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FBLA Insurance & Risk Management

Terms in this set (446)

risk management
a systematic process of identifying, analyzing and responding to projected risks
risk management model
1. risk identification
2. qualitative risk analysis
3. quantitative risk assessment
4. risk response planning
5. risk monitoring and control
pure risk
risk in which the only outcomes are loss or no loss, ex. book - stolen or not
types of pure risk
1. personal risk
2. property risk
3. liability risk
personal risk
a risk that directly affects an individual, ex. premature death, sickness, unemployment, old age
property risk
...
liability risk
...
speculative risk
a situation that holds out the prospects of loss, gain, or no loss no gain; common in businesses, both profit and loss possible, not very predictable Property owners face the risk of having their property stolen, damaged or destroyed by various causes. A property may suffer direct loss, indirect loss, losses arising from extra expenses of maintaining the property or losses brought about by natural disasters
direct loss
loss which flows directly from the unsecured peril, ex. house destroyed by fire - damage from fire
indirect loss
loss that arises because of a prior occurrence of another loss; loss flows directly from an earlier loss suffered, ex. machinery destroyed in fire at factory - factory was covered
extra expenses
expenses that occur because of any loss that would not have been necessary w/o the loss
particular risk
a risk that affects only an individual and not everybody in the community, ex. shoes stolen - your loss and not job of society to deal with it
fundamental risk
risk which is non-discriminatory in its attack and effect, considered a group risk and not caused by one individual, ex. bad economy, flood, political instability
dynamic risk
risks brought about by changes in the economy, ex. income, tastes of consumers, technology; these are speculative risks
static risk
risks that involve losses brought about by irregular action of nature or by dishonest misdeeds and mistakes of man, ex. bad weather, arson, theft; these are pure risks
enterprise risk management model
1. Identify risks - consider mission, people, physical aspects, financial, reputation and trust
2. Determine probability and impact - impact is either negligible, low, medium, high, probability is either rare, unlikely, possible, likely, certain
3. Identify the risk-mitigating controls that already exist.
4. If unacceptable risks remain, identify additional controls.
goal of enterprise risk management model
It creates a uniform process to evaluate:
(1) the risks that a proposed Directive is intended to address; (2) for each risk, the
probability of that risk occurring and the potential impact if it does; (3) the existing
Directives or other controls that are already in place to mitigate that risk; and (4) if there
are unacceptable risks that are not already controlled, the best way of protecting
against that risk - allows a consistent way to assess risks
actuary
use analysis to predict the risk that an event will occur, they help insurance companies decide how much to charge for coverage of various things
adjuster
work with customers who have experienced a loss, and are making a claim; also known as insurance examiners, appraisers, or investigators, claims adjusters must decide how much the insurance company should pay for the damage or loss.
underwriter
decides whether someone seeking coverage should be provided with the insurance. The underwriter evaluates the application for risk and decides if the applicant meets certain criteria. An underwriter might also help set prices for various insurance policies
loss control specialist
inspects businesses to provide strategies for reducing the risk of loss or damage, also known as risk consultants
claims adjuster
investigate insurance claims by interviewing the claimant and witnesses, consulting police and hospital records, and inspecting property damage to determine the extent of the company's liability
broker
represents the insurance applicant, must be licensed by the state in which they conduct business
insurance agent
represents the insurance company, must be licensed by the state in which they conduct business
skills necessary for working in the insurance industry
- technology
- agility & flexibility
- analytical skills
- empathy and people skills
- economic and statistical skills
- vast insurance, etc. knowledge
- confidence and sound judgement
Risk
Uncertainty of something, concerns a loss
Risk refers to ___ and ___ being injured
Property & Life
Objective Risk
Defined as relative variation of actual loss from expected loss
Objective Risk varies inversely with
square root of # of cases under observation
EX: 10,000 houses were insured
...
Objective Risk is 10/100 or 10%
...
The Law of Large Numbers
states that if the # of exposure units increases, the more closely the actual loss experience will approach the expected loss experience
Subjective Risk
defined as uncertainty based on a person's mental condition or state of mind
Chance of Loss
probability that an event will occur
Probability has both ___ and ___ aspects
objective and subjective
Objective Probability
refers to the long-run relative frequency of an event based on the assumptions of an infinite number of observations and of no change in underlying conditions
Peril
defined as the cause of loss
Hazard
condition that creates or increases chance of loss
Four Types of Hazards
physical, legal, moral, morale
Subjective Probability
A probability derived from an individual's personal judgment about whether a specific outcome is likely to occur. Subjective probabilities contain no formal calculations and only reflect the subject's opinions and past experience.
Physical Hazard
a physical condition that increases the chance of loss
EX: icy roads, chance of fire, defective lock on a door
...
Moral Hazard
dishonesty or character defects in an individual that increases severity of loss
EX: faking an accident to collect money from insurer, fraudulent claims, murdering insured to collect life insurance
...
Morale Hazard
carelessness or indifference to a loss because of the existence of insurance
EX: leaving doors unlocked, leaving car keys in unlocked car
...
Legal Hazard
refers to the characteristics of the legal system or regulatory environment that increase the frequency or severity of losses
EX: large jury verdicts, large damage awards in liability lawsuits, coverage for alcoholism, etc.
...
Risk Categories
Pure and Speculative
Fundamental Risk and Partial Risk
...
Enterprise Risk
...
