Lecture 16/17

Question 1

an ideally measurable risk involves the following

Answer 1

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

Question 2

what happens if we violate fortuitous events or potential losses that are determinable

Answer 2

you’re dealing with moral hazard

Question 3

why think of ideally measurable risks?

Answer 3

• helps plan whats covered
• how to know when to transfer insurance plans
• expected loss
• standard deviation

Question 4

loss distributions yield fair premiums…

Answer 4

• 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)

Question 5

adverse selection

Answer 5

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

Question 6

when is adverse selection generally present?

Answer 6

when potential insured have differing distributions of expected losses and also possess greater knowledge about their expected losses than the insurer

Question 7

effect of adverse selection

Answer 7

insurer unable to charge sufficient premiums for sustainable business; insurance market falls apart

Question 8

example of adverse selection in the news

Answer 8

health insurance for people with and without pre-existing conditions

Question 9

each insurance policy must have these 4 elements

Answer 9

• declaration page
• insuring agreement
• exclusions
• conditions
• MAY HAVE ATTACHMENTS

Question 10

declarations page contains:

Answer 10

• exposure info
• insurer policy info
• limit
• deductible

Question 11

exposure info

Answer 11

• insured name, location, type of org and activities

- possible misrep./concealment

Question 12

insurer and policy info

Answer 12

• premium due, policy period, coverage territory, valuation method
• covered causes of loss (perils)

Question 13

named perils

Answer 13

lists all the causes of loss

Question 14

open perils of loss

Answer 14

• special
• covered unless specifically excluded
• tends to provide more coverage

Question 15

adhesion

Answer 15

• policyholder has no say in wording in coverage (except declaration page)
• because of this it should be clear

Question 16

what happens if a peril can be interpreted in more than one way?

Answer 16

if it can be interpreted in more than one way, the one that favors the policyholder is used

Question 17

limit

Answer 17

maximum amount the insurer will pay, sometimes called the face value

Question 18

limit per occurence

Answer 18

separate limit for each event covered by the policy

Question 19

annual aggregate limit

Answer 19

total limit for the entire year (or policy party)

Question 20

deductible

Answer 20

insured retains risk below a dollar amount

Question 21

copay

Answer 21

a deductible that is stated as a period of time or a percentage of loss

Question 22

insuring agreement

Answer 22

promise of the insurance company

must give up something of value (their promise)

Question 23

exclusions

Answer 23

loss situations not covered in the policy

Question 24

prevent insurer catastrophe exclusions

Answer 24

limit situations with positive correlation

Question 25

standardize the risk

Answer 25

assist in categorizing insured to limit adverse selection

Question 26

limit duplicate coverage

Answer 26

in standardizing the risk, other coverage likely exists, supports indemnity

Question 27

maintain fortuity

Answer 27

assist in limiting moral hazard

Question 28

categories of exclusions

Answer 28

standardize the risk
limit duplicate coverage
maintain fortuity
prevent insurer catastrophe

Question 29

conditions

Answer 29

valuation
other insurance provisions
subrogation
notification, filing, investigating, paying claim
maintaining coverage

Question 30

valuation

Answer 30

think about indemnity principle

Question 31

other insurance provisions

Answer 31

used when more than one policy is applicable-supports indemnity
-share in proportion or in layers

Question 32

subrogation

Answer 32

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

Question 33

values of the loss to be paid by the insurer

Answer 33

life
health
disability
liability
property

Question 34

for depreciation do u sue original cost or replacement cost?

Answer 34

replacement cost

Question 35

other insurance provisions

Answer 35

used when more than one policy is applicable-supports indemnity

Question 36

pro rata basis

Answer 36

share based on contribution to total amount of insurance

Question 37

primary/excess basis

Answer 37

one insurer pays first, followed by the second, then third

Question 38

life insurance

Answer 38

stated value (face value) of the policy (stated amount agreed upon before the loss)

Question 39

health insurance

Answer 39

variety of ways-stated dollar per procedure actual cost, annual fee

Question 40

disability insurance

Answer 40

% income prior to disability

Question 41

liability

Answer 41

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