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Declarations
Definition
Insuring Agreement
Exclusions
Conditions
Miscellaneous Provisions
Basic Parts of an Insurance Contract
Declarations
Statements that provide information about the particular property or activity to be insured.
Declarations Page - Name and Address of Insurer - Name and Address of Insured - Insured Property Location(s) - Policy Period (Dates) - Amount(s) of Insurance (Limits) - Premium - Deductible (if any) - Other Relevant Information (Schedule of endorsements et al)
Definitions
Key words or phrases are defined so that coverage under the policy can be determined more easily. - “We,” “us,” and “our” refer to the insurer. - “You” and “your” refer to the insured.
Insuring Agreement
Summary of the major promises of the insurer (what the policy covers)
Named Perils
Only those perils specifically named in the policy are covered
Open Perils (“All Risk” perils or “Special Coverage”)
All perils are covered except for those that are specifically excluded, provide the most coverage
Exclusions
Perils or property that are not covered under the policy.
Examples:
Flood / Earthquake
War
Intentional Loss
Certain types of property
Certain perils considered uninsurable - War, wear & tear, inherent vice
Presence of extraordinary hazards
Using personal vehicle as a taxi or for Uber, Lyft
Coverage provided by other contracts - Use of autos is excluded by homeowners policy; coverage available under separate auto policy.
Moral hazard - Addressed by limiting coverage within policy
Attitudinal hazard - Losses due to freezing of pipes are only covered if there was reasonable care to maintain heat in the building.
Coverage not needed by typical insureds - Homeowners policy does not cover aircraft (Coverage available under separate policy)
Why Are Exclusions Necessary?
Conditions
Provisions in the policy that qualify or place limitations on the insurer’s promise to perform.
Examples: - Prompt notification of loss - Protect property from further loss - Valuation/Loss Settlement – “ACV” vs. “RC” - No concealment or fraud - Subrogation
Miscellaneous Provisions
Notice of Cancellation and Nonrenewal need to be given 30 - 90 days out
States have mandatory provisions (added by endorsements) - Notice of Cancellation - Notice of Nonrenewal - Notice of Loss - Mortgagee Clause
Named Insured
The person(s) or party named on the Declarations Page of the policy
First Named Insured
Has certain additional rights and responsibilities that do not apply to other Named Insureds
Other Insureds
Persons or parties who are insured under the policy even though they are not specifically named
Additional Insureds
Person or party added to the policy by an endorsement
Endorsements and Riders
Provisions that add to, delete from, or modify the original policy terms.
Examples:
Negotiated coverage enhancements
Specific exclusions
Statutory provisions to comply with state laws
(Example: Uninsured Motorists coverage)
Deductible
A deductible is a provision by which a specified amount is subtracted from the total loss payment that would otherwise be payable
***Frequency and severity of a loss goes down if they have deductibles
Eliminate small claims - It is expensive (relatively) for an insurance company to adjust small claims. - May cost more in expenses than the amount of the claim.
Reduce premiums
Pure premium = frequency x severity
Both frequency and severity are reduced.
Reduce moral and morale (attitudinal) hazard
Dishonest people may not be able to afford deductible.
People are less careless if they know it will cost them money (skin in the game).
Why Have Deductibles?
Straight Deductible
The amount the insured is responsible for per loss before the insurer pays anything
Insured pays $1,000 Insurer pays $9,000
Straight Deductible Examples - $1,000 deductible on Property Policy Claim #1 – Fire Loss $10,000 in damages Insured pays: ? Insurer pays: ?
Insured pays $900 Insurer pays nothing since the loss is below the deductible
Straight Deductible Examples - $1,000 deductible on Property Policy Claim #2 – Theft of Computer Equipment $900 covered loss Insured pays: ? Insurer pays: ?
Aggregate Deductible
The amount the insured is responsible for in total (over all losses during the policy period) before the insurer pays anything
Insured pays $600 Insurer pays 0
Aggregate Deductible Example: $1,000 annual aggregate deductible Doctor appt. #1 on 1/30 Cost $600 Insured pays: ? Insurer pays: ?
Insured pays $400 Insurer pays $500
Aggregate Deductible Example: $1,000 annual aggregate deductible - Doctor appt. #1 on 1/30 - Insured paid $600, insurer paid 0 Doctor appt. #2 on 10/13 Cost $900 Insured pays: ? Insurer pays: ?
