Risk management

What does pooling of losses achieve in insurance?

It spreads losses incurred by the few over the entire group, substituting average loss for actual loss.

What is a fortuitous loss?

A fortuitous loss is unforeseen and unexpected by the insured and happens as a result of chance.

What is meant by risk transfer in insurance?

Risk transfer means that a pure risk is transferred from the insured to the insurer who is financially better positioned to pay the loss.

What is indemnification in the context of insurance?

Indemnification refers to restoring the insured to their approximate financial position prior to the loss.

What does the law of large numbers help insurers to predict?

It helps insurers predict losses more accurately by indicating that as the number of instances increases, actual outcomes will match expected outcomes.

What does the acronym CLAMED stand for regarding ideal insured risks?

Catastrophic, Law of large numbers, Accidental, Measurable, Economically feasible, Definite.

What is the significance of reinsurance in managing catastrophic losses?

Reinsurance transfers partial or entire losses of a catastrophic event to a different insurance company.

How does adverse selection affect insurance?

Adverse selection occurs when sellers use private knowledge of risk to maximize outcomes, such as smokers being charged more for life insurance.

What are the key differences between insurance and gambling?

Insurance manages existing pure risks while gambling creates new speculative risks, and insurance is socially productive whereas gambling is not.

What are some major social insurance programs in the United States?

Social Security, Medicare, Unemployment insurance, Workers compensation, and others.

What is the principle of indemnity in insurance?

The principle of indemnity prevents insured individuals from profiting from insurance claims and seeks to restore them to their financial position prior to the loss.

How is Actual Cash Value (ACV) calculated?

ACV = Replacement Cost - Depreciation, taking factors like age and wear into account.

What is a valued policy?

A valued policy guarantees a predetermined payout regardless of the property's actual value at the time of loss.

What is a replacement cost policy?

A replacement cost policy pays the full cost to replace damaged or lost property without deducting for depreciation.

What is insurable interest?

Insurable interest requires that the insured has a financial stake in the insured property or life, ensuring they would suffer financially from a loss.

What are the three reasons for insurable interest?

1. Prevents gambling; 2. Reduces moral hazard; 3. Enables measurement of the insured's loss.

What is the principle of subrogation?

Subrogation allows insurers to recover losses from a negligent third party responsible for the damage after paying the insured.

What are the main reasons for subrogation?

1. Prevents profit from double recovery; 2. Holds the negligent party accountable; 3. Keeps insurance rates lower.

What are the four requirements for a valid insurance contract?

1. Offer and acceptance; 2. Exchange of consideration; 3. Legally competent parties; 4. Legal purpose.

What is an aleatory contract?

An aleatory contract involves unequal exchanges based on the occurrence of uncertain events.

What is a unilateral contract?

A unilateral contract involves one party making a legally enforceable promise, typically the insurer.

What defines a conditional contract in insurance?

A conditional contract's obligations depend on whether the insured has complied with all policy conditions.

What is an apparent authority in agency relationships?

Apparent authority arises when a principal's actions lead a third party to reasonably believe the agent has authority.

What does waiver mean in an insurance context?

Waiver is the voluntary relinquishment of a known legal right, such as an insurer waiving the need for complete application information.

What is estoppel in insurance?

Estoppel prevents a party from contradicting a previous action or statement that another party relied on, impacting legal defenses.

What is the definition of negligence?

Negligence is the failure to exercise the standard of care required by law to protect others from an unreasonable risk of harm.

What are the four requirements to prove negligence?

1. Existence of a legal duty; 2. Failure to perform that duty; 3. Damage or injury to the claimant; 4. Proximate cause relationship.

What does strict liability entail?

Strict liability holds a party responsible for damages caused by their actions, regardless of intent or negligence.

What are compensatory damages?

Compensatory damages are intended to reimburse an injured party for their losses, including special and general damages.

What distinguishes punitive damages from compensatory damages?

Punitive damages are awarded to punish a wrongdoer for harmful conduct and deter future misconduct, rather than to compensate for losses.

What is contributory negligence?

Contributory negligence occurs when a person's own lack of care contributes to their injury, barring them from recovering damages.

What is comparative negligence?

Comparative negligence allows damages to be apportioned based on the degree of fault of each party involved.

What does the last clear chance doctrine state?

The last clear chance doctrine allows a plaintiff to recover damages even if they were negligent, if the defendant had an opportunity to avoid the accident.

What is imputed negligence?

Imputed negligence attributes one party's negligent act to another party under certain circumstances, such as an employer to an employee.

What does res ipsa loquitur mean?

Res ipsa loquitur means 'the thing speaks for itself' and allows a presumption of negligence when an injury occurs that ordinarily does not happen without negligence.

What are the types of entrants on land with respect to premises liability?

1. Trespasser; 2. Licensee; 3. Invitee.

What are some major defects in the tort liability system in the U.S.?

