Lesson 1

Question 1

1.1.1.a Define and provide 3 possible outcomes of speculative risk and give one example

Answer 1

Speculative risk = risk assumed as a conscious choice and involves 3 possible outcomes: loss, gain, or no change.

An example is the purchase of stocks

Question 2

1.1.1.b Define pure risk, provide the possible outcome and give examples

Answer 2

Pure risk is risk related to event outside the risk taker’s control and is the opposite of speculative risk., with loss or no change the only possible outcomes.

Examples include Pure risk event including premature death, identity theft and career ending disabilities/

Question 3

1.1.2.a List 4 techniques for managing risk

Answer 3

1) Transferring Risk
2) Reducing or mitigating risk
3) Retaining Risk
4) Avoiding risk

Question 4

1.1.2.b define risk management

Answer 4

risk management is the process of identifying, assessing/measuring, and managing exposures to risk.

Once exposures have been identified and measured various methods of risk management can be used to eliminate or reduce the exposure.

Question 5

1.1.2.c Define Transferring Risk as a risk management technique

Answer 5

An individual or a business can transfer the risk of financial consequences of any loss to another party through either insurance or noninsurance contracts.

A noninsurance transfer can take the form of a hold harmless agreement or contract clause (also indemnity clause) exempting a party from liability it would otherwise be responsible for.

Question 6

1.1.2.d Define Reducing or Mitigating Risk as a risk management technique

Answer 6

These techniques are designed to lessen the possibility of loss or minimize the financial impact of losses that actually occur. Loss control can be achieved through loss prevention or loss reduction.

Question 7

1.1.2.e Define Retaining Risk as a risk management technique

Answer 7

This is an active decision to accept the consequences for financing losses associated with specific losses if they do occur.

Loss financing methods indicate how an individual or plan sponsor will pay for it.

Question 8

1.1.2.c Define Avoiding Risk as a risk management technique

Answer 8

The objective of risk avoidance is to eliminate the likelihood a risk will occur.

An individual or business can avoid risk by either refusing to assume it initially or by abandoning a risk it is exposed to.

It can be achieved by elimination, substitution and separation

Question 9

1.1.3 Provide examples of self insurance

Answer 9

Self insurance is a risk management technique where an individual or business accepts financial responsibility for losses associated with specific risks.

For examples many organizations provide health care benefit plans. A plan sponsor can self insure such benefit plans either by setting aside money or paying eligible expenses out of current income.

Another option is to only take on part of the risk, buying insurance for some categories and providing other benefits itself.

Question 10

1.1.4 Provide a rationale for self-insuring the cost of acute care drugs such as antibiotics and dental checkups and cleanings

Answer 10

These are high frequency low severity losses that can be absorbed as normal everyday expenses. They are appropriate for self insurance.

The possibilities for risk retention are limited. Generally high severity losses should not be retained. That is, losses that would seriously interrupt an individual’s or Plan sponsor’s flow of earnings and long term funtion.

Question 11

1.1.5 Briefly describe the personal risks covered by insurance

Answer 11

Personal risks arise from the possibility of death, poor health and outliving one’s savings.

Life and health insurance companies sell products that insure against financial loss from premature death, disability, illness and accident.

Question 12

1.2.1 Explain risk pooling

Answer 12

Individuals share risk. Pooling is based on the assumption that insurers can calculate the loss rate that will be sustained by members of the pool.

Question 13

1.2.2 Explain the significance of the loss rate

Answer 13

To predict the loss rate of a given group of insureds the insurer must predict the number and timing of covered losses in the group.

This allows them to determine the proper premium amount to charge to cover expected losses.

Question 14

1.2.3 Explain the significance of the law of large number to risk management

Answer 14

The law of large numbers says that the more events observed the likely that observed events will tend to the true probability the event will occur.

This allows uncertain events to become predictable in large groups.

Question 15

1.2.4 Explain how insurers use morbidity tables.

Answer 15

These display rates of mortality or incidence of sickness or accident by age among a given group of people.