Pure Risk
situation where there are only possiblities of loss or no loss
EX: premature death, job accidents, medical expenses, damage to property from fire, lightning, flood, or earthquake
...
Speculative Risk
only profit or loss possible
Fundamental Risk
affects entire economy or large numbers of people
EX: war, inflation, terrorist attack
...
Particular Risk
affects only individuals and not entire community
EX: car theft, bank robbery, house fire
...
Enterprise Risk
encompasses all major risks faced by business firms
EX: pure risk, speculative risk, strategic risk, operation risk, financial risk
...
Strategic Risk
uncertainty regarding the firm's financial goals and objectives
Operational Risk
results from firm's business operations
EX: if hackers hack an online bank
...
Financial Risk
refers to unceratinty of loss because of adverse changes in commoditity prices, interest rates, foreign exhance rates, value of money
EX: if food prices raise, school can lose money in lunch department
...
Enterprise Risk Management
single treatment program that has all major risks faced by firm
Major Types of Pure Risk
personal risks, property risks, liability risks
Premature Death
death of a family head with unfulfilled financial obligations, surviving members have to deal with
Life Value
present value of the family's share of deceased breadwinner's future earnings
Other things that need tended to after premature death
funeral expenses, medical bills, estate settlement costs, taxes on large estates
Non-Monetary Things that come with Premature Death
grief, loss of role model, counseling and guidance for children
Risk of Insufficient Income During Retirement
major risk associated with old age is not enough money during retirement, US citizens retire before 65 usually
money goes down when someone retires unless people save enough money for retirement
...
Risk of Poor Health
includes both payment of medical bills and loss of earned income, major surgery, etc.
Health insurance helps, planning for future
...
Risk of Unemployment
major threat to financial security, comes from business cycle downswings, structural changes in economy, seasonal factos, imperfections in labor market
Downsizing
a way to hold down labor costs, reducing # of workers
Property Risks
risk of having property damaged or lost from numerous cases
EX: tornadoes, windstorms, theft
...
Direct Loss
financial loss from the physical damage, destruction, theft of property
Indirect Loss
financial loss from the occurrence of direct physical damage or theft loss
Consequential Loss
loss of profits
EX: loss of rents, loss of use of building, loss of a local market
...
Liability Risks
important type of pure risk that most people face, there is no limit of $ that can be asked for, can be very costly
EX: vehicle accidents
...
Methods of Handling Risk
avoidance, loss control, retention, non insurance transfers, insurance
Avoidance
avoiding the risk
ex: stay out of high crime areas, avoid driving, etc.
...
Loss Control
reduces frequency and severity of losses
Loss Prevention
aims to reduce probability of loss
EX: not smoking, safe driving
...
Loss Reducation
reduce frequency of loss
EX: sprinklers so that business doesn't stay on fire as long
...
Retention
business firm or individual retains all or part of a given risk
Active Retntion
individual is consciously aware of the risk and plans to retain all or part of it, it can save money
Passive Retention
certain risks are unkowningly retained because of ignorance, indifference, laziness, very dangerous
Negligence
the failure to exercise the required amount of care to prevent injury to others.
Absolute liability (strict liability)
imposed on some parties without regard to fault (refers to legal liability)
Imputed negligence + vicarious liability
the principal is responsible for the acts of his agents
family purpose doctrine
holds parents responsible for the negligent acts of their children
dram shop law
holds the seller of alcoholic beverages liable for drunken patrons
res ipsa loquitur
"the thing speaks for itself" -- some actions so obviously negligent that the law presumes negligence
Legal liability arises from 3 general classes of legal wrongs
crime, tort, and breach of contract
Crime
a wrong in which a person intentionally inflicts injury, or takes something from another
Torts
legal or civil wrongs committed against people or organizations, causing them a loss
Intentional torts
willful acts or the willful failure to act when required to do so that causes injury to someone else
Breach of contract
the lack of performance by a party to another to satisfy a contract that the parties agreed to
proximate cause
a cause that directly caused the loss or suffering so that if the proximate cause didn't happen, then the harm would not have happened. (court cases)
Contributory negligence
negligence that is caused by both plaintiff and defendant --> in some states: no awards to plaintiff
Comparative negligence
allows the plaintiff to collect some damages, but it will be reduced by the amount by which the plaintiff contributed to his own injury
last clear chance rule
if defendant had a choice to prevent injury, regardless of negligence, then plaintiff will be able to collect money ignoring comparative negligence
assumption of risk
one assumes risk by engaging in an activity that is inherently risky, and, therefore, should not be allowed to collect damages if an injury results; Ex: not wearing goggles in racketball game
three damages awarded for negligence
special damages, general damages, punitive damages
special damages
awarded for losses where the financial impact is quantifiable and can be itemized (medical expenses + loss of income)
general damages
losses that cannot be known with certainty or cannot really be compensated with money (pain suffering loss of consortium)
punitive damages
assessed to deter the tortfeasor from committing the act again (for intentional torts)
personal umbrella insurance (excess liability insurance)
provides protection against legal liability that is over and above that provided by auto, home, and boat insurance -- covers direct + consequential losses
Professional liability insurance
for doctors, attorneys, lawyers etc
D & O Insurance
covers directors and officers of insurance companies to protect them from lawsuits of mismanagement etc
Indemnity
the payment of a loss by the insurer to the insured, but for no more than the actual amount of the loss; provides protection against legal liability that is over and above that provided by auto, home, and boat insurance
Actuary
uses statistics and the law of large numbers to determine expected losses and the probability of how much actual losses can deviate from expected losses
----------- expected value of probability distribution
sum of possibility of event happening x possible event (or amount of loss)
3 ways of determining amount of indemnity
actual cash value
fair market value
...
broad evidence rule
...
actual cash value
the loss at the time of the loss
(replacement cost or current price - depreciation(decrease in market bc of wear and tear))
...