Elimination (Waiting) Period
Stated period of time at the beginning of a loss during which no insurance benefits are paid.
Common in Disability Insurance – typically cannot collect until you’ve been out of work for 30, 60, or 90 days.
***Business Interruption
***________ has an elimination period, can delay start up to 30-60 days out
Coinsurance (in Property Insurance)
Encourages the insured to insure the property to a stated percentage of its insurable value.
If coinsurance requirement is not met at the time of loss, the insured must share the loss (as a coinsurer)
***Amount of Recovery = (Amount of Insurance Carried / Amount of Insurance Required) x Loss
*** Coinsurance Formula
Insurer Pays: ($300K / $400K ($500K x 80%)) x $200K loss = $150K
Example: Property Coinsurance
Commercial building with reconstruction/replacement cost of $500,000
Owner has insured the building for $300,000 Policy includes an 80% ***coinsurance clause A covered fire causes $200,000 in damages Insurer pays: ?
Coinsurance (in Health Insurance)
Provision that requires the insured to pay a specified percentage of covered medical expenses after the deductible is met.
Reduces premiums and prevents overutilization of policy benefits.
If you have to pay for a portion of it, are you going to get a medical test you don’t think you need?
Insured Pays = $1,800 ($1,000 deductible + (20% x $4,000 above deductible) Insurer Pays = $3,200 (80% x $4,000 above deductible)
Example: Health Coinsurance $1,000 deductible 80%/20% coinsurance (insurer pays 80%) $5,000 cost of a medical procedure Insurer Pays: ? Insured Pays: ?
Provisions for when multiple insurance policies apply.
Prevents the insured from profiting from a loss.
Pro Rata Liability
Contribution by Equal Shares
“Other-Insurance” Provisions
Pro Rata Liability
Each insurer’s share of a loss is based on the proportion that its insurance bears to the total amount of insurance on the property
Contribution by Equal Shares
Each insurer shares equally in the loss until the share paid by each insurer equals the lowest limit of liability under any policy, or until the full amount of the loss is paid
Company A: $300K/$500K = 60% x $100,000 = $60,000 Company B: $100K/$500K = 20% x $100,000 = $20,000 Company C: $100K/$500K = 20% x $100,000 = $20,000 - Whole $500K loss covered
Example: “Other-Insurance” Pro Rata
A building is insured for a total of $500,000.
For underwriting reasons, coverage is split between 3 insurers: A ($300,000), B ($100,000) and C ($100,000).
How much would each insurer pay for a $100,000 loss?
All 3 pay $50,000
Example: “Other-Insurance” Contribution by Equal Shares 3 policies in force, each with different limits Amount of Loss = $150,000
Company A pays $100,000, while Companies B and C pay $200,000 each
Example: “Other-Insurance” Contribution by Equal Shares 3 policies in force, each with different limits Amount of Loss = $500,000
Primary insurer
____________ pays first, and the excess insurer pays only after the policy limits under the primary policy are exhausted
“Umbrella Liability” Insurance
__________ is an example of coverage over primary liability policy limits.
Property Insurance
Cyber used to be covered in ____________
Easier + Underwriters can refuse to write policies + Brokers cannot refuse to cover clients, it will give them a bad reputation + Stress in Underwriting comes from claims settlement + Brokers have to deal with stressed out clients + Underwriters do not deal with clients nearly as much as brokers
Underwriting is generally _____ than being a Broker
young
E&O or Cyber is an extremely _____ field, and most people within the field are young and guessing/figuring out what to do
cost
Cyber is a small portion of the insurance market, but it is growing dramatically in ____
start-up
Cyber practices are easier to _______ in insurance currently, because there is a lot more information that start-ups can learn from the older companies’ mistakes
Training
On the job vs formal training
Designations
Differences in forms
Evolution of coverage
Technical expertise challenge
Day in the Life of a Broker vs Underwriter - Ability to say no vs challenge of being told no - Client interaction/education - Control over the transaction - Difference in customer - Different stressors – client vs claims - Marketing
Career Path of Underwriters & Brokers
Talent gap – Current market conditions
Lack of significant experience
Startups
Broker vs Insurance Company Experiences
3rd party
E&O - Technology E&O - Miscellaneous Professional Liability (MPL)
Media Liability
Network Security / Privacy
1st party
Breach Costs
Regulatory
PCI DSS
Business Interruption / System Failure
Dependent Business Interruption / System Failure
Digital Asset Restoration / Hardware Replacement
Cyber Extortion
Cyber - Coverages
Privacy Liability and Operational Risk
Industries (Manufacturing, Distribution, Construction vs. Service Providers, Retailer, Hospitality, Financial Institution etc.)
