Lecture 16/17 Flashcards
an ideally measurable risk involves the following
1) large # homogenous exposure units w/in the pop. of potential policyholders
2) non-catastrophic events to insurer (relatively uncorrelated/independent exposures-less need for capital)
3. fortuitous events
4. potential losses that are determinable and measurable
5. loss distributions yield fair premiums
what happens if we violate fortuitous events or potential losses that are determinable
you’re dealing with moral hazard
why think of ideally measurable risks?
- helps plan whats covered
- how to know when to transfer insurance plans
- expected loss
- standard deviation
loss distributions yield fair premiums…
- premiums that reflect differing expected losses across groups of insureds
- premiums that are too large relative to the max payment available (low frequency, high severity)
adverse selection
the tendency of buyers with higher than average expected losses to buy more coverage than buyers with lower than average expected losses when charged the same premium
when is adverse selection generally present?
when potential insured have differing distributions of expected losses and also possess greater knowledge about their expected losses than the insurer
effect of adverse selection
insurer unable to charge sufficient premiums for sustainable business; insurance market falls apart
example of adverse selection in the news
health insurance for people with and without pre-existing conditions
each insurance policy must have these 4 elements
- declaration page
- insuring agreement
- exclusions
- conditions
- MAY HAVE ATTACHMENTS
declarations page contains:
- exposure info
- insurer policy info
- limit
- deductible
exposure info
- insured name, location, type of org and activities
- possible misrep./concealment
insurer and policy info
- premium due, policy period, coverage territory, valuation method
- covered causes of loss (perils)
named perils
lists all the causes of loss
open perils of loss
- special
- covered unless specifically excluded
- tends to provide more coverage
adhesion
- policyholder has no say in wording in coverage (except declaration page)
- because of this it should be clear
what happens if a peril can be interpreted in more than one way?
if it can be interpreted in more than one way, the one that favors the policyholder is used
limit
maximum amount the insurer will pay, sometimes called the face value
limit per occurence
separate limit for each event covered by the policy
annual aggregate limit
total limit for the entire year (or policy party)
deductible
insured retains risk below a dollar amount
copay
a deductible that is stated as a period of time or a percentage of loss
insuring agreement
promise of the insurance company
must give up something of value (their promise)
exclusions
loss situations not covered in the policy
prevent insurer catastrophe exclusions
limit situations with positive correlation
standardize the risk
assist in categorizing insured to limit adverse selection
limit duplicate coverage
in standardizing the risk, other coverage likely exists, supports indemnity
maintain fortuity
assist in limiting moral hazard
categories of exclusions
standardize the risk
limit duplicate coverage
maintain fortuity
prevent insurer catastrophe
conditions
valuation other insurance provisions subrogation notification, filing, investigating, paying claim maintaining coverage
valuation
think about indemnity principle
other insurance provisions
used when more than one policy is applicable-supports indemnity
-share in proportion or in layers
subrogation
once the policyholder is paid by the insurer for loss any right to sue another party for the same loss is transferred to the insurer-also promotes indemnity principle
values of the loss to be paid by the insurer
life health disability liability property
for depreciation do u sue original cost or replacement cost?
replacement cost
other insurance provisions
used when more than one policy is applicable-supports indemnity
pro rata basis
share based on contribution to total amount of insurance
primary/excess basis
one insurer pays first, followed by the second, then third
life insurance
stated value (face value) of the policy (stated amount agreed upon before the loss)
health insurance
variety of ways-stated dollar per procedure actual cost, annual fee
disability insurance
% income prior to disability
liability
pay on behalf of the insured for amounts the insured is legal responsible to pay plus also provide defense (and have right to defend/settle