. Depreciation is calculated as the age of the item divided by its useful life; doesnt depend on purchase price of item
...
amount of indemnity
based on actual cash value
Fair market value
the price that a property would fetch in an open market (price that seller + buyer agree on)
replacement cost
current price of a NEW item
depreciation
decrease in market value because of wear and tear
broad evidence rule
uses all relevant factors in determining the cash value for the loss, which can include, appraisals, income generated by the property, and anything else that could potentially affect the value of the property
appraisal
impartial assessment of an item's worth
valued policy
pays face amount for items that are hard to put a price for, like antiques, heirlooms etc; price determined before policy put in place
replacement cost insurance
pays for the replacement value of the loss, without any deduction for depreciation; often has stipulations designed to lessen moral hazard ex: might make insured rebuild own house; if old house, more cost to repair than rebuild, so company pays for functional replacement (replace old with new and safer)
insurable interest
need in order to buy insurance. insured thing must affect you (loss for you)= insurable interest // the insurable interest must exist at the time of the loss.
Subrogation
the right for an insurer to pursue a third party that caused an insurance loss to the insured
if company finds material information was false when a loss occurs
insurance company can deny coverage
Utmost good faith (uberrimae fidei)
complete and total honesty—all statements must be true and all material facts must be revealed; otherwise, insurance could not be provided economically
Representation
the statements made by the insured on the insurance application
Material Representation
convincing statement made to induce someone to enter into a contract to which the person would not have agreed without that assertion
misrepresentation
A false or misleading statement that, if intentional and material, can allow the insurer to void the insurance contract.
concealment
failure to disclose material information; to deny insurance bc of concealment to prove: 1. the insured knew that the fact was important in regard to the insurance being applied for; 2. there was an intention to defraud insurer
warranty
a promise by the insurance applicant to do certain things or to satisfy certain requirements, or, it is a statement of fact that is attested by the insurance applicant
affirmative warranty
statement of fact (basically representation)
promissory warranty
promise to do something or that something will be done in a specific way
express warranty
specifically stated in the contract
implied warranty
one that is presumed
insuring agreement (insurance contract)
specifies the risks that are covered, the limits of the policy, and the term of the policy
conditions
requirements of the insured
limitations
specify the limits of the policy
exclusions
specify what is not covered by the contract
4 requirements for valid contract
1.offer and acceptance,
2.consideration,
...
3.competent parties, and
...
4.legal purpose.
...
consideration
the value that the parties to a contract give to each other
binder
temporary contract that can be oral or written that binds the insurance company to the contract immediately until it has a chance to examine the application, and issue a formal policy.
parole evidence rule
written policy determinative where there is any conflict between the oral and written agreement
life insurance process
apply; pay 1st premium; receive conditional premium receipt
conditional premium receipt
like a binder, but differs from it because coverage is conditional upon the health of the applicant, occupation, and other factors; (premium paid first)
insurability premium receipt
if applicant is insurable according to company's underwriting standards, then life insurance becomes effective from date of the application or from date of medical examination
contract of adhesion
contract drafted by one party and signed by the weaker party, who must adhere to the contract and therefore does not have the power to negotiate or modify the terms of the contract.
endorsement (rider)
an amendment or addition to the basic policy that allows the policy to be tailored in acceptable ways for individual situations
Case law to benefit insured(insurance contracts not negotiable) 1
if the terms of a contract are not specific, then the terms are interpreted in a way that would most benefit the insured
principle of reasonable expectations
requires that any exclusion or other qualification be conspicuous (clear to see); otherwise, the insured is entitled to coverage that he reasonably expects
unilateral contracts (insurance)
only the insurer makes a legally enforceable promise to pay for covered losses
bilateral contracts
the promises that each party makes are enforceable by the other party through legal proceedings
commutatie contacts
the amount of consideration given by both parties are usually fairly equal; (most non-insurance contracts are this)
conditional contracts (insurance)
if the insured fails to pay the premium, or fails to abide by the contract, then the insurer is not obligated to pay for any of the insured's losses
aleatory contracts
characterized by unequal consideration // insurance company only has to pay if certain events occur // (noninsurance is equal consideration)
indemnity contracts
insurance company is only required to compensate for actual losses, up to the policy limits
breach of contract
If the insured fails to perform these duties or satisfy these conditions, then the insurance company may be relieved of its obligation to pay the claim
condition precedent
either a condition that must be satisfied or something that the insured must do before or when a loss occurs and before the insurer will perform, which, in most cases, is by paying the claim
condition subsequent
a condition that must be fulfilled after an event that required an act by the insurer
waiting period
of 1 or more months, which requires the insured to be disabled for a time greater than the waiting period, and for which payments will be paid only for the time after the waiting period when the insured is disabled // The time between the filing of an insurance claim and the payments made on the claim // TIME DEDUCTIBLE -where the insured must wait a specific amount of time after a disability to collect any insurance.
