Introduction to Insurance

Question 1

Components of the insurance system

Answer 1

i. Agent: captive (one company) vs. independent/broker (many companies)
ii. Company ownership: stock (stockholders) vs. mutual (policyholders)
iii. Employees: (1) underwriters, (2) claims adjusters, (3) actuaries, (4) marketing

Question 2

Four functions of insurance

Answer 2

i. Risk transfer
ii. Risk pooling
iii. Risk allocation – match premium price to risk
iv. Risk reduction

Question 3

Expected value

Answer 3

Probability of a loss x its magnitude if it occurs

Question 4

Two market failures

Answer 4

i. Adverse selection
ii. Moral hazard (Insurable interest)

Question 5

Vlastos v. Sumitomo Marine & Fire Insurance Company

Endorsement was ambiguously worded, “Warranted that the 3rd floor is occupied as Janitor’s residence.”

Answer 5

Ambiguous language in an insurance policy must be interpreted in favor of providing coverage.

Question 6

De Smet Farm Mutual Insurance Company of South Dakota v. Busskohl

On an insurance application, defendant answered that he had not previously been denied home insurance when he had been previously denied due to his suspected arson.

Answer 6

A material misrepresentation, even if not intended, in an insurance application allows the insurer to rescind the policy.

a. The insured fraudulently or intentionally misrepresented a fact material to the insured’s acceptance of risk

b. The insurer, in good faith, would not have issued the policy or covered the hazard that caused the loss had the insurer known the truth.