Insurance Lesson 1 Flashcards
Types of Risk:
Pure
Speculative
Subjective
Onjective
Pure risk:
Loss or no loss
Death, accident, fire
Speculative risk:
Profit, loss, no loss
Entrepreneurs, voluntary, not insurable
Subjective risk:
Individual’s perception of risk
Objective risk:
Measurable & quantifiable
Measures variation of actual loss from expected loss
Example Exam Question:
Which is an insurance risk?
A. Objective
B. Pure
C. Subjective
D. Objective
B
Probability of loss:
Chance of loss occurring
Useful for insurer to quantify cost of claims
Higher probability may result in decline of coverage
Severity:
Actual dollar amount of loss
More important than probabiltiy
Law of Large Numbers:
More units exposed to similar loss, predictability of loss to entire pool increases
Helps to reduce objective risk
Perils:
Actual cause of loss
Ex: fire, wind, tornado, earthquake, burglary, collision
Hazards:
3 Types
Condition that increases likelihood of loss occurring
Moral
Morale
Physical
Moral Hazard:
Character flaw, lead to false claim
Morale Hazard:
Indifference by insured person
Physical Hazard:
Tangible condition that increase probability of peril occurring
Ex: icy/wet roads, poor lighting, defective equipment
Adverse Selection:
Tendency of person with __ than average risks to purchase/renew insurance?
Premiums are dependent upon balance between __ & __ risks in the pool?
Managed through __, __, & __?
Higher
Favorable & unfavorable
Underwriting, denying insurance on front end, raising premiums on back end
Example Exam Question:
Underwriter responsibility of achieving profit within risk parameters of company. What is greatest challenge?
A. Setting premiums
B. Motivating salespeople
C. Making sure profit margins are correct
D. Managing adverse selection
D
Requisites for insurable risk:
CHAD not Catastrophic for insurer Homogenous (large number of similar exposure units) Accidental measurable & Determinable
Example Exam Question:
Which is not a requisite for insurable risk from insurer’s perspective?
A. Law of large numbers
B. Accidental, measurable, determinable
C. Not catastrophic for insured
D. Premiums must be affordable
C
Elements of a Valid Contract:
COALL Competence Offer & Acceptance Legal consideration Lawful purpose
Example Exam Question:
Signs life insurance contract & gives first month’s premium. Hit by bus leaving office. Will wife be able to collect?
A. Yes, as long as Eric was insurance (no terminal illnesses or life threatening pre-existing conditions)
B. No, policy was not delivered
C. Yes, regardless of whether Eric was insurable
D. No, signing & paying not considered offer & acceptance
A
Principle of Indemnity:
Insured only entitled to compensation to extent of loss; cannot make a profit
Subrogation Clause:
Cannot receive compensation for same claim from insurer & third party
Principle of Insurable Interest:
Must have emotional or financial hardship resulting from damage, loss, or destruction
Insurable Interest:
Property & Liability:
Life:
P&L @ inception & time of loss
Life @ inception
Example Exam Question:
Mike injured by Tim. Mike collects from insurance & sues Tim. Tim’s insurance also pays Mike for same injuries. Which has been violated?
A. Subrogation
B. Subjective Risk
C. Adverse Selection
D. Adhesion
A
Void vs Voidable
Void: never valid, not enforceable
Voidable: allows cancelation by one of the parties while other is bound by agreement
Warranty
Promise by insured to insurer
Breach of warranty is grounds for avoidance
Representation
Must be material misrepresentation to void insurance contract
Concealment
When insured is silent about fact material to the risk
Example Exam Question:
42 applying for life insurance. To receive lower premium, says age 34. What will insurance company likely do?
A. Avoid the contract
B. Void the contract
C. Refund premiums & rent claim be beneficiaries
D. Pay beneficiaries lesser face value based on premiums paid & actual age
D
Adhesion
Take it or leave it; no negotiations; ambiguities in favor of insured
Aleatory
Money exchanged may be unequal
Unilateral
Only one promise is made by insurer (pay in event of loss)
Insured not obligated to pay premiums - if not paid, no promise by insurer
Conditional
Insured must abide by terms & conditions of insurance contract
Example Exam Question:
House slid down hill after heavy rain storm & is total loss. Insurance contract states “earthquake is general exclusion”. Which is likely to win in court & why?