recission
can be ended by mutual agreement
incontestable clause
prevents an insurer from canceling a life insurance policy after a 1 or 2 year period
ISO and AAIS
national insurance advisory organization that develops policy forms, rules etc
declarations
name and age of insured + issued date; 1st part of contract that contains info derived from insurance application; premium amount, deductible amount etc
definitions
lists key terms + phrases to minimize ambiguity
named insured
includes any others who are included for coverage even if not named specifically
insuring agreement
states what insurer promises + under which conditions
named perils coverage policy
covers ONLY what is specifically stated in the policy
all risk coverage policy
covers any risk that is not specifically excluded
conditions
required actions by the insured after a loss
endorsements are for
...
riders are for
property + liability insurance
life + health insurance
...
other provisions
additional info, like how to cancel insurance
deductible
amount of money subtracted from the value of a loss
high deductible
low premium
large loss principle
main purpose of insurance is to cover large catastrophic losss
property insurance deductibles include
lump sum deductible; percentage deductible; straight or aggregate
lump sum deductible
equal to a specific amount
percentage deductible
percentage of the value of the insured property
straight deductible
applies to each separate loss
aggregate deductible
total deductible for a given policy period (adds up)
deductibles in health insurance
dollar deductible, time, calendar year, corridor, elimination period deductible
dollar deductible
form of dollars
time deductible
insured must wait specific amount of time after disability to collect any insurance
calendar year deductible
amount that must be paid by insured in a calendar year before insurance company pays anything (similar to aggregate)
corridor deductible
deductible that only applies to the major medical plan that only pays when the basic plan does not plus a specific dollar amount
elimination period deductible (waiting period)
requires insured to be disabled for time greater than waiting period and when payments will be paid only for the time after the waiting period
New developments: percentage deductible
pay percentage
buy back option
allows consumers to have dollar deductible for higher premiums
pro rata share
If a loss occurs that is covered by more than 1 insurance policy that was purchased by the insured, then each policy pays a portion of the loss that is proportional to the amount of that policy over the total amount of all policies for the loss
primary and excess insurance
For instance, if you drive someone's car, and have an accident, then the car owner's insurance is considered primary, and your auto insurance is considered excess. If the owner's insurance was capped at $300,000, and the liability for the accident was $40,000, then the owner's insurance would pay the entire bill. However, if the liability was $350,000, then the owner's insurance would pay the policy limit of $300,000 and your insurance would pay the remaining $50,000.
coordination-of-benefits clause
stipulates which insurance is primary and which is excess
1
employment is primary while coverage provided by being a dependent is excess
birthday rule
stipulates that whichever parent has the earlier birthday is the insurance that is considered primary
Tillinghast Towers-Perrin and the Casualty Actuarial Society
actuarial companies that found credit scores low means high claims = credit based scores
stock insurance company
a corporation with stockholders that participate in the gains and losses of the corporation// charter determines insurance given
mutual insurance companies
nonprofit corporations owned by the policyowners
Mutual insurers
are corporations owned by the policyowners, who elects the board of director
assessment mutual
has the right to charge more premiums if losses and expenses have been greater than expected
advance premium mutuals
company is owned by the policy owners, but the advance premium mutual cannot charge assessments if losses were greater than expected, pays for excessive losses out of its surplus// charges a greater premium than is necessary to cover its losse
factory mutual
commercial property insurer that insures only those sites that meet its rigid safety and construction qualifications (highly protected risk)// inspects all sites regularly, and offers loss control services to reduce risk
fraternal insurers
mutual companies that provide life and health insurance to members of a social or religious organization
perpetual mutuals
charged a single premium or a lump sum that covered a long time// if cancel insurance, part of premium returned
demutulize
convert their legal organization from a mutual company to a stock company
insurance agent
represents the insurance company // must be licensed by the state in which they conduct business.
insurance broker
represents the insurance applicant // must be licensed by the state in which they conduct business.
surplus lines
any type of insurance not offered by an insurer licensed to do business within the state; must be given to a nonadmitted insurer
nonadmitted insurer
insurer not licensed for that state
surplus lines broker
a broker licensed to place business with non-admitted insurers if no insurance available for a specific thing
Graham Leach Bliley Act (GLB)
required more uniform laws so that agents + brokers could work in different states
apparent authority
if agent actually does represent company then insurance applicant can accept this
express powers
lists what agents can and cannot do in representing the principal
implied powers (incidental authority)
powers implied by agent's express powers that allow agent to fulfill requirements of the agency agreement
agency agreement
binds principal(person or company) and agent; source of agent's authority
waiver
voluntary relinquishment of a legal right
estoppel
prevention of exercise of one's rights because of inconsistent acts or statements that caused someone else to rely on those acts of statements to their detriment; Ex: if insurance agent tells client that he can mail premium later than due date, then insurance company cannot deny payment of claim for loss that occurs between due date + receipt of premium
General agents
have the authority to bind the insurance company, and can issue a policy immediately as a binder
binder
evidence of insurance until the policy is actually issued
Soliciting agents (aka special agents)
do not have the legal authority to bind the company to a contract; the insurance company must approve of the application before the insurance becomes effective.
direct writer
an employee of the insurer, and, therefore, only represents the insurer // ONLY REPRESENTS ONE INSURANCE COMPANY
independent agent
represent multiple companies and will shop your policy to find the best coverage at the best premium
exclusive/captive agent
only one company (like direct writer but not an employee -- an independent contractor )
Claims adjusters
investigate insurance claims by interviewing the claimant and witnesses, consulting police and hospital records, and inspecting property damage to determine the extent of the company's liability.
