auto
What actions create liability?
- Negligence
- Intentional Torts
- Strict Liability
What is a Tort?
A wrongful act other than a breach of contract for which a civil action may be brought against the tortfeasor.
*A tort is generally regarded as a crime.
What is an intentional tort?
A deliberately performed act such as assault, battery, libel, slander or false arrest
What is an unintentional tort?
Negligence or carelessness
What is an attractive nuance and an example of it?
A situation in which a high degree of care is imposed on the land occupied for certain conditions on the land.
Ex: A pool that isn’t screened or fenced or a vacant lot where children play
What is negligence per se with an example of it?
A situation where the standard of care is set by a statute.
Ex: A school zone or crosswalks
What is strict liability with an example of it?
(Product liability) Generally limited to manufactures and distributors of products found to be defective.
Ex: Pharmacueticals that cause illness or death, cars found to have defects
What is absolute liability and an example?
An extra hazardous condition that results in losses to others.
Ex: Keeping of wild animals, workers’ compensation and blasting
What is vicarious liability or respondeat superior with an example?
When one person is held liable for the negligent behavior of another person.
Ex: Branch manager at BD responsible for supervising other, same as manager at insurance agency
What is the assumption of risk?
One party recognizes and understands the danger in an activity yet voluntarily chooses to encounter it, another party cannot be held responsible for the injury.
Ex: Skiing, stock car racing
What is contributory negligence?
Any negligence on the part of the injured party, although slight, defeats the claim.
Ex: Jaywalking or Drunk Driving
What is comparative negligence?
Any degree of negligence on the part of the injured party, this does not defeat the claim, but is used in some manner to mitigate damages payable by the other party. Damages are adjusted proportionally
Ex: Injured party is found 20% negligent, the other party is found 80% negligent.
What does the term last clear chance mean?
Any contributory negligence of the injured party will not bar recovery of damages if the other party (immediately prior to the accident) had a last clear chance to prevent the accident but failed to do so.
Ex: Road rage
What is the capital utilization method in determining life insurance needs?
Uses annuitization to fund future income needed but leaves no money at the end of the anticipated distribution period.
What is the capital retention or capital preservation method in determining life insurance needs?
Presumes that only interest is distributed and the original capital is still left at the end of the income period.
Tom makes $120k, his wife will receive $20k in SS, if he dies and their investments earn 7%, what amount of money will provide an equivalent income without invading capital? Provide the steps
((120-20)/.07)+100*= 1,528,571
- this 100 is for the first year because the day he dies she will need income for the rest of the year
John wants his wife to have $36k in income that will increase with inflation (4%). He can realize a net investment return of 7%, how much insurance should he purchase?
(36k/(.07-.04)) + 36k*= 1,236,000
- this 36k is for the first year because the day he dies she will need income for the rest of the year
How much will disability carriers typically issue to a person for their earned income?
50-60%. This may be improved by adding group disability coverage after individual policy has been issued.
Long term care insurance is generally purchased and calculate as what?
Per Diem. Costs vary but the typical amount is $200 to $400+ per day.
What is the most common type of employee benefit?
Medical insurance. Most new plans are PPO or HMO, while older plans-imposed deductibles and coinsurances.
What are the types of property loss exposure facing families that would require them to purchase property insurance?
Real or personal. Insurance should be used for risks with high severity and low frequency, while retention should be used for low severity and low frequency.
What is liability risk?
Makes individuals responsible for certain losses they cause by injuring others or damaging property of others.
Clients should have adequate liability protection which typically includes personal umbrella liability policy.
Are there different durations which you would need insurance coverage?
Yes. Disability you would only need until you retire, life insurance may be needed for an entire lifetime or possibly until children have completed college. Health insurance you are eligible to receive medicare at age 65.
What is a participating policy?
Pays an annual dividend to the policyholder. They charge a larger premium (willful overcharge) and if the extra premium is not needed it is returned as a dividend generally tax free.
Dividends are generally based on higher-than-expected investment return and/or lower-than-expected mortality and expenses
What should a financial planner do when choosing an insurance company?
Select a company that holds one of the 3 highest rating from at least three of the rating services.
A.M. Best A++ to F (provides detailed historical
data on insurance carriers)
Standard and Poors AAA to CCC
Moody’s Aaa to C
Weiss A+ to F
What is underwriting?
The process of selecting and classifying exposures.
What is the insurer seeking as an applicant for underwriting?
The insurer seeks to accept only applicants who (on average) will have actual loss experience comparable to the expected loss experience that is built into the company’s premium rates.
What two activities must the underwriter complete?
- Cover a large number of individual insureds so that the law of large numbers works
- Obtain homogeneity of insureds so that there is a reasonable equity between the better and poorer individual insureds
What 5 sources of information does the underwriter use?
- An application for insurance
- Information from the agent or broker
- Investigations
- Information bureaus
- Physical examinations or inspections
What is the sequence of events during the loss adjustment process?
- Notice of loss: Notice by the insured to the insurance company that a loss has occurred.
- Investigation: The adjuster must first determine that there was a loss and then whether the loss is covered under the policy
- Proof of Loss: Insured files a signed proof of loss (must be in writing)
- Payment or denial of claim
What is an adjuster?
Someone who investigates losses