Increasing reliance on technology has created an operational risk for almost all industries!
Aggregation Concerns - Dependent Business Interruption - Infrastructure Exposure
Evolution of Controls - Heightened Awareness From Boards and C-suite Members
Ransomware
War in Russia & Ukraine
Cyber - Exposures
Ransomware / Business Income Losses
Ransomware is the catalyst driving the dramatic changes in the cyber insurance market
Ransomware demands drive decision making during a claim. However, the Business Interruption loss (net income loss and extra expense) are typically magnitudes higher than the actual demand
Historically benign risks like Manufacturers/Distributors are reevaluating their exposure due to the severity of cyber business interruption losses
War Exclusion under new scrutiny as a results of the Russia/Ukraine conflict
Regulatory Developments
OFAC SDN list and ransom payment restrictions
SEC mandating timeline cyber breaches are disclosed
Cyber Infrastructure and Security Agency (CISA) releases regular updates on ransomware gang activities and Common Vulnerability and Exposures (CVEs)
Huge Fines and Penalties!
Cyber – Claims Update
Increased Primary Pricing (stabilizing Excess Cyber market)
Stabilizing Retention / Attachments
Increased Excess Limit Deployment / New Carriers Entering the Market (Primary options remain very limited)
Evolution of the underwriting process
More written applications
Required underwriting calls
Denial of coverage due to controls
Follow up questions throughout the renewal process
Focus on certain controls (MFA, patch management, backups, IAM, detection and response)
Quantification of Cyber Exposure
Emergence of Startups / Insurance-techs
Prediction: 2023 will be the year of War Exclusions and systemic risk restrictions!
Cyber – Market Conditions
Premature Death
Two Scenarios:
The death of a family head with outstanding unfulfilled financial obligations
Death of a person that creates negative business consequences (Example: CEO needs “key person” coverage)
Costs of Premature Death
Future earnings are lost forever
Additional expenses incurred
Funeral expenses
Uninsured medical bills
Higher childcare costs
Estate settlement expenses
Outstanding debts
Possible reduction in standard of living for survivors
It depends on family size, income levels, existing financial assets, and financial goals
How Much Life Insurance is Needed?
Human Life Value Approach
Needs Approach
Approaches to Estimate Amount of Life Insurance Needed
Human Life Value Approach
Present value of the family’s share of the deceased breadwinner’s future earnings 1. Estimate the individual’s average annual earnings over his/her productive lifetime. 2. Deduct taxes and self-maintenance costs. 3. Using a discount rate, determine the present value of the family’s share of earnings for the number of years until retirement
Disadvantage of Human Life Value Approach
Ignores assets and other sources of income (Social Security, retirement plans).
Earnings & expenses assumed to be constant (most people get a raise each year).
Based on income rather than need.
Effects of inflation on earnings and expenses are ignored
Needs Approach
Amount needed depends on the financial needs that must be met if a family head should die
Calculation should consider:
Estate clearing fund (burial, medical bills, debts, attorney’s fees, taxes)
One- or two-year readjustment period (same income as prior to death)
Dependency period for children (until youngest is at least 18)
Income for surviving spouse (if needed)
Special needs (college education, mortgage, emergencies)
Retirement needs for surviving spouse
Disadvantages of Needs Approach
Difficult to estimate the cost of future needs (what will college cost in 20 years?)
Assumptions can be construed in different ways causing a large range of values.
Needs may be different (What if the surviving spouse remarries?)
Reasons Why Someone Would Not Purchase (Enough) Life Insurance
Belief that life insurance is too expensive to purchase.
Difficulty in making the correct decisions about its purchase.
Procrastination.
They simply don’t understand its importance.
Opportunity cost. (What the person gives up by using money to purchase Life insurance.)
