Insurance and Risk Management

pure risk

• offers no opportunity for gain

• transferred by insurance

• major types of pure risk

  • personal, property, liability

• ex. premature death, job accidents, medical expenses, damage to property from fire, lightning, flood, earthquake

probability

the likelihood an event will occur

peril

the cause of a loss

legal hazard

the characteristics of the judicial system that increase the frequency and severity of losses

ex. large jury verdicts, large damage awards in liability lawsuits, coverage for alcoholism

risk

uncertainty concerning the occurrence of loss

possibility of loss or injury

principle of insurable interest

the policy must have a financial stake in the insured property or person

when the risk of financial loss must be demonstrated before buying a life insurance policy on someone else

financial stake

a financial interest or share in something

law of large numbers

the larger the number of exposure units, the more closely the actual results obtained will approach the probable results expected

controllable risk

a risk that can be reduced or avoided through actions like implementing safety procedures, employee training, regular maintenance, or modifying work practices

ex. loss from theft, currency exchange risks, addressing skills issues, poor cashflow, lawsuits

self-insurance

a company or individual sets aside a pool of money to be used to remedy an unexpected loss

when an individual or business assumes the total risk of economic losses

loss severity

• probability that a liability judgement may exceed a firm’s net worth

• the financial impact of a loss

loss frequency

probable number of losses that may occur during some period

loss reserve

an estimate of an insurer’s liability from future claims it will have to pay out on

a liability that represents an estimate of the claims reported and adjusted but not yet paid, claims reported and filed but not yet adjusted, and claims incurred but not yet reported to the company

adverse selection

persons with a higher than average probability of loss seek greater insurance coverage than those with less risk

when sellers have information that buyers do not have, or vice versa, about some aspect of product quality

appropriate techniques for loss exposures

• retention (low frequency, low severity)

• loss prevention and retention (high frequency, low severity)

• transfer (low frequency, high severity)

• avoidance (high frequency, high severity)

example of risk of financial resources

a person suing you and possibly winning a large judgement against you

maximum probable loss

the worst loss that is likely to happen

which one of the following statements about stock insurers is true

stockholders bear any losses and share in any profits

property insurance will pay for a loss

without regard to fault

the best way to protect a small child in a automobile is

to place the child in a special car seat in the back seat of the car

the most important factor in an insurance company’s decision on the price you pay for the homeowners insurance is

estimated danger of loss based on the insurance company’s past experience

bodily injury liability

covers the other driver’s medical expenses if you’re at fault

in personal auto policy (pap)

personal injury protection (pip)

covers medical expenses and lost wages for you and your passengers regardless of who’s at fault

in personal auto policy (pap)

endorsement

an amendment to your individual policy that reflects any changes to the standard policy

personal liability insurance

• protects you financially if you are legally responsible for causing injury to someone or damaging their property

• covers medical bills for injuries sustained by guests on your property, legal fees and court settlements if you are sued, repair costs for damage to another person's property, lost wages for the injured party

• does not cover damage or injury to yourself or members of your household, damage caused intentionally, damage caused by your lawn mower or other vehicles after they leave your property

term life insurance contracts generally do not have

cash value, lifetime coverage, the ability to accumulate cash

personal auto policy (pap)

protects the policyholder and their passengers from financial loss in the event of an accident while driving a private vehicle for personal use

collision coverage

• protects a car owner against financial loss resulting from a wreck or rollover

• without regard to fault

assigned risk plan

provides insurance to people who are considered too high-risk and would otherwise be denied coverage

doctrine of comparative negligence

• dictate how the responsibility for an accident will be shared between the parties directly involved in an accident where bodily injury or property damage was suffered

• ex. judy is found to be 70% to blame and don 30% to blame in an accident in which judy suffers a loss of $1,000 and don suffers a loss of $10,000. under the doctrine of comparative negligence don recovers $7,000

decutible

the amount an insured pays on a claim before the insurer pays the remainder

subrogation

describes the right held by most insurance carriers to legally pursue a third party that caused an insurance loss to an insured

100/300 bodily liability coverage

your car insurance policy will cover up to $100,000 per person injured in an accident you cause, and a maximum of $300,000 for all injuries sustained in a single accident

which statement about workers’ compensation is correct

workers’ compensation will pay death benefits

another term for a salary continuation plan is

a sick leave plan

beneficiary

the person or legal entity designated to receive a life insurance death benefit

group plan insurance

covers all employees of the insured by a single contract

advantages include low cost

term life insurance

• limited to a specific length of time

• most reasonably priced life insurance is term

medicare

provides hospital medical benefits to people over 65 and to eligible disabled people under 65

which of the following statements about long-term care is not correct

long-term care insurance guarantees you a spot in the facility you want

tax-deferred

earnings on the investment are not taxed until you collect the money

universal life insurance

a type of permanent life insurance that offers the flexibility to change your death benefit and adjust your monthly premiums

combines term and whole

3 main types of life insurance

term, whole, universal

401k

an employer-sponsored retirement plan in which the employee, and usually the employer, makes payments into a fund that the employee manages

premium

money paid by the insured to the insurer to purchase an insurance policy

commercial insurance

for business organizations, institutions, and government agencies

binder

temporary evidence of insurance until a policy is actually issued is provided

dram shop laws

laws under which businesses that sell liquor may be held liable for the negligence of those who consume the liquor

alien insurer

an insurance provider offering coverage in a country other than the company's home country

foreign insurer

based in the U.S. but sells policies in states other than where it's domiciled

insured

the person or business for which an insurance company assumes the risk

dependent

a person who must rely on another for financial support

declarations

• the page of an insurance policy that identifies the insurance company and the insured, and summarizes the coverage provided by that particular policy

