102-1 Principles of Ins. & Ins. Needs Analysis Flashcards Preview

CFP 2 - Risk, Insurance, Emp. Benefits > 102-1 Principles of Ins. & Ins. Needs Analysis > Flashcards

Flashcards in 102-1 Principles of Ins. & Ins. Needs Analysis Deck (50)
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1

Risk

A condition in which there is a possibility of an adverse result from the expected desired outcome

2

Peril

The cause of a financial loss, and in the insurance world, is the actual event for which an individual purchases insurance

E.g. a fire destroying an individual’s home

3

Hazard

A condition increasing the probability that a peril will, in fact, occur

4

3 categories for hazards

Physical hazard: e.g. leaving oily rags near a furnace

Moral hazard: dishonesty of an employee who embezzles funds from employer

Morale hazard: (I.e. indifference) leaving car running when you go into the store knowing that it’s insured if it’s stolen

5

Deductible

The stated amount of money the insured is required to pay on a loss before the insurer will make any payments under the policy

6

Riders

And Endorsements

Written additions to an insurance contract that modify the original provisions

Allow policyholders to customize an insurance contract to their needs

7

Law of Large Numbers

This theory asserts that the larger the # of members in a group, the greater the probability that the actual loss experience will equal the expected loss experience

8

Adverse Selection

Broadly illustrated by the fact that people with the highest risk of loss will also be the most likely to purchase insurance, thereby causing the insurer the greatest cost in terms of claims

9

Self-insurance

Involves insuring individuals or entities by setting aside money to cover potential future losses rather than purchasing insurance, as may be the case with health insurance

10

Static Risks

Result from factors other than changes in the economy

Tend to incur with regularity and can be insured

Examples: earthquakes, floods

11

Dynamic risks

Result of changes in the economy such as changes in the business cycle or inflation

Insurance does not typically cover dynamic risks

12

Fundamental risks

Affect a large group of people

Examples: recessions, earthquakes

13

Particular risks

Affect individuals or small groups of people

14

Pure risk

Involves only the chance of loss or no loss
No chance of gain

Example: the possibility that a person’s home will burn

Pure risks are insurable

15

Speculative risk

Involves both the chance of loss and the chance of gain

Example: gambling

Not insurable

16

4 elements of an insurable risk

1. Must be a large and similar sample of individuals or events

2. Must be measurable, definite

3. Must be accidental and not intentional

4. Cannot be catastrophic to society

17

Insurable interest

Means there must be a relationship in which the person applying for the insurance will incur a loss (financial and/or emotional) from the destruction, damage, or death of the insured subject

For property and casualty insurance, an insurable interest must exist both when the policy is written and when loss occurs

For life insurance, insurable interest only needs to exist when the policy is written

18

5 methods of managing risk

1. Risk avoidance

2. Risk diversification

3. Risk reduction

4. Risk retention

5. Risk transfer

19

Indemnity

The policy owner will be reimbursed by the insurer only up to the actual loss and cannot profit

2 purposes:
-prevent the insured from profiting from insurance claims
-reduce moral hazards

20

Adhesion

The policy owner can only accept or reject the contract and cannot modify its terms

Because of this characteristic of insurance contracts, if a provision in a policy is disputed in court, the policyowner will get the benefit of the doubt regarding any ambiguity in its terms

21

Unilateral Contracts

Means that only the insurance company legally promised to perform and that there is no legally enforceable promise to pay the premiums to the policyowner

22

Aleatory contracts

Means that the outcome is affected by chance and that the dollars collected by the parties are usually unequal

23

Contracts of utmost good faith

Full disclosure on the part of the proposed insured is required

24

Right of subrogation

Means that the policyowner is required to assign the right of recovery against a third party to the insurance company if the company pays for a loss caused by the third party

25

Collateral Source Rule

This rule holds that damages against a negligent patty should not be reduced simply because the injured party has insurance protecting against the specific peril

26

5 required elements to make an insurance contract legally enforceable

1. Offer and acceptance

2. Consideration (exchange of value)

3. Legal object

4. Legal capacity

5. Legal form

27

Voidable contract

Means that for reasons deemed satisfactory by a court, the contract can be set aside by one of the parties

28

Tort

A private wrong.