Rising costs, inefficiency in victim compensation, uncertainty of outcomes, high jury awards, and long delays in lawsuits.

What are some proposals for tort reform?

Capping non-economic damages, restricting punitive damages, and improving alternative dispute resolution techniques.

What are common reasons for medical malpractice problems?

Medical errors, complexity of procedures, high-risk specialties, and incentives for attorneys.

What is a class action lawsuit?

A class action lawsuit is a legal action where one plaintiff sues on behalf of a group of individuals harmed in similar ways.

What is defined as an occurrence under Section II of the homeowners policy?

An occurrence is defined as an accident, including continuous or repeated exposure to harmful conditions, resulting in bodily injury or property damage during the policy period.

What does personal liability coverage under Section II of a homeowners policy protect against?

It protects insureds when a claim or suit for damages is brought against them for negligence that causes bodily injury or property damage.

What is Coverage F in a homeowners policy?

Coverage F provides medical payments to individuals injured on insured property, regardless of the insured's legal liability.

What types of properties are included under the residents premises of a homeowners policy?

Properties include the insured's home, vacant land, cemetery plots, and land under construction.

What does Coverage E provide in a homeowners policy?

Coverage E provides legal liability protection for the named insured and family members for personal acts causing bodily injury or property damage.

What is the purpose of the additional coverage for damage to property of others?

It covers property damage caused by an insured, valued at replacement cost, up to $1,000 per occurrence, without requiring legal liability.

What does the earthquake endorsement cover?

It covers direct physical loss to property caused by an earthquake, including shockwaves and tremors during a 72-hour period.

What is the inflation guard endorsement in homeowners insurance?

It provides for an annual pro rate increase in coverage limits for A, B, C, and D under the policy.

What are major factors that determine the cost of a homeowners policy?

Factors include construction, location, fire-protection class, age of the home, deductible amount, insurer, and loss history.

What is an insurance score in homeowners insurance?

An insurance score is a credit-based score that predicts future claim costs, with lower scores indicating a higher likelihood of claims.

What recommendations are given for shopping for homeowners insurance?

Evaluate the home's details, compare quotes, understand policy coverage and exclusions, and consider additional coverage for natural disasters.

What is a stock insurer?

A stock insurer is a corporation owned by stockholders focused on earning profits for them, with a board of directors responsible for overseeing management.

What are the three major types of mutual insurers?

1. Advance Premium Mutual: Owned by policyholders, does not issue assessable policies. 2. Assessment Mutual: Can assess policyholders additional amounts if financial conditions are unfavorable. 3. Fraternal Insurer: Provides life and health insurance to members of a social or religious organization.

What is demutualization?

Demutualization is the conversion of a mutual insurer into a stock insurer.

What is Lloyd's of London?

Lloyd's of London is a marketplace for insurance underwriters known for syndicates that underwrite insurance, not an insurance company itself.

What is a reciprocal exchange in insurance?

A reciprocal exchange is an unincorporated organization in which insurance is exchanged among members (subscribers), who insure each other.

What is the difference between an agent and a broker?

An agent represents the insurer with legal authority to act on its behalf; a broker represents the insured and cannot bind the insurer.

What are the roles of wholesalers and retailers in insurance distribution?

Wholesalers do not deal with the end consumer and include managing general agents and surplus lines brokers, while retailers sell insurance directly to consumers.

What are key characteristics of Lloyd's of London?

Lloyd's is a marketplace with limited liability for members, multiple syndicates that specialize in different risks, and financial requirements to protect members' assets.

What defines the Independent Agency System?

Independent agents represent multiple companies, writing policies on their behalf and owning the renewal rights to the policies.

What is a mass-merchandising plan in property and liability insurance?

A mass-merchandising plan offers discounted insurance rates to groups, such as companies or unions, allowing members to secure lower rates.

What distinguishes insurance pricing from other product pricing?

Insurance pricing is uncertain as insurers do not know the number or cost of claims in advance, unlike other products where costs are known beforehand for profit margin calculations.

What is underwriting in insurance?

Underwriting is the process of selecting, classifying, and pricing applicants for insurance to ensure a profitable book of business.

What are the main objectives of an insurer in settling claims?

1. Verification of a covered loss; 2. Fair and prompt payment of claims; 3. Personal assistance to the insured.

What steps are involved in the claims process?

1. Claim initiation; 2. Claim confirmation; 3. Assignment to a claims analyst; 4. Investigation; 5. Determination of coverage and loss; 6. Settlement offer; 7. Final payment and closure of claim.

What is reinsurance?

Reinsurance is an arrangement where a primary insurer transfers part or all potential losses to another insurer (reinsurer) to stabilize profits and increase underwriting capacity.

What is the difference between facultative and treaty reinsurance?

Facultative reinsurance involves separate negotiations for each case, while treaty reinsurance automatically covers all policies under agreed terms, simplifying the process.

