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Principles of Risk and Insurance Flashcards

1
Q

Risk

A

A condition with a possibility of loss or a situation with an exposure to loss

ex:
-Exposure to germs or viruses
-Starting a business
Activity that may result in injury
-Owning real estate
-Losing a job
-Becoming a CFP licensee (liability)

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2
Q

Peril

A

Is the cause of loss. Insurance can cover economic loss for certain perils.

Ex:
-Fire
-Windstorm
-Liability
-Collision
-Theft
-Sickness or injury

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3
Q

Hazard

A

A condition that may create or increase the chance of loss arising from a given peril and may also increase frequency or severity of loss

Ex:
-Building on an earthquake fault
-Poor maintenance of car’s brakes
-Not disposing of a xmas tree
-Working in a contagious disease lab

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4
Q

What are insurable risks:

A

For an insurance company to assume a risk, the risk must have ALL the following characteristics:
-There must be a sufficiently large number of homogeneous exposure units to make losses reasonably predictable
-The loss produced by the risk must be definite and measurable
-The loss must be fortuitous (chance) or accidental
-The lost must be catastrophic to the insurance company

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5
Q

Self Insurance

A

-A formal program of risk retention
-The business performs most functions of an insurance company for its own risks
-Requires a large number of similar potential losses, ability to predict overall losses with a reasonable accuracy, and the establishment of a formal fund for future losses and their possible fluctuations.
-Primarily used by but NOT limited to large companies

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6
Q

Advantages of Self-Insurance to a Company

A

-The company can avoid the cost associated with commercial insurance (commissions, overhead, taxes, and profit)
-Reserves for future claims can be invested in short-term money market type instruments. The company can use the earnings to offset the costs of the program

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7
Q

Disadvantages of Self Insurance to a company

A

-It can leave a company exposed to catastrophic loss
-The company must duplicate the services provided by the insurance company
-The company may have to pay income taxes on reserves held for future claims at yearend

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8
Q

What are the two elements of The Risk Management Process?

A

1) Risk Control
2) Risk Financing

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9
Q

What are the elements of Risk Control?

A

-Risk avoidance
-Risk diversification
-Risk reduction

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10
Q

What are the elements of Risk Financing?

A

-Risk retention
-Risk transfer

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11
Q

What are the basic rules of Risk Management?

A

-Coverage for potential catastrophes should be purchased first (life, disability, health, homeowners, and auto)
-SEVERITY is more important than PROBABILITY
-High probability will mean high premiums or a decline of coverage by carrier

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12
Q

What are 2 examples of Risk Avoidance?

A

-Instead of purchasing a property, rent it
-Avoiding buying a house with a swimming pool

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13
Q

What is 1 example of risk diversification?

A

-Store assets at different locations

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14
Q

What are 2 examples of Risk Reduction?

A

-Install sprinkler system, smoke detectors and burglar alarm for home
-Create safety programs for businesses

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15
Q

What are 3 examples of Risk Retention?

A

-Deductibles in insurance policies
-Coinsurance in insurance policies
-Self-insurance

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16
Q

What are three examples of Risk Transfer?

A

-Insurance
-Hold harmless agreements/hedging contracts (risk sharing)
-Incorporation of your business (risk sharing)

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17
Q

For risks that involve HIGH loss SEVERITY and LOW loss FREQUENCY, the most suitable technique is…

A

-Risk transfer (insurance)

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18
Q

For risks that involve HIGH loss SEVERITY and HIGH loss frequency, the most suitable technique is….

A

-Risk avoidance

-The insurance premiums would probably be prohibitive

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19
Q

For risks that involve LOW loss SEVERITY and HIGH loss frequency, the most suitable techniques are…

A

-Risk retention and reduction

-High frequency will cause the insurance premiums to be significant

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20
Q

For risks that involve LOW loss SEVERITY and LOW loss frequency, the most suitable technique is…

A

-Risk retention

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21
Q

Principle of Indemnity

A

A principle underlying insurance contracts (other than life insurance) under which the insurer seeks to reimburse the insured for approximately the amount lost, no more and no less.

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22
Q

Insurable Interest

A

A right or relationship with regard to that which is insured so that insured will suffer financial loss from a loss.

-Must operate at the issuance of an insurance policy AND at the time of loss in P&C
-With life insurance, insurable interest must operate at the time of issues but does not need to be present at time of death

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23
Q

4 elements that must apply for a contract to be legally enforceable:

A
  1. Must be preceded by offer and an acceptance by the one to whom the offer is made (the application)
  2. Must be consideration (generally money)
  3. The principal must have legal capacity to execute the contracts.
    - Incompetent or intoxicated adults have limited or no capacity to execute
    -Minors may have capacity to contract for necessities only (Adult must sign as owners)
  4. The contract must be for lawful purpose.
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24
Q

Unilateral contract

A

-Only one party makes a binding promising

-Only one of the parties in an insurance contract (the insurer) makes a binding promise that if broken breaches the contract