Question 16

1.3.1.a List the 5 characteristics of a loss required to be considered insurable

Answer 16

1) Loss must occur by chance
2) Loss must be definite
3) Loss must be financially significant
4) Probable loss must be predictable
5) The loss must not be catastrophic to the insurer

Question 17

1.3.2.a Define and provide an example of an indemnity contract

Answer 17

In an indemnity contract the amount payable is based on the actual amount of financial loss incurred at the time of the loss (subject to maximums).

Prescription drug coverage and property and liability insurance are examples.

Question 18

1.3.2.b Define and provide an example of a valued contract

Answer 18

In a valued contract, the amount payable when a loss occurs is specified in advance (face value), regardless of the actual amount of loss.

Life insurance is an example of a valued contract.

Question 19

1.4.1 Explain the significance of adverse election in the pricing of insurance

Answer 19

Adverse selection is the tendency of individuals with a greater than average likelihood of loss to seek insurance protection to a greater extent than others.

Insurers need to carefully review applications to asses risk so that the premiums charged will be sufficient

Question 20

1.4.2.a Provide examples of how physical and moral hazards impact the likelihood an individual will suffer a loss

Answer 20

Physical: high blood pressure may increase mortality

Moral: A criminal record

Question 21

1.4.2.b Define a moral hazard

Answer 21

A moral hazard occurs when the reputation, financial position or criminal record of a proposed insured indicates they may act dishonestly.

Question 22

1.4.3.a Identify 4 risk classes used in life insureds for the purpose of determining equitable premium rates for requested coverage

Answer 22

1) Declined Risk
2) Substandard Risk
3) Standard (impaired) Risk
4) Preferred Risk

Question 23

1.4.3.b define the life insurance underwriting class: Declined Risk

Answer 23

Declined Risk applies to proposed insureds who are considered to present a risk that is too great for the insurer to cover

Question 24

1.4.3.c define the life insurance underwriting class: Substandard Risk

Answer 24

Substandard Risk applies to proposed insureds that have significantly higher than average risk but are still insurable

Question 25

1.4.3.d define the life insurance underwriting class: Standard (impaired) Risk

Answer 25

Standard (impaired) Risk applies to proposed insureds who have a likelihood of risk that is not significantly greater than average

Question 26

1.4.3.e define the life insurance underwriting class: Preferred Risk

Answer 26

Preferred Risk applies to proposed insureds who present a significantly less-than-average likelihood of loss

Question 27

1.5.1.a Define an individual insurance policy

Answer 27

Purchased on an individual basis for protection against the financial hazards of death, accident, sickness, covering only one person or family.

Question 28

1.5.1.a Define a group insurance policy

Answer 28

Group policy is for a group of people usually without individual evidence of insurability. It is designed to insure classes rather than individuals. The lives aren’t named or identified as individuals but rather as members of a class.

A group insurance policy is issued to a plan sponsor for the benefit of plan members. The sponsor is the policy owner. Individual members hold certificates rather than policies as evidence of insurance.

Question 29

1.5.2 Contrast individual and group insurance in terms of underwriting

Answer 29

Individual - requires the proposed insured to meet the insurer’s requirements for evidence of insurability

Group - focuses on the characteristics of the group and doesn’t usually require evidence of insurability for individuals

Question 30

1.5.3 Compare the rights of dependents of covered benefit plan members with the rights of the members

Answer 30

Dependents such as children or spouses typically don’t have the same rights as plan members. For example, the right to name a beneficiary, usually the beneficiary must be the member

Question 31

1.5.4.a List the 4 things that a policyholder and insurer must do to have a valid group insurance contract under law.

Answer 31

1) Mutually agree to the contract terms
2) Have contractual Capacity
3) Exchange legally adequate consideration
4) Form the contact for lawful purpose

Question 32

1.5.3.b Describe how the obligation to form a contract for a lawful purpose is fulfilled for an individual policy as opposed to a group policy

Answer 32

In an individual purpose the lawful purpose requirement is met by the presence of an insurable interest.

