Brainscape's Knowledge GenomeTM

Browse over 1 million classes created by top students, professors, publishers, and experts.


See full index

GBA 1 > Module 2 - Risk Concepts and Employee Benefit Planning > Flashcards

Module 2 - Risk Concepts and Employee Benefit Planning Flashcards

1
Q

(A) Risk and Employee Benefits

Definition of Risk

A
  • Risk means uncertainty with respect to personal loss
  • The inability to determine a future loss and figure out how expensive it will be should the loss take place
  • Loss is meant to convey any decrease in value suffered
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
2
Q

(A)1 Risk and Employee Benefits

Peril and Hazard Distinguished from Risk

A

Peril and hazard are insurance terms used primarily in property and liability insurance but also in life and health insurance.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
3
Q

(A-1A) Risk and Employee Benefits

Peril and Hazard Distinguished from Risk

Definition of Peril

A
  • Defined as the cause of personal or property loss, destruction, or damage.
  • Common perils involving property are fires, floods, earthquakes, thefts, burglaries
  • Common perils involving personal are illnesses, bodily injuries, and death
  • Originally called death insurance and accident and sickness policies but their names were changed for euphemistic and marketing reasons
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
4
Q

(A-1B) Risk and Employee Benefits

Peril and Hazard Distinguished from Risk

Definition of Hazard

A
  • A condition that either increases the probability that a peril will occur or that tends to increase the los when a peril has struck
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
5
Q

(A-1C) Risk and Employee Benefits

Peril and Hazard Distinguished from Risk

3 Types of Hazards

A

1 - Physical Hazards
2 - Moral Hazards
3 - Morale Hazards

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
6
Q

(A-1D) Risk and Employee Benefits

Peril and Hazard Distinguished from Risk

Define Physical Hazard

A
  • Physical conditions that fit within the definition of hazard.
  • Examples in the workplace; presences of flammable materials and absence of fire extinguishing equipment, machines without appropriate safety devices, faulty heating and air conditioning units.
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
7
Q

(A-1E) Risk and Employee Benefits

Peril and Hazard Distinguished from Risk

Define Moral Hazard

A
  • Dishonest, unethical, and immoral people
  • Examples; those who steal from the employer, purposely damage employer property, file fraudulent medical claims, abuse sick leave and PTO, file false overtime and expense statements
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
8
Q

(A-1F) Risk and Employee Benefits

Peril and Hazard Distinguished from Risk

Define Morale Hazard

A
  • Exist when people act with carelessness or indifference
  • Examples; individuals who appear to be accident prone or disaster prone, failure to lock rooms, vaults, or areas from which valuable items are stolen, forgetting to notify the ER of faulty materials that cause personal injuries, ignoring the fact that a number of employees all experience the same symptoms of physical discomfort, which ultimately can be traced to a job-related cause.
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
9
Q

(A2) Risk and Employee Benefits

Types of Risk - 2 Types

A

1 - Pure Risk

2 - Speculative Risk

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
10
Q

(A2) Risk and Employee Benefits

Types of Risk - PURE RISK

A

Pure risk is risk in which only two alternatives are possible
1 - either the risk will not happen (no financial loss)
2 - it will happen (financial loss)

Example - Illness, loss from fire, auto accident, unemployment, disability, theft of property, earthquake

Pure risk for the most part can be insured

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
11
Q

(A2) Risk and Employee Benefits

Types of Risk - SPECULATIVE RISK

A

The possibility of gain.

Three potential outcomes -
1 - loss
2 - no loss
3 - gain

Example - purchase of a share of common stock, acquiring a new business, gambling

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
12
Q

(A3) Risk and Employee Benefits

Pure Risk - 3 Classifications

A

1 - Personal Risk
2 - Property Risk
3 - Legal Liability Risk

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
13
Q

(A-3A) Risk and Employee Benefits

Personal Risk

A
  • The most important classification of pure risk from an employee benefit standpoint
  • Losses that have a direct impact on an individuals life or health
  • Death, illness, accidents, unemployment, and old age are all considered to be personal losses
  • Measured with some degree of accuracy
  • By estimating potential lost income from a particular loss or medical expense associated with it, one can approximate the potential loss.
  • With that information, one can estimate needed protection and seek insurance appropriately.
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
14
Q

