Module 1 Principles of Insurance Flashcards
What is IGADCIM?
IDENTIFY risk management goals
GATHER relevant data for risk exposure
ANALYZE the info to determine risk exposure
DEVELOP a risk management plan
COMMUNICATE the recommendations
IMPLEMENT the recommendations
MONITOR the recommendations for any needed changes
You’re driving and the person in front of you slams their brakes, has broken taillights and you hit them. Due to ___ the person you hit can’t collect damages from you.
Contributory Negligence
You’re driving and the person in front of you slams their brakes and you hit them. If this is the case, which law would prevent you from paying the full cost of damages?
Comparative Negligence.
With this kind of contract, you can only accept or reject.
Adhesion
With this type of contract you cannot modify the terms.
Adhesion
HOA contract and the limited degree of freedom to modify the terms would be an example of which type of contract?
Adhesion
What’s the difference between an insurance producer and an insurance company?
Insurance producer would be an insurance agent. Insurance company would be an insurance company. Yes I typed that.
Damages in court come in several forms. Which type of damages would be granted “pain and suffering”?
General Damages
What are some examples of insurance agents that represent several different companies?
Independent agent, broker, surplus line agent
What’s a big difference between an independent agent and a captive agent?
Independent agent represents several Different companies, while a captive agent represents either only one company or one Group of companies
What’s a big difference between a surplus line agent and a captive agent?
Surplus line agents represent several different companies while a captive agent represents either only one company or one Group of companies
Whats an example of an agent that represents one company or one group of companies?
Captive agent
People that are most likely to make insurance claims are the most likely to purchase forms of insurance. What’s this called?
Adverse Selection
Hazard vs Peril. Handling propane is an example of?
Hazard. There is no inherent danger in handling it, but things can go south quickly, and that makes it hazardous
Hazard vs Peril. You park your car at the top of a hill and you have a faulty handbrake. Example of?
Hazard. Nothing has happened, but if the handbrake fails, things will go south quickly and that makes it hazardous
Hazard vs Peril. A fire breaks out in the kitchen. Example of?
Peril. Something has happened, things are going south quickly, and that makes it perilous
Hazard vs Peril. I’m moving apartments and drop a piano down a long flight of stairs. Example of?
Peril. Something has happened, things (piano) are going south quickly, and that makes it perilous
The potential for a dangerous situation or condition that increases the likelihood of a loss.
Pure risk
Risk
Hazard
Peril
Hazard. Nothing has happened, but the chances of something bad are higher than normal.
The actual cause of a loss
Pure risk
Risk
Hazard
Peril
Peril. Something bad has happened. Things have migrated south.
Which section of an insurance contract contains this information: what is insured, to what amount, and under what conditions?
Insuring agreement
What information is found in the insuring agreement section of an insurance policy?
What is insured, to what amount, and under what conditions
What information is found in the exclusion section of an insurance policy?
What is excluded…
In which section would you find exclusions from the insurance policy?
Exclusion section
In Insurance contracts, what does the term unilateral mean?
Only one side is bound to the contract and has to perform.
Only one side is bound to the contract and has to perform. This would match what characteristic of an insurance policy?
Unilateral
In insurance contracts, the outcome is affected by chance and the amounts collected by parties are generally unequal. Which characteristic of an insurance policy does this exhibit?
Aleatory
In insurance contracts, what does the term aleatory mean?
The amounts paid to each party are generally unequal and the outcomes are affected by chance.
In insurance contracts, what is meant by “utmost good faith”?
All parties must disclose all facts honestly, or the policy may be rescinded
In insurance contracts, all parties must disclose all facts honestly, or the policy may be rescinded. Which characteristic is this?
Utmost Good Faith
You live in a dangerous neighborhood and decide to install an extra deadbolt on your door, which type of risk management is this? And would this be risk financing or risk control?
Risk reduction - you’re reducing the risk of someone being able to break in. Risk control - you’re not actively putting money into the risk itself, only into controlling the likelihood of the risk turning into a peril - robbery/theft.
You live in a dangerous neighborhood and decide to move to a neighborhood (or state) with less crime. Which type of risk management is this? And would this be risk financing or risk control?
Risk avoidance - you’re avoiding the risk entirely. Risk control - you’re not actively putting money into the risk itself, only into controlling the likelihood of the risk turning into a peril - robbery/theft.
You live in a dangerous neighborhood and decide to increase the coverage on your home insurance. Which type of risk management is this? And would this be risk financing or risk control?
Risk transfer - you’re transferring the risk to the insurance company (it’s their problem now). Risk financing - you’re paying money into the management of the risk
You live in a dangerous neighborhood and decide to buy a shotgun. Which type of risk management does this most closely resemble? And would this be risk financing or risk control?
