Insurance/Principals Of Insurance

Question 1

What type of risk can insurance be used for?

Answer 1

Pure Risks -either a chance of a loss or no loss Example: death, auto accident and house fire

Question 2

What arev the components of risk?

Answer 2

Probability of loss - the “chance” of a loss occurring Severity - the actual dollar amount of the loss Law of large numbers: *specifies that when more units are exposed to a similar loss the predictability of such a loss to the entire pool increases *The more exposures the more likely the results will equal the true results and be predictive if future results

Question 3

What causes a loss? Examples?

Answer 3

Perils Ex: fire, wind, tornado, earthquake, burglary and collision

Question 4

What increases the likelihood of a loss occurring?

Answer 4

Hazards - moral, morale and physical hazard Moral: character flaw, leads to a false claim Morale: indifference created because a person is insured Physical: a tangible condition that increases the probability of a peril occurring (icy roads)

Question 5

What is adverse selection?

Answer 5

* the tendency of persons with higher than average risks to purchase or renew insurance policies * Premiums are dependent on a balance been favorable and unfavorable risks in the pool * Managed through underwriting, denying insurance on the front end and raising premiums on the back end

Question 6

How do you remember requisites for insurable risks?

Answer 6

Insurable risks are CHAD: Catastrophic (must not be) Homogenous exposure units (similar) Accidental (from insured’s viewpoint) measurable and Determinable (so insurer can accurately forecast actual losses; value of a house vs cash in wallet)

Question 7

How do you remember the elements of a valid contact?

Answer 7

A legal contract requires COALL! Competent parties (18 or older, minor can void contract) Offer and Acceptance (signing an insurance application and paying first premium, as long insured qualifies for the policy) Legal consideration (whatever is being exchanged; money, services or property) Lawful purpose (can’t be illegal)

Question 8

What is the principle of indemnity?

Answer 8

*insured cannot receive compensation from both the insurer and the third party for the same claim *Insured cannot profit from an insurance contract

Question 9

What is the subrogation clause?

Answer 9

*insured can’t receive compensation from both the insurer and a 3rd party for the same claim *If insured collects compensation from their insurance company, they lose the right to collect compensation from the third party *Insurer “steps into the shoes” of the insured to recoup any restitution from the 3rd party or the 3rd party’s insurer

Question 10

What is the principle of insurable interest?

Answer 10

* insured must have an emotional or financial hardship resulting from damage, loss, or destruction *P&L insurance- insured must have overreact insurable interest at the time of policy inception AND are time of loss *Life insurance- insured only needs an insurable interest AT THE TIME of policy inception

Question 11

What is a warranty?

Answer 11

*A promise made by the insured to the insurer *Breach of warranty is grounds for avoidance (Ex Kellen Winslow riding a motorcycle)

Question 12

What is representation?

Answer 12

*statements made by the insured to the insurer during application process *Must be a material “misrepresentation” to void an insurance contract *Misrepresenting age on a life insurance application is NOT material misrepresentation, insurer simply adjusts death benefit based on actual age

Question 13

What is concealment?

Answer 13

When the insured is silent about a fact that is material to the risk.

Question 14

What is adhesion?

Answer 14

*insurance policy is “take it or leave it”, no negotiations on terms or conditions *Any ambiguities in an insurance contract are found in favor of the insured

Question 15

What is aleatory?

Answer 15

Money exchanged may be unequal; small premium/large payout

Question 16

What is unilateral!

Answer 16

Only one promise made by insurer, pay in the event of a loss Insured not obligated to pay premiums, no premiums paid then no promise by insurer

Question 17

What is conditional?

Answer 17

Insured must abide by the terms and conditions of the insurance contract. If not met, insurer may not pay the claim.