(A-3B) Risk and Employee Benefits

Property Risk

A
  • The uncertainty (possible loss) that decreases the value of one’s real or personal property.
  • Examples; fire, flood, earthquake, wind, theft, and automobile collisions
  • The home, furniture, jewelry, cars would be the types of property losses
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
15
Q

(A-3C) Risk and Employee Benefits

Legal Liability Risk

A
  • A loss resulting from negligent actions of a person that result in injury to another person.
  • Stems from lawsuits by the injured party seeking damages from the negligent party
  • Common sources; negligent behavior associated with automobiles, ones home or business, sale of products, professional misconduct (malpractice)
  • UNLIMITED POTENTIAL LOSS
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
16
Q

(A4) Risk and Employee Benefits

Methods of Handling Risk - 5 Types

A 
1 - Avoidance 
2 - Control 
3 - Retention 
4 - Transfer 
5 - Insurance
17
Q

(A-4A) Risk and Employee Benefits

Methods of Handling Risk

Type 1 - AVOIDANCE

A
  • One does not acquire the risk to begin with and hence wold not be subject to risk
  • One is unable to avoid some risks and attention to them must be focused on the alternatives
  • it is almost impossible to use the avoidance technique in employee benefits - how does one avoid death or illness?
18
Q

(A-4B) Risk and Employee Benefits

Methods of Handling Risk

Type 2 - CONTROL

A
  • A mechanism by which one attempts either to prevent or reduce the probability of a los taking place, or to reduce the severity of the los after it has taken place
  • Examples; smoke detectors, fire-resistant building materials, seats belts, air bags, etc.
  • Employee Benefits use control in conjunction with insurance as any procedure used to reduce or prevent accidents, illnesses, or premature death would help in lowering the cost of most benefit plans.
  • Employers adopt accident prevention programs with intent of lowering workers comp and other EB costs as well as improving employees health and welfare
19
Q

(A-4C) Risk and Employee Benefits

Methods of Handling Risk

Type 3 - RETENTION

A
  • The risk is assumed and paid for by the person suffering the loss.
  • Used with losses that are small in terms of financial impact on a person or company
  • Sometimes more economical to retain the risk that it is to insure it - CAR example
20
Q

(A-4D) Risk and Employee Benefits

Methods of Handling Risk

Type 4 - TRANSFER
Two Forms of Transfer

A
  • One switches or shifts the financial burden of risk to another party
  • Example; landlord charges a security deposit, travel agent having client sign a waiver if they are visiting a place of war
  • Non-insurance transfers do not typically serve as risk handling measures in EBP

1 - Insurance
2 - Non-Insurance

21
Q

(A-4E) Risk and Employee Benefits

Methods of Handling Risk

Type 5 - INSURANCE

A

-The Pooling of fortuitous losses by transfer of such risks to insurers who agree to indemnify insures for such losses or to render services connected with the risk

  • A common method of financing employee benefits
  • Important to clarify the difference between insurance and gambling
  • Insurance is a mechanism for handling an existing risk; based on a mutual sharing of any losses that occur; pure risk
  • Gambling creates a risk where one did not previously exist; involves a gain for one party (winner) and the expense or another (loser - remains in a negative situation); speculative risk
22
Q

(A5) Risk and Employee Benefits

Summary of Risk-Handling Alternatives

A
  • Long Term Care Techniques
  • Insurance = Transfer
  • Proper Health Care and Living Conditions = Control
  • Finding a way to pay for the loss out of savings or income = Retention
23
Q

(B1) Insurance and Insurable Risk

Advantages of Insurance

A
  • Known Premium (cost); set in advanced by the insurance company
  • Outside administrator can be an advantage to the employer - employer does not have to be involved with employee coverage
  • More economical for an employer to use insurance rather than other alternatives as the insurance company may be more efficient and able to do the job for a lower cost
24
Q

(B2) Insurance and Insurable Risk

Disadvantages of Insurance

A
  • Insurance companies charge administrative expenses that are added to the premium to compensate for their overhead expenses
  • Employer satisfaction is directly impacted by the insurers ability to handle claims and solve problems; slow payment or restrictive claim practices can have an adverse effect on employees
25
Q