Loss adjustor
independant claims specialists who investigate complex or contentious claims on behalf of insurance companies
Appraiser
A practitioner who has the knowledge and expertise necessary to estimate the value of an asset, or the likelihood of an event occurring, and the cost of such an occurrence.
Insurance underwriters
decide if applications for insurance cover (risks) should be accepted and, if so, what the terms of that acceptance are. (selection + categorization)
field underwriting
broker matches applicant to insurer
Reinsurance
the term that describes this distribution of policies and the attendant risk among insurers. // where an insurance company (the insurer) transfers a portion of its risks to another (the reinsurer)
misrepresentation
false or incomplete comparisons of different policies sold by competitors
twisting
duping the insured by false information or comparisons to change already owned policies to those that the agent or broker is selling
anti-rebating laws
prevent the agent or broker from sharing part of their commission with the customer
HO-2
policy is a NAMED PERILS POLICY that specifically covers perils enumerated in the policy, and no others (ex: windstorm, lightning, or hail, and fire or explosion)
HO-3
most commonly purchased policy // open perils policy that covers any DIRECT DAMAGE TO HOUSE OR OTHER STRUCTURES ON PROPERTY unless it is specifically excluded. INCLUDES PEOPLE INJURIES
HO-5
policy is also an open perils policy, but also includes direct damage or loss to PERSONAL PROPERTY.
The HO-8
policy is for OLDER HOMES that have a replacement cost that is much higher than its market value
The HO-6
modified HO-2 policy specifically designed for owners of CONDOMINIUMS OR COOPERATIVES
The HO-4
modified HO-2 policy for RENTERS of rooms, apartments, or houses.
Medicare
the federal HEALTH INSURANCE program for people who are 65 or older
Medicaid
A joint federal and state program that helps LOW-INCOME individuals or families pay for the costs associated with long-term medical and custodial care
domestic insurer
insurer is one formed under the laws of this state
foreign insurer
one formed under the laws of any state, other than this state
alien insurer
one formed under the laws of any country other than a state of the United States.
nonadmitted insurer
an insurer who is not licensed to do business within the state
Comprehensive coverage (auto insurance)
your insurance company pays for damage to your auto caused by an event other than a collision
hedging
insuring themselves against a negative event. (buying home insurance is hedging because it compensates for any loss..)
Futures Contract
an agreement traded on an organized exchange to buy or sell assets, especially commodities or shares, at a fixed price but to be delivered and paid for later.
bait and switch
A dishonest marketing tactic in which a marketer advertises a very attractive price/rate/term that is really a teaser rate meant to attract customers. Once the customer comes into the store/office to inquire about the advertised price/rate (the "bait"), the advertiser will attempt to sell the customer a more expensive product (the "switch").
twisting
the act of replacing insurance coverage of one insurer with that of another based on misrepresentations (coverage with Carrier A is replaced with coverage from Carrier B)
Self-insurance
a risk management method in which a calculated amount of money is set aside to compensate for the potential future loss
active risk retention
money is set aside to pay for an expected amount of loss
passive risk retention
no money is set aside // retaining risk because the risk is unknown or because the risk taker either does not know the risk or considers it a lesser risk
inherent vice
self-destruction of something just of is nature. EX: rotting fruit
exposure units
people or things that are subjected to loss and are insured
catastrophic losses
occurs erratically, w/ great destruction
catastrophic insurance
natural disasters(flood, hurricane etc) and man made (terrorist attacks) not usually covered by regular insurance bc it's hard to calculate when it'll happen, so people need catastrophic insurance.
3 risks that can be covered by insurance
personal, property, libaility
insurance score
# of claims made; corresponds to credit score
adverse selection
company more loss than expected because provide false information for a lower premium
legal liability
liability for party imposed by the court for its actions/inactions w/ money as compensation
legal wrong
failure to do something to perform a legal duty
coinsurance
requires the insured to pay a certain percentage of his losses or expenses
co-payment
a small, set fee that is independent of the total amount of the bill, but must usually be paid when the service is rendered
coordination of benefit clause
stipulates which insurance is primary and which is excess// in GROUP health insurance
NAIC
written the coordination-of-benefits provision; 2 rules: 1. insurance received as part of employment is primary while coverage provided by being a dependent is excess
birthday rule
Ex: if children injured: stipulates that whichever parent has the earlier birthday is the insurance that is considered primary
primrary insurer
wrote the policy for the insured (reinsurance)
hours clause
would limit the time that the insured could file a claim for damages. (now 96 hours)
2 basic reinsurance
facultative + treaty
facultative reinsurance
based on individual agreements to cover specific losses; for a particular coverage
treaty reinsurance
involves a standing agreement with a particular reinsurer; services provided by both parties are specified by contract
pro rata reinsurance
proportionate sharing of premiums, losses, and expenses between the primary insurer and the reinsurer
excess of lose reinsurance
an arrangement where the reinsurer only covers losses that are greater than the primary insurer's retained limit
Surplus-share treaty
retention limit for each policy; the reinsurer pays anything above the line, up to a specified maximum amount
reinsurance pool
formed by a group of insurers that combines their financial assets to underwrite insurance jointly; for catastrophic losses
FICO + ChoicePoint
organizations w/ formula to calculate insurance score
collision coverage
damage to the insured's motor vehicle because of a collision
comprehensive coverage
covers all other insurable damage to the insured's motor vehicle that is not the result of the collision, Ex: vandalism
Personal Auto Policy
covers personal vehicles, but not recreational vehicles; covers pickups or vans weighing less than 10,000 pounds, if they are not used for business delivery; ranching + farming; carpenter or plumber
covered auto
any listed in the declarations section of the insurance contract, a newly acquired vehicle, a trailer owned by a named insured, or a temporary substitute vehicle, any personal vehicle leased for at least 6 months
newly acquired vehicle
broadest coverage of any vehicle shown in the declarations, except collision coverage. Coverage begins when you are the new owner. For coverage for collision and other-than-collision damage, you must notify the insurer within 14 days if any of the vehicles in the declarations section has such coverage. If not, then notice must be given within 4 days. However, if it is an additional vehicle, the insurer must be notified with 14 days.