A. Insurance because stated exclusion
B. Insurance because homeowner’s policies do not cover mudslides
C. Randy because aleatory principle
D. Randy because contract is adhesive
D
Waiver
Party relinquishes a known right
Estoppel
Party is denied assertion of a right
Parol Evidence Rule
Contract reflects complete understanding of both parties
Reformation
Contract is revised to express original intent of all parties
Rescission
Deems contract void from inception
General Agent vs Independent Agent vs Broker Representation
General: represents 1 insurer
Independent: represents multiple unrelated insurers
Broker: represents policy owner
Express Authority
Given through agency or written agreement
Insurer is responsible for acts of agent
Implied Authority
Authority public perceives & valid agency agreement exists
Actual delivering of contract & accepting premium
Insurer responsible even if client is mislead
Apparent Authority
Insured believe agent has authority when no authority exists
Example Exam Question:
Scott to take insurance exam. Boss gifts business cards. Misses exam. Take insurance application from Carlos & gets check for first year premium. Carlos dies by lightning strike. Which is correct?
A. Carlos’ Bene will collect $10M because of explicit authority & check was given to agent
B. Policy not issued because Scott not licensed
C. Carlos’ Bene will not receive anything because check while issued was given to unlicensed agent
D. Presuming Carlos meets normal underwriting standards, Bene will collect $10M under apparent authority
D
Conditions
Details duties & rights of insured & insurer
Declarations
Includes name of insured, descriptions, amounts, term, inception/termination dates
Exclusions
What will not be covered
May exclude perils, specifics
Riders & Endorsements
Written additions, customize,t take precedence
Regulation of insurance industry is done at ___ level
State
Legislative Branch
Licensing of agents
Enacts laws & requirements for business in particular state
Judicial Branch
Rules on constitutionality of laws passed
Render decisions & interpretations regarding policy terms
Executive Branch/State Insurance Commissioner
Administers, interprets, enforces insurance laws
Does not make laws
Goals of State Insurance Regulation
Protect insured
Maintain & promote competition
Maintain solvency of insurers
Replacement Cost
Current cost of replacing
Actual Cash Value
Replacement - Depreciation
Can impose financial burden
*Most auto policies
Example Exam Question:
Purchase theater system $10,000 2 years ago. Replacement cost is $8,000. Destroyed in fire. 40% depreciated. How much will Brandon receive under Actual Cash Value?
A. $2,000
B. $2,700
C. $3,200
D. $4,800
D
Agreed Upon Value
Determined jointly by insured & insurer
*Usually art & antiques
Deductibles
Amount insured must pay before insurer will make payments
Retain risk
Copayments
Addition to deductibles
Portion of losses incurred
% of expenses above deductible
Coinsurance
Requires insured to cover stated percentage of property value
If meet coinsurance requirement, pay lesser of: face value, replacement cost, or actual expenditures
If below coinsurance requirement, pay greater of actual cash value or formula
(Face value/coinsurance) x loss - deductible
Superannuation
Outliving of funds
Mitigated by annuities
Insurance Rating Agencies & Rating Systems:
AM Best’s: Highest: A++ to A/A- Lowest: C/C- to D Moody’s: Highest: Aaa to Aa1/Aa2 Lowest: B1/B2/B3 to Caa Standard & Poor’s: Highest: AAA to BBB Lowest: BB and lower CC
National Association of Insurance Commissioners (NAIC)
Financial ratio analysis
No regulatory power
Involved in accrediting state offices
Issues “model legislation”
6 Steps of Risk Management:
DIEDIE Determine objectives Identify risks Evaluate risks Determine alternatives Implement Evaluate, monitor, review
Risk Management Guidelines:
Avoid: most serious
Transfer: risk high, frequency low
Retention/Reduction: risk low, frequency high (too expensive to insure)
Example Exam Question:
Which does not match action:
A. Avoidance: hard hat on construction site
B. Reduction: installing sprinkler system in building
C. Transfer: auto insurance
D. Retention: health insurance policy deductibles
A
Underwriting Ratings for Insureds
Preferred: lowest premiums, insured exceed requirements
Standard: average
Rated: will accept for greater premium
Decline: will not insure
Factors effecting premiums:
Health Family health history Risk factors/high risk activities Credit rating Driving record
Lesson 1 Review:
Tendency for higher than average risk individuals to seek out/purchase insurance policies is:
A. Peril
B. Hazard
C. Law of large numbers
D. Adverse selection
D
Lesson 1 Review:
What type of hazard results from indifference person had to potential loss because insurance?