“Term” Insurance
“Whole Life” Insurance
Types of Life Insurance
“Term” Insurance
Death benefit only Temporary protection (Example: 10, 20, 30 years)
“Term Life” Insurance
Term insurance can be provided for 5, 10, 15, 20, 25, or 30 year periods (terms).
Premiums paid during the policy term are level (but would increase if the policy was renewed for a new term).
Most policies are renewable, meaning the policy can be renewed without evidence of insurability.
Most policies are convertible, meaning the term policy can be exchanged for a cash-value policy without evidence of insurability
When Is Term Life Insurance Appropriate?
***There is no cash value in the policy
The amount of income that can be spent on Life insurance premiums is limited.
The need for protection is temporary.
The insured wants to guarantee future insurability.
Limitations of Term Insurance
Premiums increase with age at an increasing rate and eventually reach prohibitive levels.
Inappropriate if you wish to save money for a specific need by accumulating “cash value” via Life insurance
Examples of Term Life Insurance Premiums
Examples of Term Life Insurance Premiums
“Whole Life” Insurance
Death benefit plus savings component (cash-value)
Policy period is lifetime of insured, doesn’t expire
Generic term.
A cash-value policy that provides lifetime protection.
A stated amount is paid to a designated beneficiary when the insured dies, regardless of when the death occurs.
Ordinary Life
Limited Payment Life
Types of Whole Life
Whole Life – Ordinary
Level-premium policy that accumulates cash values and provides lifetime protection to age 121.
Premiums are payable throughout the lifetime of the insured.
The policy accumulates a cash-surrender value, which is the amount paid to a policyholder who surrenders the policy early.
The policyholder has the right to borrow the cash value.
Whole Life – Limited Payment
Very similar to Ordinary Life.
Insured has lifetime protection, and premiums are level, but they are only paid for a certain period of time.
Commonly premiums are paid for 10, 20, or 30 years.
Example:
Buy 20-year limited-payment policy at age 25.
After 20 years (at age 45), the policy is paid in full.
No additional premium is required, and the coverage remains in place.
Advantages: Whole Life
Maintain coverage for your entire life (vs. a certain time period with term).
Accumulate savings (cash-value)
Disadvantages: Whole Life
Do you really need life insurance when you are 70?
Premiums are higher than term insurance.
Whole Life is more expensive than Term Life
Variable Life
Universal Life
Variations of “Whole Life” Insurance
Variable Life Insurance
A fixed-premium policy in which the death benefit and cash values vary according to investment experience.
Policyholder has input into how cash-value is invested.
No minimum guaranteed cash-values
Universal Life Insurance
A flexible premium policy that provides lifetime protection.
After the first premium, the policyholder decides the amount and frequency of payments.
Most policies have a target premium, but the policyholder is not obligated to pay it.
Most policies have a no-lapse guarantee if the minimum premium is paid.
Cash-value accumulates (accumulation fund) on premiums net of mortality charges and expense charges.
Policyholder can borrow the cash-value.
Advantages of Universal Life
Flexibility in payments.
Cash withdrawals are permitted
Favorable tax benefits (death benefit is normally tax-free)
Disadvantages of Universal Life
More expensive than “Term” Life insurance.
Advertised rates of return do not include deductions for expenses.
Insurers can increase expenses at any time.
*Policy can lapse because some policyholders do not have a commitment to pay premiums
Life Insurance Comparison
Life Insurance Comparison
Group Life Insurance
Differs from individual insurance.
Coverage of many persons under one contract.
Examples: - Life insurance through an employer. - Life insurance through a group sponsor
Group vs. Individual Insurance
Group vs. Individual Insurance
Advantages of Group Insurance
May be less expensive.
Tax benefits to employees (costs are usually pre-tax).
Employer may pay all/part of premium.
No evidence of insurability; no physical exam.
Insurance you would not have otherwise.
Disadvantages of Group Insurance
Inflexible for individuals.
Must be employed or part of group to be covered.
Not always available. Employer could discontinue benefit.
May not provide sufficient limits
Group Life Insurance
Differs from individual insurance.
Coverage of many persons under one contract.
Examples
Life insurance through an employer.