temporary substitue vehicle
any vehicle that you are driving because you are unable to use your insured vehicle, and you do not own the temporary vehicle
automobile liability coverage
pays for any damages and liabilities that you are legally obligated to pay for, and also pays defense costs. The cost of defense is over and above the limit of liability. However, no defense is provided if the liability is not covered. When the liability is covered, the insurer has the right to investigate and settle any claims independently of the insured
single limit
standard policy provides this; limit for all liability, no matter how it is apportioned
split limit
divides the limit of liability into 3 parts: the limit for each person, the total limit, and limit for property damage
ex: 100/300/50 would have a limit of liability of $100,000 for each person, a total limit of $300,000, and a limit of $50,000 for property damage
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automobile medical payments coverage
a no-fault payment for injuries or funeral expenses caused by vehicles designed for the road to the insured to prevent the need for litigation
uninsured motorist coverage
cover the insured if they suffer damages from uninsured motorists
underinsured motorist coverage
any deficiency of compensation for injuries caused by someone with inadequate insurance to cover your losses can be collected from your own insurance company, up to the policy limits
stacking
allows the insured to collect up to the total limits of coverage for all vehicles owned by the insured, whether they are insured under the same or different policies
loss settlement
actual cash value, or repair cost-->cost to repair vehicle > its worth, then loss will be declared a total loss, and actual cash value for the vehicle will be paid.
after market parts
If the vehicle can be repaired, the insurer will usually use cheaper after-market parts
betterment
If the insured insists on original manufacturer's equipment (OEM) for an older vehicle, then he will have to pay for the betterment by paying the difference between the price of the OEM part and the after-market part
after loss duties
Notify the insurer in the event of a loss, and tell the insurer how, when, and where the loss occurred, so that it can be investigated. The insured must protect the property from further damage, and the insurer will pay reasonable costs, such as towing and storage for its safekeeping. The insured will also have to cooperate with the insurer in providing evidence, testimony in court or for discovery, and help in finding or identifying witnesses.
If the loss is caused by a collision with another vehicle, especially if it was a hit-and-run collision, the insured must notify the police immediately after the incident or after it is discovered
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miscellaneous-type vehicle endorsement
standard auto insurance policy for motorcycles, mopeds, motor scooters, motor homes, snowmobiles, and most other recreational vehicles;
primary difference between the personal auto policy and motorcycle coverage
liability not covered on non-owned motorcycle, unless temporary substitute. insurance of the owner of the motorcycle would apply
shared market (residual market)
a market in which all of the insurance companies that do business within a state must participate; where high risk drivers must get their insurance
shared market structure
1.assigned risk plan-- if a particular insurance company writes 10% of the automobile insurance plans within the state, then it is assigned 10% of the high-risk drivers// higher premium
2.joint underwriting association-- similar to the assigned risk plan, but the premiums paid by high-risk drivers goes into a common pool and each company must pay its pro rata share of losses and expenses of the pool// all share underwriting losses
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3.reinsurance facility-- a reinsurance pool is established that receives contributions from all of the insurance companies operating within the state; accepts all drivers; insurance company decides whether to place it in the reinsurance pool or accept the driver as a regular customer; insurance company that issued the policy also services the policy
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4.specialty auto insurance--specialize in insuring high-risk drivers by charging high premiums for usually the minimum amount of coverage required by the state
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underwriting income
difference between premiums collected on insurance policies by the insurer, and expenses and claims paid
life insurance -- beneficiary
person, business, trust, or estate paid a specified amount after insured dies
owner of the policy
the person or organization who pays the premiums and has ownership rights-- the right to name the beneficiary; the right to receive dividends and to surrender the policy for cash; the right to change ownership; and the right to assign a policy as collateral for a loan
medical underwriting
requires that the insurance applicant receive a physical exam to determine the health of the applicant as well as supply medical information on the insurance application
4 underwriting classes for life insurance
preferred--healthier than average+have lower risk occupations, charged lower premium than standard rate
standard--charged the standard premium
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substandard--those whose health, occupation, personal habits, or other variables predict a shorter lifespan, so they are charged a higher rate
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uninsurable--hose people in poor health, with unhealthy habits, or who work in hazardous occupations; insufficient amount of info (rare disease)
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financial underwriting
requires that the company determine that the beneficiary would suffer a loss if the insured died, if the beneficiary is also the owner of the policy
after death of insured
face amount of the policy is paid to the named beneficiary
group life insurance
provided to specific groups, such as employees at a firm, or members of an organization; usually paid by employer
individual life insurance
purchased by individuals; usually greater face value
face value vs cash value
face value is amount paid to beneficiary after you die
cash value is taken out of premium and is for the insurance company, you can loan from the cash value. if you die and you did not pay your loan, the beneficiary receives face value - the loan that you owe
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survivor (second to die) life insurance
for estate planning; benefits given after both spouses die
the payment of a life insurance policy to a beneficiary is not taxable unless
beneficiary takes the proceeds as an annuity, and the money not paid continues to earn interest, then the interest is taxable// If the transferee was non-exempt, then, for the buyer, the difference between the cash value of the policy and the purchase amount is taxable when the policy is finally paid.