A. Peril
B. Physical
C. Moral
D. Morale
D
Lesson 1 Review:
Which is correct regarding peril & hazard?
A. Hazard is proximate or actual cause of loss
B. Peril is proximate or actual cause of loss
C. Peril is condition that creates or increases likelihood of loss occurring
D. None of the above
B
Lesson 1 Review:
Which is not a requisite for insurable risk?
A. Large number of homogenous exposure units must exist
B. Insured losses must be accidental from insured’s standpoint
C. Insured losses must be measurable & determinable
D. Loss must not pose catastrophic risk for insured
D
Lesson 1 Review:
Principle of indemnity is:
A. Person entitled to compensation only to extent financial loss has been suffered
B. Cannot indemnify self from both insurance company & negligent 3rd party for same claim
C. Insured must be subject to emotional/financial hardship resulting from loss
D. Insured & insurer must be forthcoming with all relevant facts about insured risk & coverage for that risk
A
Lesson 1 Review:
Subrogation clause is:
A. Person entitled to compensation only to extent financial loss has been suffered
B. Cannot indemnify self from both insurance company & negligent 3rd party for same claim
C. Insured must be subject to emotional/financial hardship resulting from loss
D. Insured & insurer must be forthcoming with all relevant facts about insured risk & coverage for that risk
B
Lesson 1 Review:
When must insurable interest exist for property insurance claim?
A. At inception & time of loss
B. Policy inception only
C. Time of loss
D. Either inception or time of loss
A
Lesson 1 Review:
When must insurable interest exist for life insurance claim?
A. At inception & time of loss
B. Policy inception only
C. Time of loss
D. Either inception or time of loss
B
Lesson 1 Review:
When insured is spent to fact that is material to risk being insured, what has occurred?
A. Breach of warranty
B. Misrepresentation
C. Concealment
D. Breach of indemnity
C
Lesson 1 Review:
58 applying for life insurance. Stated 28 on application. What happens if bene’s try to collect on policy?
A. Void the policy
B. Require payment on premiums for 58 year old insured
C. Recalculate face value based on actual premiums paid
D. Bring lawsuit against estate
C
Lesson 1 Review:
Which is false?
A. Adhesion: insured must take it or leave it
B. Aleatory: amounts exchanged may be unequal
C. Unilateral: only 1 promise which is by insured to pay premium
D. Conditional: terms are under condition that premiums paid
C
Lesson 1 Review:
Sees agents name on business card & letterhead. If agent has valid agency agreement, what authority to believe his agent has to enter into insurance contract?
A. Express
B. Implied
C. Apparent
D. None
B
Lesson 1 Review:
House with FMV $500,000. $300,000 insurance. Coinsurance requirement of 80%. If house hit by tornado & $150,000 loss, what will insurer pay?
A. $75,000
B. $112,500
C. $150,000
D. $250,000
B
Lesson 1 Review:
Insurance regulation is primarily conducted at what level?
A. SEC
B. State Insurance Commissioner
C. Federal Insurance Commissioner
D. NAIC
B
Lesson 1 Review:
Which regarding loss frequency is true?
A. Expected number of losses that will occur within a given period
B. Potential size or amount of loss
C. Measure of total amount of losses incurred by insurer
D. Measure of variability between actual & expected loss
A
Lesson 1 Review:
Which regarding loss severity is true?
A. Expected number of losses within a given period
B. Potential size or amount of loss
C. Both
D. Neither
B