• the page of an insurance policy that includes your name, address and the insured property

the primary purpose of coinsurance in property insurance is to

achieve equity in rating

all policyholders are paying a premium that is fair based on the level of coverage they have relative to the value of their property

coinsurance

• an insured individual's share of the costs of a covered expense

• the amount that the insured pays after the deductible has been paid

exclusions are used in insurance policies for all except which one of the following reasons

to waive policy conditions

what information is contained in the insuring agreement of an insurance policy

a summary of the major promises of the insurer

all of the following statements about business objectives in designing a rating system are true except the rating system should

be independent of long-run changes in the economy

types of term life insurance policies

level, decreasing, renewable, convertible, yearly renewable (yrt)

not increasing term

to be properly classified as "insurance" an arrangement also must have all but one of the following elements

it must be described by a legal contract between the parties

assumption of risk doctrine

a person who understands the danger inherent in an activity cannot recover damages in the event of injury from the activity

what is the practical effect of an insurance policy being a contract of adhesion

the policy is interpreted in the insured's favor if the policy contains any ambiguities or uncertainties

contract of adhesion

a legally binding agreement between an insurance company and an insured party where the insurance company drafts the terms and conditions, and the insured has little to no ability to negotiate

in property insurance, the applicant accepts the offer by

completing the application and paying the first premium

the policy provision requiring the filing of proof of loss with the insurer is an example of a(n)

condition

settlement options

refers to how the death benefits are distributed to the beneficiaries

which one of the following statements describes how losses will be settled if a property insurance policy is written on a replacement cost basis

losses are settled without a deduction for depreciation

replacement cost basis

a method of valuing insured property that calculates the cost of replacing it without accounting for depreciation

insurance must, by law in most states, meet all but one of the following requirements

must encourage loss control efforts by the insured

ravi is cited in an accident that he thinks is not his fault, because the other car sped into a blind intersection and hit ravi's car as he was pulling into traffic. what should ravi do

sign the ticket

loss

a decrease in or disappearance of value

all of the following statements about the methods of regulating insurance are true except

insurers are totally exempt from regulation by federal agencies and laws

misrepresentation

• the practice of making false claims for an insurance product (by the insured)

• renders the contract voidable and may give rise to a right to damages depending on the type of misrepresentation that has occurred

guaranty fund

a state-administered pool of money designed to protect policyholders if an insurance company becomes insolvent (meaning it can’t pay its claims)

direct response system

• a type of marketing designed to elicit an instant response by encouraging prospects to take a specific action

• company sells insurance through radio ads, telemarketers, and newspaper and magazine inserts

in treaty reinsurance, the reinsurer must

accept all business that falls within the scope of the treaty

facultative reinsurance

a reinsurance contract that is entered into on a case-by-case basis after an application for insurance is received by a primary insurer

moral hazard

• a situation where someone takes on more risk because they don't have to bear the full costs of that risk

• 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

inspection report

a detailed document that assesses the condition and functionality of a property, system, or equipment, highlighting potential issues and providing recommendations for repairs or improvements

special agent

an agent who has authority to perform only a specific act or function

independent insurance agent

an insurance agent that sells insurance policies from a variety of different companies

marketing

the career in which people develop business strategies and presentations to promote the sale of different insurance products

workers' compensation

a system of insurance set up by state law that pays employees who are injured on the job

actuary

• an employee forecasts the financial needs of insurance companies using mathematical and computer models

• chief role is to manage risk

captive/exclusive agent

sells only the products of one insurance company

accident reconstructionist

• a professional who uses their knowledge of physics, engineering, and law enforcement to analyze the causes and contributing factors of a collision

• allows a person to investigate claims to determine credibility and liability

loss control specialist

an employee identifies risks and provide recommendations to reduce loss and damages

speculative risk

a category of risk that, when undertaken, results in an uncertain degree of gain or loss

only profit or loss possible

diversifiable/nonsystematic/particular risk

• risk that comes from individuals and local impacts

• affects only individuals and not the entire community

• can be eliminated or controlled

  • ex. diversified portfolio of stocks, diversified lines of insurance, homes, etc.

• ex. car theft, bank robbery, house fire

principle of indemnity

an insurance contract compensates you for any damage, loss or injury caused only to the extent of the loss incurred

admitted assets

assets that, by law, are included in a company's annual financial statements

unearned premium reserve

the amount of unexpired premiums on policies or contracts as of a certain date

assessable policy

a type of insurance policy that may require the policyholder to pay additional funds to cover an insurer's losses

comprehensive coverage

optional type of car insurance that protects against damage to your vehicle from non-collision events

copayment

the amount of money that a patient with health insurance pays for each health care service

cobra (consolidated omnibus budget reconciliation act)

a federal law that allows people to keep their employer's health insurance for a limited time after their employment ends

• can also apply to dependents of covered employees

medicaid

provides health coverage to low-income individuals and families

right of reciprocity

• a principle or agreement where states or countries extend similar privileges to insurers, agents, or policyholders based on mutual respect for each other’s regulations

• aims to create uniformity and facilitate ease of doing business across jurisdictions

ira (individual retirement accounts)

a self-funded and self-managed savings or investment account that can help you to accumulate more wealth for your retirement than you might with a traditional savings or investment account

defined benefit plan

promises a specified monthly benefit at retirement