Risk retention - you’re deciding to let them f-around and find out. Risk financing - you will have to pay money if the risk becomes more than just a risk. New door, deadbolts, damaged property, walls with bullet holes in them..
Which of these are under the umbrella of risk financing?
Risk avoidance
Risk transfer
Risk retention
Risk reduction
Risk transfer and risk retention
Which of these are under the umbrella of risk control?
Risk avoidance
Risk transfer
Risk retention
Risk reduction
Risk avoidance and risk reduction
*Which of these is the most effective method of risk financing?
Risk avoidance
Risk transfer
Risk retention
Risk reduction
Risk transfer
*Which of these is the most effective method of risk control?
Risk avoidance
Risk transfer
Risk retention
Risk reduction
Risk Avoidance
Decreasing your deductibles would be an example of which type of risk management?
Risk avoidance
Risk transfer
Risk retention
Risk reduction
Risk transfer. By decreasing your deductible you’re increasing your premium, paying more to transfer your risk.
What type of company is owned by the policyholders of the company?
Mutual Companies
What type of company is owned by the shareholders?
Stock Companies
What is a PLUP?
Personal Liability Umbrella Policy. It acts as an extension to whatever insurance you already have. If you don’t have coverage on something, the PLUP will not cover it either. Under a PLUP, there may be “drop down” limits, where the underlying insurance type will have to be exhausted before the umbrella will “drop down” to help out. Standard amount $1 Million. Maximum $10 Million. Exclusions include work liability, professional liability, and any intentional actions.
What type of policy is a “drop down” policy which helps out only after the underlying policy is exhausted?
PLUP. Personal Liability Umbrella Policy.
What type of policy is typically seen as an overarching extension with massive limits that increases your overall insurance in each area you have insured?
PLUP. Personal Liability Umbrella Policy.
What is the standard amount of coverage offered under a PLUP?
$1,000,000
What is the minimum amount of coverage offered under a PLUP?
$1,000,000
*What is the maximum amount of coverage offered under a PLUP?
$10,000,000
What is the maximum amount that can be paid out when the insured loss occurs?
Coinsurance amount
Policy Limit
Actual Cash Value
Replacement Cost
Policy Limit
What is the policy limit?
The maximum amount that can be paid out when the insured loss occurs
*What is the typical percentage of coinsurance coverage?
80%
What may refer to the minimum percentage of insurance that is required to avoid being penalized for inadequate insurance when there are partial losses?
Coinsurance. Before getting overwhelmed by question, remember this example: 300k replacement cost for a house. 200k insurance on it. 100k in losses. 1k deductible. 100k is a PARTIAL LOSS. I’d guess the penalization would be the fact that you’d be required to pay part of the cost if your coverage is less than that 80% of the replacement cost.
The replacement cost of a property minus depreciation is?
Actual Cash Value of the property
How is the Actual Cash Value calculated on a property?
Replacement cost of the property minus depreciation
What refers to the determination of how an insurance policy should be priced?
Actuarial pricing
What is actuarial pricing?
The determination of how an insurance policy should be priced
What is insurance underwriting?
The process of evaluating risks to determine whether they’re reasonable to accept and to what degree
What is the process of evaluating risks to determine whether they’re reasonable to accept and to what degree?
Insurance underwriting
What is the significance of the McCarran Ferguson Act of 1945?
The McCarran-Ferguson Act of 1945 granted states the authority to regulate and tax the business of insurance
Which act gave states the authority to regulate the insurance business?
McCarran Ferguson Act of 1945
What does consideration mean in insurance contracts?
Refers to the exchange of something of value. Generally means Payment.
Which characteristic of insurance refers to the exchange of something of value?
Consideration
Which type of insurance insures personal properties that are in transit?
Inland Marine
Which type of insurance insures floater risks?
Inland Marine
What does an inland marine insurance policy cover?
Floater risks - Essentially valuable personal properties that are transported which are at risk of damage.
Your client has two homes and typically likes to spend six months at each of them. Because of this, he has valuable personal properties moved back and forth. Which type of insurance would be able to cover these migrations of property?
Inland Marine
Risk vs Hazard vs Peril. Which of these is the chance of loss?
Risk
What is a pure risk?
The chance of loss or no loss, no chance for gain.
The chance of loss or no loss, with no chance for gain is called?
Hazard
Pure risk
Fundamental Risk
Static Risk
Pure Risk
Fire, smoke, water, lightning are examples of?
Hazards
Risks
Perils
Perils
Which risks would be types of economic-centric risks?