In group contracts it is met by the policyholder entering into a contract to provide a benefit to covered group members

Question 33

1.5.5 Describe the parties to a group insurance master/policy and the duties

Answer 33

The parties to a master contract/policy are the insurer and the group policyholder.

The policy holder is the employer or plan sponsor.

Question 34

1.5.5.b List the responsibilities of a group policyholder (6)

Answer 34

• sign the master contract/policy
• decide what type of group insurance coverage to purchase
• negotiates terms of the contract
• makes decisions regarding amendments
• administers the plan and
• collects & remits all the premiums

Question 35

1.5.6 Contrast the ownership rights of the parties to a group insurance contract with those under individual insurance policies

Answer 35

A group policyholder does not have the same ownership rights under a master contract than an individual insured has in an individual policy, because some of those rights are granted to the insured group members.

For example the right to name a beneficiary

Question 36

1.6.1 Identify the main types of insurable groups (4)

Answer 36

1) Single employer groups
2) Multi employer groups (typically within a union or industry)
3) Association groups (employees or employers who are part of an association)
4) Creditor groups - groups of individuals who borrow from banks and other money lending institutions.

Question 37

1.6.2 Explain factors that impact how insurers typically establish group insurance premium rates

Answer 37

On a group by group basis and by benefit included in coverage.

The rates are recalculated annually to account for the changing makeup of the group

Question 38

1.6.3 List 9 factors considered by group underwriters when assessing whether a particular group will experience a predictable average loss rate

Answer 38

1) The purpose of the group - must be unrelated to obtaining insurance
2) The size of the group - regression to mean in larger
3) demographics
4) geographic location
5) The flow of new members into the group
6) Stability of the group
7) Occupational activities of the group
8) The required participation rates - guard against adverse selection
9) how benefit level will be determined

Question 39

1.6.4.a Explain the rationale behind the following fundamental principal of group insurance underwriting:

The employee must be permanent and actively at work

Answer 39

The assumption is that if an individual is working on a permanent basis for a certain minimum number of hours a week they must be reasonably healthy and represent a low enough risk that evidence of insurability isn’t required

Question 40

1.6.4.b Explain the rationale behind the following fundamental principal of group insurance underwriting:

Choices of coverage must be restricted

Answer 40

The insurer protects itself from adverse selection by predetermining the benefits that will be available and imposing maximum limits on coverage

Question 41

1.6.4.c Explain the rationale behind the following fundamental principal of group insurance underwriting:

For contributory plans member contributions must be made through deductions in pay

Answer 41

If a plan is contributory employee contributions must be deducted from employees pay and, combined with plan sponsor contributions, remitted to the insurer in one single payment. This simplifies the administration process and keeps plan expenses to a minimum.

Question 42

1.6.4.d Explain the rationale behind the following fundamental principal of group insurance underwriting:

The plan sponsor must contribute at least some of the cost

Answer 42

If the plan sponsor doesn’t pay the full cost of the plan it typically contributes half the cost. This indicates the sponsor’s commitment to the plan.

Question 43

1.6.4.e Explain the rationale behind the following fundamental principal of group insurance underwriting:

the risk must be spread

Answer 43

There must be a sufficient number of group members to reduce, as much as possible, the chance of fluctuation in claims incurred.

Insurers have requirements for a number of employees who must be enrolled (2 or more) and require that these participation rates be met

Question 44

1.6.4.f List the 5 fundamental principals of group insurance underwriting

Answer 44

1) The employee must be permanent and actively at work
2) Choices of coverage must be restricted
3) For contributory plans member contributions must be made through deductions in pay
4) The plan sponsor must contribute at least some of the cost
5) The risk must be spread

Question 45

1.6.5 Justify why groups such as those found in clubs and lodges and groups of people participating in mass marketing insurance plans don’t meet the fundamental principals of group insurance underwriting applied to single employer sponsored plans.

Answer 45

Clubs don’t require members to be actively employed and there is no capacity to deduct contributions from payroll

The relationship between companies and mass marketed plan participants is illusory and from an insurance standpoint, don’t involve a true association. It’s not being actively at work.