A tort occurs when a person infringes on the rights of another person in a way that gives the injured person the right to sue for damages

Classified as intentional or unintentional

29

Negligence

When someone fails to act in a reasonably prudent manner and causes harm to someone

(An unintentional tort)

30

Vicarious Liability

When a person is liable for the torts committed by someone else

31

Defenses to Negligence

Assumption of risk
-example: fan hit by baseball at game, fan understood risk

Contributory negligence
-example: person cannot recover damages if he was in any way responsible for the accident

Comparative negligence
-example: if person was responsible for 50% of the accident, he could recover up to 50% of damages

32

Strict Liability

Holds tortfeasors- a party who commits a tort- liable for damages sustained by their actions or from their products, whether or not they were deemed “at fault”

33

Types of Damages

Special damages: designed to compensate the injured person for measurable losses, such as doctor bills and automobile repairs

General damages: compensate the injured person for intangible losses, such as pain and suffering, that cannot be measured in dollars and cents

Punitive damages: typically imposed when the wrongdoer acted intentionally or in a way that recklessly disregarded the rights of others

34

Agents vs Brokers

Agents: Represent a specific company and act on behalf of the insurance company (I.e., the principal)

Brokers: must submit the application to the insurance company for approval before the insurance is bound

35

3 types of Agent Authority

1) Express Authority: typically spelled out in writing and is contained in the agency agreement or contract

2) Implied Authority: Authority the insurance company does not expressly give to agents but that agents in similar circumstances normally possess

3) Apparent Authority: e.g. an agent who has the insurer’s logo on one’s stationery and on the office’s signage has the apparent authority to represent that insurer to the public

36

National Association of Insurance Commissioners (NAIC)

Created by state commissioners

Exchange info and ideas and coordinate regulatory activities

Makes recommendations for legislation and policy

37

Warranty

Merely a promise made by the insured to the insurer that is part of the insurance contract and, as such, must be adhered to be the insured

38

Representations

Statements made by the proposed insured to the insurer in the application process

39

Concealment

Occurs when the insured is silent about a fact that is material to the risk

40

3 ways to value losses for property insurance

1) Replacement Cost: the current cost of replacing property with new materials of kind and quality

2) Actual cash value (ACV): equal to replacement cost minus functional depreciation

3) Agreed-upon value: used at times because valuing certain losses is so difficult, amounts paid for a loss are agreed upon by the insurer and the insured at the time a policy is issued

41

2 major types of insurance companies

1) mutual companies: owned by their policyholders and offer participating policies that share in the profits of the company through the payment of policy dividends

2) stock companies: owned by the stockholders and usually offer nonparticipating policies

42

Rating Services and their ranges for instance products

A.M. Best: A++ through D

Standard & Poor’s: AAA through D

Moody’s: Aaa through C

Fitch: AAA through D

43

Social Insurance

Mandatory insurance administered by the government with benefits mandated by law

Examples: social security, Medicare, Medicaid, worker’s compensation

44

Public Insurance

Designed to enhance public trust in financial institutions

Examples: FDIC, PBGC, SIPC

45

Private Insurance

Insurance marketed by private insurance companies

Includes: disability, health, long-term care insurance, property insurance, liability insurance, life insurance

46

3 methods for life insurance needs analysis

1. Capital retention method
-method of determining the amount of life insurance needed which uses the interest of earnings only to furnish the continued support of the family

2. Human life value method
-uses an individual’s income-earning ability as the basis for determining the required amount of life insurance

3. Financial needs or insurance needs analysis method
-aka insurance needs method
-analyzes all recurring expenses of the dependent survivors and any unusual expenses that may result from the death of the insured
-then compares these needs with the existing assets that would be available at the death of the insured and then funds the difference

47

Conditional

An insurance policy is conditional in that the insurer is obligated to compensate the insured only if certain conditions are met

48

McCarran-Ferguson Act of 1945

Gave states the authority to regulate the insurance industry

49

Required for a loss to be insurable

-accidental, not intentional
-measurable
-noncatastrophic to society
-must be a sufficiently large and similar sample of individuals or events to make the loss reasonably certain

50

Classic risk management model

High probability, high severity: avoid the risk

High probability, low severity: reduce the risk

Low probability, high severity: transfer the risk

Low probability, low severity: retain the risk