(B3) Insurance and Insurable Risk

Characteristics of an Insurable Risk - 6 Total

A

1 - There should be a large number of homogenous risks (exposure units)
2 - The loss should be verifiable and measurable
3 - The loss should not be catastrophic in nature
4 - The chance of loss should be subject to calculation
5 - The premium should not be reasonable or economically feasible
6 - The loss should be accidental from the standpoint of the insured

26
Q

(B-3A) Insurance and Insurable Risk

Characteristics of an Insurable Risk - 6 Total

1 - Large Number of Homogenous Risks

A

The insurance company must be able to calculate the number of losses it will incur from the total number of risks it insures.

  • Insurance is based on the law of large numbers which means the greater the number of exposure, the most closely the actual results will approach the probable results that are expected from an infinite number of exposures.
  • Plans with large numbers of homogenous risks can be experience rated
27
Q

(B-3B) Insurance and Insurable Risk

Characteristics of an Insurable Risk - 6 Total

2 - Loss Should be Verifiable and Measurable

A
  • Death and retirement benefit claims are the easiest to determine whether a loss has taken plane or not
  • DBL, Medical, and Dental are hard to verify and when hard to verify, the insurer may attempt to overcome the problem though several methods.
  • Policy provisions are helpful in the above DBL / medical / dental situations
  • Benefit maximums, waiting periods, pre-existing conditions, alternative medical verification, required 2nd opinion and hospital stay monitoring are a few of the provision that help win these situations.
28
Q

(B-3C) Insurance and Insurable Risk

Characteristics of an Insurable Risk - 6 Total

3 - Loss Should Not Be Catastrophic in Nature

A
  • a serious problem occurs when a large percentage of the risks insured can be lost from the same event.
  • assume a fire insurance company insured all of its risks in one geographical location - this happened and resulted in an insurance companies bankruptcy.
  • Geographic speak of the risks insured is essential because a concentration of losses from one event could impair or bankrupt a company.
  • Case exist in which it is almost impossible to obtains a spread of risk - floor or unemployment are examples
29
Q

(B-3D) Insurance and Insurable Risk

Characteristics of an Insurable Risk - 6 Total

4 - Chance of Loss Should be Subject to Calculation

A
  • Data on both the frequency of losses and the severity of the losses must be available to determine the loss portion of the premium.
  • Referred to as the pure premium portion of the premium
  • Essential to the pure premium calculation would be a large number of homogenous exposure units as previously discussed
30
Q

(B-3E) Insurance and Insurable Risk

Characteristics of an Insurable Risk - 6 Total

5 - Premium Should be Reasonable or Economically Feasible

A
  • For an EBP to be acceptable to the employer and the employee, the plan must have a premium that is considered reasonable relative to the risk bring insured, that is, the insured must be able to pay the premium.
  • An insurance companies expenses (“loading” = expense) not related to the losses covered by the pure premium must be added to that premium to obtain the total premium
  • Pure Premium + Loading = Total Premium to Be Paid by the plan
31
Q

(B-3F) Insurance and Insurable Risk

Characteristics of an Insurable Risk - 6 Total

6 - Loss Should Be Accidental From the Standpoint of the Insured

A

-Pertains to property and liability coverage

32
Q

(B4) Insurance and Insurable Risk

Insurable Risk Summary

A
  • Insurance companies consider providing insurance to EBP if they meet the minimum standards of an insurable risk
  • Life Medical, Dental, Disability Income, Retirement Programs
  • Life Insurance is the best example of a plan that meets all desirable standards of an insurable risk
  • DBL income creates more of a problem from an insurability standpoint
  • Excess unemployment insurance would be a benefit that boarders on being uninsurable
33
Q

(B5) Insurance and Insurable Risk

Handling Adverse Selection

A

-Individuals who have higher than average potentially insurable risks “select against” the insurer

34
Q

(B6) Insurance and Insurable Risk

Handling Adverse Selection

A

GBA 1 (11 decks)

Brainscape helps you reach your goals faster, through stronger study habits.
© 2024 Bold Learning Solutions. Terms and Conditions