transferred for value
immediate cash from selling life insurance policy to an exempt transferee, the life insurance proceeds remains tax-free
exempt transferees
the insured
partners of the insured
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partnerships where the insured was a partner
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corporations where the insured was a shareholder or officer
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accelerated death benefit
allows the insured to withdraw some of the death benefits when the insured is terminally ill
Accelerated death benefits are fully excludable from income if
the insured is a terminally ill individual, which is a person who has been certified by a physician as having an illness or physical condition that can be expected to result in death within 24 months from the date of the certification.
yearly renewable term insurance policy
covers the policyholder for 1 year; provides no cash value, so most of the premium covers the mortality charge, the amount that must be paid for those who die
cost of the premium is determined by
death rate of each age group
smoker
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gender
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not family history of disease or genetics bc not easy to segment the population in this way, and there may not be a large enough difference in mortality rates to justify the expense of segmentation; also privacy + discrimination
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term life insurance
provides protection for only a limited time, and has no cash value; can be bought for 1, 5, 10, or 20 years, and is renewable without providing evidence of insurability
it cannot easily be changed to accommodate new needs, such as a new child. It also does not develop any cash value. cheapest life insurance
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Most term insurance policies are convertible
an be converted to a cash-value policy
attained-age method
to determine how much pay to convert
bases the insurance premiums on the age of the insured at the time of conversion
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original-age method
bases the premiums on the age of the insured when the term insurance was first acquired
cash value life insurance
usually covers much longer terms, up to a lifetime, and builds a cash value for the policy owner
Yearly renewable term insurance
covers 1 year, and is renewable every year up to a certain age limit, without the need to provide evidence of insurability; premiums increase each year
term to age 65 policy
covers the insured to age 65.
level premium; level face value
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Decreasing term life insurance
serves the needs (for term insurance declines as mortgages are paid down and children grow up and leave home)
level premium; the face value of the policy declines
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Increasing term life insurance
for people who wish to provide a hedge against inflation, especially for parents with children who will be attending college// increasing premium, increasing face value
reentry term insurance
insured must periodically provide evidence of good health and insurability to qualify for the lower premiums
whole life insurance
a policy that covers the insured's whole life// level premiums, accumulates a cash value that insured can surrender, if they wish to terminate the policy, or borrow against, usually at lower interest rates
at 100
policy matures, and the death benefit is paid to the owner of the policy
modified whole life insurance
stepped premiums that allow young people to pay smaller premiums when they are making less, then after a specific time, the premiums step up to a higher level as the insured's income increases
limited-payment life insurance
requires the payment of premiums for a limited time for a lifetime protection// at the end of the term does not pay any more premiums, but has lifetime protection
single-premium whole life insurance
which provides lifetime protection for the payment of a single large premium
endowment insurance policy
matures by certain date, when the owner of the contract receives the proceeds of the policy. If the insured dies any time before the end of the term, then the designated beneficiary receives the face value of the policy.
combination whole life insurance
combines a whole life policy with initial term insurance; term life insurance up, then cheaper than initial whole life insurance// premium is invested to increase the cash value of the policy as the term insurance decreases// greater protection in the beginning for a growing family
hospital-surgical insurance plan (basic plan)
cover basic medical expenses, but not major medical catastrophes; hospital expenses, surgical expenses, outpatient services, and doctor visits; limit 100,000
Major medical insurance plan
more comprehensive and have higher limits than hospital-surgical plans; limits 500,000 to 5,000,000+; there is a deductible and coinsurance requirement
calendar year deductible
has to be paid only once per year; carry-over provision allows the payment of any deductible during the last 3 months of the year to be carried over into the next year
family deductible
single deductible that applies to all members of a family; if the deductible is $100 per month, 2 members were treated within a month, and the $100 deductible paid for the 1st member, then no deductible for the 2nd member
coinsurance
usually 20% of the bill remaining after the deductible is paid; percentage of the bill insured has to pay
stop-loss limit
a cap on the coinsurance payment, which prevents a financial burden if the loss is a large amount; ex: loss is $100,000, and the stop-loss limit is $3,000, and the deductible is $1,000, then the insured would have to pay the $1,000 deductible and $3,000 for the coinsurance, not 20,000 (20% coinsurance)
primary care physician
responsible for your health care as well as for making referrals to specialists and approving further medical treatment
Medical Information Bureau (MIB) database
underwriting for health and life insurance draws information from here
subrogation
taking the place of the insured as to rights and remedies
anti-staking provision
prevents the insured from collecting from more than 1 insurance policy for the same loss
shared market
where high risk drivers buy insurance; a market in which all of the insurance companies that do business within a state must participate
assigned risk plan
if insurance company writes 10% of the automobile insurance plans within the state, then it is assigned 10% of the high-risk drivers
joint underwriting association
premiums paid by high-risk drivers goes into a common pool and each company must pay its pro rata share of losses and expenses of the pool
reinsurance facility
established that receives contributions from all of the insurance companies operating within the state; insurance company decides whether to place it in the reinsurance pool or accept the driver as a regular customer, but insurance company that issued the policy also services the policy