What is a quota-share treaty in reinsurance?

A quota-share treaty is an agreement where the ceding company and reinsurer share premiums and losses based on a previously established percentage.

What role do information systems play in an insurance company?

Information systems organize and manage data about customer policies and claims within the insurance company.

What does loss control aim to do in insurance?

Loss control helps prevent issues that could lead to insurance claims by identifying risks and providing preventive advice.

What are the key purposes of insurance regulation?

Protection of customers, market stability, and maintaining public trust in the financial system.

What was the significance of Paul vs. Virginia?

Affirmed the right of states to regulate insurance, establishing a precedent for state-level oversight.

What did the Southeastern Underwriters Association case rule?

Declared that insurance is considered commerce, thus subjecting it to federal regulation.

What does the McCarran-Ferguson Act assert?

Continued state regulation and taxation of the insurance industry is in the public interest.

What are the principal methods of regulating insurance companies?

State-based regulation, financial solvency, consumer protection, rate regulation, and federal oversight.

Name some principal areas of insurance company operations regulated by states.

Formation and licensing, solvency regulation, rate regulation, policy forms, sales practices, and consumer protection.

What is the difference between prior-approval law and modified prior-approval law?

Prior-approval law requires all rates to be approved, while modified prior-approval law allows rates based on loss experience to be used immediately after filing.

What is twisting in insurance?

The inducement of a policyholder to drop an existing policy and replace it with another that provides little or no economic benefit.

What issues do critics argue exist in state regulation of insurance?

Defects in state regulation necessitate federal standards for nondiscrimination and essential coverage availability.

What techniques do regulators use to monitor insurance company solvency?

Capital standards, risk-based capital standards, reserve requirements, and annual financial statements.

Why were social insurance programs established in the U.S.?

Social insurance programs were established to address social and economic challenges individuals face, covering risks that private insurance cannot, and providing economic security in cases of long-term impacts such as disability or premature death.

What are typical eligibility requirements for group insurance plans?

Employees must typically be full-time, meet minimum hours, have a waiting period, be actively at work, and sometimes have coverage restricted to specific employee classes.

What is required for being fully insured under the OASDI program?

To be fully insured under the OASDI program, an individual must have earned 40 credits from covered employment.

What does it mean to be currently insured under the OASDI program?

Being currently insured means earning at least six credits during the last 13 quarters before death, disability, or retirement benefit entitlement.

Describe the recent and duration work tests for disability insurance under OASDI.

The recent work test requires a specific amount of work credits based on age when disabled; the duration work test needs credits at specific ages without time constraints, with special exceptions for the blind.

What role do Social Security retirement benefits play for retirees?

Social Security retirement benefits are the predominant source of income, providing over 90% of total income for many retirees in lower income quartiles.

What are survivor benefits in relation to Social Security?

Survivor benefits provide financial protection to dependents of deceased workers with either fully or currently insured status, equivalently valuing substantial life insurance amounts.

What eligibility criteria exist for disability-income benefits under Social Security?

Disability-income benefits can be paid to workers who meet specific eligibility requirements, reflecting substantial protection for the disabled and their dependents.

How is disability defined in the context of OASDI?

Disability is defined as the inability to engage in substantial gainful activity due to a medically determinable physical or mental impairment.

What does Part A of Medicare cover?

Part A covers inpatient hospital care, skilled nursing facility care, hospice, and limited home health care.

What are the basic objectives of state unemployment compensation programs?

The objectives include providing short-term income for unemployed individuals, aiding job searches, and supporting employers to reduce involuntary job loss.

What are the basic objectives of workers' compensation laws?

Objectives include broad coverage for job-related accidents, substantial income protection, sufficient medical and rehabilitation services, encouragement of workplace safety, and reduction of litigation.

What are the principal benefits of Workers Compensation Laws?

Principle benefits cover unlimited medical care, disability income, death benefits, and rehabilitation services for workers injured on the job.

What is meant by premature death in insurance?

Premature death refers to the death of a family head with outstanding financial commitments, affecting dependents, educational needs, and mortgage obligations.

What are the costs associated with premature death?

Costs include loss of earnings, increased expenses, reduced standard of living, and non-economic costs such as emotional damage.

Why is life insurance important in the context of premature death?

Life insurance provides financial support to dependents, helping to restore some of the income lost due to the death of the breadwinner.

How does family structure affect the impact of premature death?

The financial impact varies: single breadwinner families may face vulnerability, dual-income families may struggle with income loss, and single-parent families lack immediate support.

What is human life value?

Human life value is the present value of the deceased breadwinner's future earnings available for family support.

What are the cash needs associated with premature death?

Cash needs include funeral costs, medical bills, debts, probate costs, and taxes.

What is a major limitation of term insurance?

Term insurance premiums increase with age and can become prohibitive; it is also not designed for saving towards specific needs.