Particular Risks
Dynamic Risks
Speculative Risks
Static Risks
Fundamental Risks
Pure Risks
Static Risks and Dynamic Risks. Related to the economy vs Not Related.
Which risks would be types of people-centric risks?
Particular Risks
Dynamic Risks
Speculative Risks
Static Risks
Fundamental Risks
Pure Risks
Fundamental Risks and Particular Risks.
Affects large groups of people vs Affects small groups/individuals
Which types of risks help to determine insurability?
Particular Risks
Dynamic Risks
Speculative Risks
Static Risks
Fundamental Risks
Pure Risks
Pure risks and speculative risks. Possibility of loss/no loss vs loss/no loss/gain
This type of risk is not related to the economy, and can typically be insured.
Static Risk. Examples: earthquakes and floods.
This type of risk is related to the economy, typically uninsurable.
Dynamic Risk.
Examples: changes in business cycle, inflation.
This type of risk affects large groups of people.
Fundamental risk. Examples: earthquakes, recessions
This type of risk affects individuals/small groups of people.
Particular risk. Examples: burglary, car accidents.
*You’re about to go driving, which types of risk would you be exposed to on the road?
Particular Risks
Dynamic Risks
Speculative Risks
Static Risks
Fundamental Risks
Pure Risks
Particular (small groups affect by car crash risk) Static (wouldn’t be related to economy) Pure risk (no chance of gain)
*You decide to live in California, which is on the San Andreas Fault Line. Which types of risk would you be exposed to living in an area with high rates of earthquakes?
Particular Risks
Dynamic Risks
Speculative Risks
Static Risks
Fundamental Risks
Pure Risks
Fundamental (large groups affected by earthquake risks) Static (not related to economy) Pure risk (no chance of gain)
*You decide to live in a country that continuously borrows money and prints more money to pay for those debts. Inflation inevitably occurs. Which risks would be associated with this situation?
Particular Risks
Dynamic Risks
Speculative Risks
Static Risks
Fundamental Risks
Pure Risks
Dynamic Risk (inflation is economic) fundamental risk (affects a large group of people)
What are the seven steps of the risk management process?
IGADCIM
Identify
Gather
Analyze
Develop
Communicate
Implement
Monitor
Which risk management technique is most appropriate for: High severity, High frequency?
Risk avoidance (avoid at all costs)
Which risk management technique is most appropriate for: High severity, low frequency?
Risk transfer (insure it)
Which risk management technique is most appropriate for: Low severity, high frequency?
Risk reduction (don’t drive behind big trucks on freeway, often get chips on windscreen)
Which risk management technique is most appropriate for: low severity, low frequency?
Risk retention (probably won’t happen, but if it does you’ll be fine, just deal with it)
Which risk management technique would apply to self-insurance?
Risk retention. You’re still retaining the risk by transferring it to yourself.
Why is self-insurance not a true type of insurance?
True insurance is a transfer of risk, not a retention of risk.
Elements of Insurable Risk. What’s the law of large numbers?
There must be a sufficiently large number of homogeneous exposure units to make the losses reasonably predictable. Have to be widely distributed geographically as well.
There must be a sufficiently large number of homogeneous exposure units to make losses reasonably predictable, and it has to be widely geographically distributed as well. Which element of insurable risk is this?
Law of Large Numbers
Losses produced by risk HAVE to be:
Definite/Measurable
Indefinite/Immeasurable
Fortuitous/Accidental
Intentional
Catastrophic
Not Catastrophic
Definite/Measurable, Fortuitous/Accidental, and Not Catastrophic
Limiting Insurer’s Liability. Which factor would address the fact that a loss will be suffered?
Actual Cash Value of loss
Policy Limits
Subrogation
Insurable Interest
Coinsurance
Other Insurance ( (we) will not profit)
Deductible
Insurable interest
Limiting Insurer’s Liability. Which factor concerns the replacement cost minus depreciation?
Actual Cash Value of loss
Policy Limits
Subrogation
Insurable Interest
Coinsurance
Other Insurance ( (we) will not profit)
Deductible
Actual Cash Value of loss
Limiting Insurer’s Liability. Which factor concerns the maximum amount that can be paid? Pick one.
Actual Cash Value of loss
Policy Limits
Subrogation
Insurable Interest
Coinsurance
Other Insurance ( (we) will not profit)
Deductible
Policy Limit
Limiting Insurer’s Liability. Which factor concerns the fact that the client will not profit?Actual Cash Value of Loss
Policy Limits
Subrogation
Insurable Interest
Coinsurance
Other Insurance ( (we) will not profit)
Deductible
If you got this wrong, go exercise, shower, go to sleep, wake up, have some breakfast, fire up the laptop, and read the question and answer choices, Slowly.