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25
Contract adhesion
The contract is accepted "as is" It is not a regulated contract (terms are not dictated by a governing body, but by negotiation between insurer and insured) -Insurance contracts are generally contracts of adhesion. In the event of ambiguity in the terms, the courts are likely to rule in favor of the insured and against the insurer.
26
Recission
The contract is deemed null from the beginning due to fraud, misrepresentation, concealment, or mutual mistake(s) as to a material fact.
27
Aleatory Contract
-The amount of dollars spent by the contract parties is usually unequal. -Insurance is an aleatory contract because as the insured you may pay large premiums and receive no benefit. Conversely, you could pay small premiums and receive a large benefit.
28
Reformation
When the contract between parties fails to express the original intent of the parties, the contract can be amended.
29
Collateral Source Rule
In tort liability, the plaintiff's measure of damage should not be mitigated by payments received from sources other than the negligent party/tortfeasor ex: If Penny is hurt by Rick and Penny's insurance compensates her for the injury, she can still sue Rick for the medical expenses and lost income should would have incurred if she didn't have the insurance
30
Subrogation
When an insurer pays a claim, it takes over the legal rights its insured had against a negligent third party -Ex: The insurer pays the collision coverage for the insured's car that was caused by a negligent driver of another car. The insurer then takes over the rights of the policy owner to sue the negligent driver (by subrogation).
31
What are the 5 elements of an insurance contract?
DDICE 1) Declarations 2)Definitions 3)Insuring agreements 4) Conditions 5) Exclusions
32
Declarations
Part of an insurance contract. -Factual statements (person, property, activity, etc.) -Specifically printed for the individual contract and not pre-printed like the other parts of the contract
33
Definitions
-Explains the key policy terms
34
Insuring agreements
-Spells out the basic promises of the insurance company
35
Conditions
-Spells out in detail the duties and rights of both parties
36
Exclusions
-Spells out the circumstances when the insurer will not pay
37
What are considered personal risks?
-Death -Disability -Poor health -Unemployment -Superannuation (the risk of outliving an individuals or couple's money)
38
What is superannuation
The risk of outliving an individual's our couple's money
39
What are considered property risks?
-Real -Personal -Auto
40
What are actions that create liability?
-Negligence -Intentional torts -Strict liability
41
42
Tort
A wrongful act other than a breach of contract for which a civil action may be brought against the tortfeasor
43
Intentional Tort
A deliberately performed act such as assault, batter, libel, slander, or false arrest
44
Unintentional Tort
Negligence or carelessness
45
Attractive Nuisance
-A situation which a high degree of care is imposed on the land occupier for certain conditions of the land. -Ex: a pool that isn't screened or fenced; vacant land where children play; land with access to a river or lake
46
Negligence per se
-A situation where standard care is set by statute. -Ex: School zones and crosswalks
47
Strict Liability
-Generally limited to manufacturers and distributors of products found to be defective. -Ex: romaine lettuce w/ e. coli bacteria; cars with defective parts; pharmaceuticals that cause illness or death
48
Absolute Liability
-An extra hazardous condition which results in losses to others. -Ex: keeping of wild animals and blasting. *workers compensation falls under absolute liability
49
Vicarious Liability (respondeat superior)
-When one person is liable for the negligent behavior of another person) -Ex: Branch manager at the BD who is responsible for the representatives. -A manager at an insurance agency who is responsible for the agent
50
Assumption of Risk
-If one party recognizes and understands danger in an activity yet voluntarily chooses to encounter it, another person cannot be held responsible for the injury -Ex: Signing an assumption of risk form before going on a hike but then falling and breaking your leg.
51
Contributory Negligence
- Any negligence on the part of the injured party, although slight, it defeats the claim. -Ex: jaywalking and driving drunk
52
Comparative Negligence
-Any degree of negligence on the part of the injured party does not defeat the claim, but is used to mitigate damages payable by the other party. -Ex: In a claim, the injured party is found 20% negligent, and the driver is found 80% negligent. Damages are adjusted accordingly
53
Last Clear Chance
-Any contributory negligence of the injured party will not bar recovery of damages if the other party, immediately prior to the accident, had a last clear chance to prevent the accident but failed to do so. Ex: road rage
54
What are the life insurance needs analysis methods
1. Capital utilization: facts annuitization to fund future income, but leaves no money at the end 2. Capital Retention or Preservation: presumes that only interest is distributed. The original capital is still left at the end of the income period
55
How much of earned income is usually issued by disability carriers?
50-60%
56
Participating Policies
-Pays annual dividends to the policy holder -They charge larger premiums, but if the extra premium isn't needed it's returned to the policy holders as a dividend (generally tax free) -Dividends are generally based on higher-than-expected investment return and/or lower than expected mortality and expenses
57
Industry Ratings
Rating services evaluate insurance companies based on their financial strength. Several companies rate life insurance: -A.M Best: A++ to F -Standard & Poor's: AAA to CCC -Moody's: Aaa to C -Weiss: A+ to F *Financial planners should choose a company that holds one of the three highest ratings from at least three of the rating services.
58
Underwriting
-The process of selecting and classifying exposures -The insurer seeks to accept only applicants who (on average) will have actual loss experience comparable to the expected loss experience that is built into the company's rates. -Underwriter must complete both of the following: - Cover a large number of individual insureds so that they law of large numbers works -Obtain homogeneity of insureds so that there is a reasonable equity between the better and poorer individuals
59
What information is used for the underwriting process?
- An application for insurance -Information from the agent or broker -Investigations -Information bureaus -Physical examinations or inspections
60
What is the loss adjustment process?
1. Notice of loss: Notice by the insured to the company that a loss has occurred 2. Investigation: The adjuster must first determine that there was a loss and then whether the loss is covered by the policy 3. Proof of loss: Insured files a signed proof of loss 4. Payment or denial
61

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