specialty auto insurers
insurance companies that specialize in insuring high-risk drivers by charging high premiums for usually the minimum amount of coverage required by the state
HEALTH INSURANCE:
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basic plan(hospital surgical insurance plan)
covered basic medical expenses; hospital expenses, surgical expenses, outpatient services, and doctor visits
major medical insurance plan
limits apply to the entire treatment rather than for specific services
Lloyd's of London
a large insurance marketplace, where underwriters meet with buyers of insurance or their brokers to create an insurance agreement
loss
unexpected reduction in the economic value of one's possessions
expense
expected payment for a good or service
personal risk
risks that affect someone directly, such as illness, disability, or death
property risk
affects either personal or real property
direct loss
loss or damage to the property itself
consequential loss/indirect loss
loss created by the direct loss
legal loss (liability loss)
particular type of personal risk that you will be sued because of neglect, malpractice, or causing willful injury either to another person or to someone else's property
insurable risks include:
personal, property, and legal risks
pure risk
risk in which there is only a possibility of loss or no loss
speculative risk
differs from pure risk because there is the possibility of profit or loss
fundamental risk
risk that can affect many people at once (earthquake, terrorism)
economic risk
fundamental risks because they affect many people (unemployment)
particular risk
risk that affects particular individuals (robbery, vandalism)
enterprise risk
set of all risks that affects a business enterprise
strategic risk
from goal-oriented behavior (company buys machine for efficiency, but ends up with more losses than before)
operational risk
from the operation of the enterprise Ex: risk of injury to employees, risk that customers' data leaked bc of bad security
financial risk
risk that an investment will result in losses
chief risk officer (cro)
primary responsibility of reducing risk throughout the enterprise (creating depts hiring ppl)
risk
chance of loss
peril
direct cause of loss// something that may cause loss (fire, hurricane)
hazard
anything that causes/increases likelihood of loss (skydiving)
physical hazard
physical condition that increases the possibility of a loss (smoking)
moral hazards
losses that results from dishonesty
morale hazards
loss that results from the insured worrying less about losses// sub: legal hazard -- American legal system moral hazard motivates people to sue for financial profit
5 major ways of handling risk
avoidance,
loss control,
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retention,
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noninsurance transfers,
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insurance.
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avoidance
elimination of risk (not participating in stock market)
loss control
loss prevention-- reducing the probability of risk
loss reduction-- minimizes the loss
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risk retention (active retention, risk assumption)
handling the unavoidable or unavoided risk internally// retained risks occur with greater frequency, but have a lower severity// accepting risk// deductible we pay small losses, but once over deductible, insurance pays big losses
self insurance
retaining risk; set aside money for unexpected losses
noninsurance transfers
contract-- like warranty
hedging-- an investment to reduce the risk of price movements in an asset; forward contract (bank guarantee some money at some rate) a hedge is a futures position that is approximately equal and opposite to the hedger's position in the underlying asset.
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incorporating (business risks)-- claiming corporate entity as separate from owners (branch of company wont be affected by some loss i guess)
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losses for insurance
Losses must be accidental and unintentional.
the loss must be determinable and measurable.
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catastrophic losses
frequency of occurrence and the severity of losses cannot be accurately forecasted, and, thus, catastrophic losses are usually not insured by private companies.
3 risks covered by insurance
- Personal risk-- any risk that can affect the health or safety of an individual
- Property risk-- any risk that can cause a partial or total loss to property, such as theft, fire, or so-called "acts of God". (uncontrollable natural forces)
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- Liability risk-- the personal or business risk associated with being found liable to another because of negligence or willful acts that caused a loss to another's property or person, such as injuring someone while driving under the influence of alcohol, or because the insured failed to perform a duty, such as performing contractual obligations.
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underwriting
the selection and classification of insurance applicants according to the probable payout for that class.
Actuaries
set the insurance rates; use statistics and the law of large numbers to determine expected losses and the probability of how much actual losses can deviate from expected losses.
Underwriter
decides which class the insurance applicant belongs
factors for underwriting
auto insurance: number of points + car accidents
insurance scores (based on credit score because correlation low credit score high claims)
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clauses in insurance contact where company doesn't need to pay
presence of pre-existing conditions for a health insurance applicant
suicide after buying life insurance
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3 general classes of legal wrongs
crime: a person intentionally inflicts injury, or takes something from another
tort: legal or civil wrongs committed against people or organizations, causing them a loss; ex: causing an auto accident, or failure to make a safe product
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breach of contract: lack of performance by a party to another to satisfy a contract that the parties agreed to.
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4 requirements to presume negligence
-there must be a legal duty to perform or to use reasonable care;
-there must have been a failure to perform that duty;
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-the plaintiff must have suffered an injury or a loss;
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-the negligent act must have been the proximate cause(cause that directly caused the loss or suffering so that if proximate cause didn't happen, then harm would not happen)of the injury.
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coinsurance
percentage of an amount you have to pay health and property insurance
copayment
fixed amount you have to pay health insurance
THIS SET IS OFTEN IN FOLDERS WITH...