Question 18

Name the contract rights and provisions

Answer 18

Waiver: occurs when a party relinquishes a known right Estoppel: when a party is denied assertion if a right to which they are otherwise entitled (agent says your auto premiums won’t go up because of one accident, insurer estopped from raising premiums) Waiver provision: insurer may seek to avoid liability due to loss their agents offering policy changes not authorized by the company

Question 19

Name the contract rights and provisions

Answer 19

Waiver: occurs when a party relinquishes a known right Estoppel: when a party is denied assertion if a right to which they are otherwise entitled (agent says your auto premiums won’t go up because of one accident, insurer estopped from raising premiums) Waiver provision: insurer may seek to avoid liability due to loss their agents offering policy changes not authorized by the company

Question 20

Describe contracts: dispute remedy

Answer 20

Parol Evidence Rule: stipulates the contract reflects the complete understanding of both parties Reformation: contract revised to express original intent of all parties Rescission: deems contract void from inception

Question 21

Describe contracts: dispute remedy

Answer 21

Parol Evidence Rule: stipulates the contract reflects the complete understanding of both parties Reformation: contract revised to express original intent of all parties Rescission: deems contract void from inception

Question 22

Name the types of insurance agents

Answer 22

Agent is a legal rep of insurer General: represents one insurer (Allstate) Independent: represents multiple, unrelated insurers Broker: represents policy owner, not the insurance Co

Question 23

What are the types of authority an agent can legally bind an insurer!

Answer 23

Express: insurer responsible for acts of an agent; given through an agency or written agreement Implied: authority that the public perceives, and a valid agency agreement exists; delivering if insurance contract and accepting a premium; insurer still responsible even if a client is misled Apparent:. Insured believes agent has authority to act on behalf of insurer even though no authority exists; could be inferred based on business cards/sign on the wall even though agency agreement actually excited

Question 24

How is the insurance industry regulated?

Answer 24

STATE level not federal Legislative: provides for licensing of agents and enacts laws and requirements for doing business in a particular state Judicial: rules in laws passed by legislative Executive: administers, interprets, and enforces insurance laws; does NOT make law

Question 25

What is the difference between replacement cost and actual cash value (ACV)?

Answer 25

Replacement: current chat if replacing property with new materials of like kind ACV: includes depreciation (almost all auto policies)

Question 26

For homeowners insurance, what is the coinsurance formula?

Answer 26

If coverage is less than the coinsurance requirement (usually 80%), then insurer pays the greater of ACV or the following formula: Coinsurance = 80% X Replacement Cost (Face Value / Coinsurance) X Loss - Deductible

Question 27

What are the perils that can reduce/eliminate the ability to earn?

Answer 27

Dying too soon: leaving obligations; life insurance Living too long: superannuation is outliving funds; annuities can mitigate this risk Disability

Question 28

What are the perils that can destroy/deplete existing assets!

Answer 28

Damage to property: natural disasters, accidents and crime can damage property. Direct (loss of house to fire) and indirect (hotel expenses while house is repaired. Homeowners, renters and personal auto Legal liability for injuries inflicted upon others: personal assets can be seized, wages garnished, PLUP used to mitigate risks

Question 29

What is the National Association of Insurance Commissioners?

Answer 29

*provides a watchlist of insurance companies based your financial ratio analysis; to measure financial health of insurance companies *NO regulatory power over the insurance industry (exam tip) *Issues model legislation that state legislatures may or may not adopt

Question 30

How do you remember the six steps of risk management!

Answer 30

DIEDIE: don’t insure everything squared Determine the objectives Identify the risks Evaluate risks for probability/potential loss Determine alternatives Implement the program Evaluate, monitor, and review (control)

Question 31

What are the risk management guidelines?

Answer 31

Avoidance: for the most serious types of risk Transfer: use insurance where financial risk is severe but frequency is low Retention/reduction: financial risk low and frequency high making it too expensive to insure (deductibles)

Question 32

What are the approached to providing adequate life insurance protection?

Answer 32

Needs approach: any future cash it income need discounted using present value of that future cash flow. Note: for spousal income needs, include “blackout period” (SS survivor benefits cease, last child reaches age 16, and ends when spouse starts receiving SS retirement benefits, age 60 at the earliest) Human life value approach: uses projected future earnings LESS self maintenance costs as the basis for determining needs (individuals current earnings, future growth rate of earnings, number of working years remaining, cost of self maintenance and the capitalization rate (discount rate)