Life insurance through a group sponsor
Contestability
ability to cancel a policy
***Incontestable Clause
insurer can not contest the policy after it has been in force for 2 years
Ownership Clause
The policyholder possesses all contractual rights in the policy while the insured is living
Entire Contract Clause
The policy and application constitutes the entire contract
Suicide Clause
If insured commits suicide within 2 years the face amount of the policy is not paid. Premiums refunded
Grace Period
Period to pay overdue premiums
Reinstatement Clause
Terms if policy lapses for non-payment. (Evidence of insurability, et al)
Misstatement of Age or Sex Clause
Payment at death adjusted to amount of coverage premiums paid would have purchased
Beneficiary Designation
Primary / Contingent
Revocable / Irrevocable
Specific person(s) / Class
Change of Plan
Provides policyholders flexibility to change plans
Nonforfeiture Options (Cash Value)
Only Whole Life; Applies to Whole Life / Cash Value policies if policies are “surrendered”.
Whole Life policies have higher premiums than just life insurance protection.
Insurers must pay at least a minimum to policyholders who “surrender” policies.
Statutory options: 1. Cash value – Take cash 2. Reduced paid-up insurance – Cash surrender value is used to buy a paid-up policy with a reduced limit. 3. Extended term insurance – Cash surrender value used to buy period of term insurance with the same limit.
Cash – Recieve Cash payment for policy + Cash is generally Tax Free
Interest Option – Interest paid to beneficiary periodically
Fixed Period Option – Payment over a fixed period of time at guaranteed interest rate.
Fixed Amount Option – Scheduled payment of a fixed amount with an agreed interest rate until funds are exhausted.
Life Income (Annuity) Option – Guarantees income for life.
Life Income
Life Income with Guaranteed Period
Life Income with Guaranteed Total Amount
Joint and Survivor Income
Settlement Options on Policy Proceeds
Additional Policy Terms/Benefits
Waiver of Premium Provision
Term Insurance Rider / Buy Additional Term limits
Guaranteed Purchase Option / Insurability + Guaranteed
Accident Death & Dismemberment Rider / Higher limits
Cost of Living Rider / Increase by CPI
Accelerated Death Benefits / Certain illnesses or conditions
Viatical Settlement / Sell policy to investors Stranger Owned Life Policy
Narrative Summary with policy features
Numeric Summary with current, guaranteed and midpoint APR
Annual Report
NAIC – Life Insurance Model Regulation
A.M. Best
Fitch
Moody’s
Standard & Poors
Financial Strength of Insurer - Ratings
Annuities
Periodic payment that continues for a fixed period of time or for the duration of a designated life or lives
Individual Retirement Account (IRA)
Allows workers with taxable compensation to make annual contributions to a retirement plan up to certain limits and receive favorable income-tax treatment
IRA rules are horribly complex and detailed
Contribution and tax-deductible amounts are updated periodically
Eligibility Requirements 1) Must have taxable income; you can’t put more into account than you earned 2) Must be under age 72 (SECURE Act increased required minimum distribution age from age 70 ½ )
Traditional IRA
Annual contributions to a Traditional IRA are income-tax deductible, investment income accumulates tax free, and distributions are taxed upon withdrawal.
Deduction for contribution gradually phased out if your income is above a certain amount
Roth IRA
Annual contributions to a Roth IRA are not income-tax deductible, investment income accumulates tax free, and qualified distributions are received tax free (if certain requirements are met).
2022 Maximum annual contribution - $6,000
2022 Age 50 and over catch up - $1,000 per year for total of $7,000
2023 Maximum annual contribution - $6,500
2023 Age 50 and over catch up - $1,000 per year for total of $7,500
401K Plans
Must have taxable income
Must be under age 72 (SECURE Act increased required minimum distribution age to 72 from age 70 ½ )
Annual contributions to a 401K plan are income-tax deductible, investment income accumulates tax free, and distributions are taxed upon withdrawal.
Withdraw without penalty at age 59 ½.
Certain hardship exceptions prior to age 59 ½.
2022 Maximum annual contribution - $20,500
2022 Over 50 catch up - $6,500 per year for a total of $27,000
2023 Maximum annual contribution - $22,500
2023 Over 50 catch up - $6,500 per year for a total of $29,000
Any employer match that you receive does not count toward this limit!!!
Note key ages
Note 
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