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GTPR Flashcards > Principal of Insurance > Flashcards

Principal of Insurance Flashcards

1
Q

insurance

A

used as a protection against financial loss
used to protect against “pure risks”
involves the transfer of loss and the sharing of losses with others

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2
Q

Pure risk

A

simply create either a financial loss or no loss
house fires, auto accidents, personal illness
the only insurable risk

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3
Q

speculative risk

A

there is a chance of profit, loss, or no loss
generally undertaken by entrepreneurs
generally voluntary risk and not insurable

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4
Q

subjective risk

A

differs based upon an individuals perception of risk

buying a radar detector because the police in the area issue speeding tickets

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5
Q

Objective Risk

A

does not depend on an individuals perception but is measurable and quantifiable
measures the variation of an actual loss from expected loss

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6
Q

Severity

A

actual dollar amount of the loss

more important than the probability of the loss

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7
Q

Law of Large #s

A

when more units are exposed to a similar loss, the predictability of such a loss to the entire pool increases
helps reduce objective risk
The more exposures, the more likely that the results will equal true results and thus will be predictive of future results

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8
Q

Perils

A

the actual cause of a loss

fire, wind, tornado, earthquake, burglary, collision

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9
Q

Hazard

A

a condition that increases the likelihood of a loss occurring
3 types: moral, morale and physical hazard

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10
Q

Moral Hazard

A

a character flaw

a character flaw would lead to a false claim

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11
Q

morale hazard

A

the indifference created because a person is insured

not concerned about a situation because a person knowingly has insurance in place

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12
Q

physical hazard

A

a tangible condition that increases the probability of a peril occurring
icy/wet roads, poor lighting, defective equip

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13
Q

Adverse selection

A

the tendency of people with higher than average risks to purchase or renew insurance policies
managed through underwriting, denying insurance on the front end, and raising premiums on the back end
This is the underwriters greatest challenge

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14
Q

Requisite for an insurable risk

A

a large # of similar exposure units
losses must be accidental form insureds POV
losses must be measurable and determinable so that the insurer can accurately forecast actual losses
losses must not pose a catastrophic risk for the insurer
premiums must be affordable
an insurer cannot provide coverage that would cause it to become financially insolvent
cannot insure moral hazards bc premiums would skyrocket

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15
Q

Elements of a valid contract

A

1 party must make an offer and the other party must accept that offer (signing of insurance app & first premium pmt)
must by legal competency of all parties involved in a contract (18 or older)
must be legal consideration (money, services, ppty)
contract must pertain to a lawful purpose

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16
Q

Principle of Indemnity

A
  • an insured is only entitled to compensation to the extent of the insured’s financial loss
  • an insured cannot make a profit from an insurance contract

to make whole again

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17
Q

Subrogation Clause

A
  • cannot be compensated twice for the same injury by 2 different parties
  • The insured cannot receive compensation form both the insurer and a 3rd party for the same claim
  • if the insured collects compensation from their insurance company, they lose the right to collect compensation from the 3rd party
  • the insurer “steps into the shoes” of the insured to recoup any restitution from the 3rd party or the 3rd partys insurer
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18
Q

Principle of Insurable Interest

A
  • an insured must have an emotional/financial hardship resulting from damage, loss or destruction
  • property and Liability insurance - the insured must have insurable interest at time of policy inception and at time of loss
  • life insurance - the insured only needs an insurable interest at the time of policy inception
  • life insurance policies are considered LT investments
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19
Q

Void Contract

A

was never valid and thus never came into existence.
not an enforceable contract since it lacks one of the 4 elements of COALL
ex: contract to sell heroin

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20
Q

Voidable contract

A
  • a valid contract that allows cancellation by one of the parties however the other party is bound by the agreement
  • selling a car to a minor
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21
Q

warranty

A

a promise made by the insured to the insurer

a breach of warranty is grounds for avoidance

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22
Q

Representation

A

statements made by the insured to the insurer during the application process
must be a material “misrepresentation” to void an insurance contract
misrepresenting age on a life insurance app is not a material misrepresentation and the insurer will simply adjust your death benefit up or down based on your actual age

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23
Q

Concealment

A

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

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24
Q

Characteristics of insurance contracts

A
  • adhesion
  • aleatory
  • unilateral
  • conditional
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25
Q

adhesion

A

take it or leave it
no negotiations over terms and conditions
any ambiguities in an insurance contract are found in favor of the insured

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26
Q

aleatory

A

money exchanged my be unequal

small premium with possible large benefit

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27
Q

unilateral

A

one promise is made by the insurer which is to pay in the event of a loss
insured is not obligated to pay the premiums
if premiums are not paid, then there’s no promise by the insurer

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28
Q

conditional

A

the insured must abide by the terms and conditions of the insurance contract
if the terms and conditions are not followed, then the insurer may not pay a claim

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29
Q

waiver

A

occurs when a party relinquishes a known right

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30
Q

estoppel

A

when a party is denied assertion of a right to which they are otherwise entitled

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31
Q

waiver provisions

A

an insurer may seek to avoid liability associated with a loss due to their agents offering policy changes not authorized by the company

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32
Q

Parol Evidence Rule

A

Once the contract is placed in written form all previous/prior understandings may not contradict the written contract
stipulates that the contract reflects the complete understanding of both parties

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33
Q

Reformation

A

contractual remedy in which the contract is revised to express the original intent of all parties

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34
Q

rescission

A

deems a contract void from inception

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35
Q

general agent

A

represents 1 insurer, such as AllState

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36
Q

Independent Agent

A

represents multiple, unrelated insurers

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37
Q

Broker

A

actually represents the policy owner, not the insurance company

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38
Q

Express Authority

A

given through agency or written agreement

insurer is responsible for acts of an agent based on express authority

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39
Q

Implied Authority

A

the public perceives, and a valid agency agreement exists
actual delivering of an insurance contract and accepting a premium
insurer is still responsible even if a client is misled

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40
Q

Apparent Authority

A

when the insured believes that the agent has authority to act on behalf of the insurer when in fact, no authority actually exists
NO expressed Authority granted
the rep should not have the marketing pieces
could be inferred based on business cards or a sign on the wall, but the agency agreement actually expired
if an agent represents that insured can pay the premium late, but is wrong, then the insurer is still responsible.

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41
Q

Regulation of the insurance industry

A

done at the STATE level, not the federal level

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42
Q

legislative branch

A
  • “L”aw

- provides for licensing of agents and enacts laws and requirements for doing business in a particular state

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43
Q

Judicial Branch

A
  • “Judge”
  • rules on constitutionality of laws passed by the legislative branch
  • render decisions and interpretations regarding policy terms
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44
Q

Executive or State Insurance Commissioner

A
  • administers, interprets, and enforces insurance laws
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45
Q

Goals of State Insurance Regulation

A
  • protect the insured
  • maintain and promote the competition
  • maintain solvency of insurers
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46
Q

Replacement Cost

A

current cost of replacing property with new materials of like kind

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47
Q

Actual Cash Value (ACV)

A

= replacement cost - depreciation (of replacement cost value)

can impose serious financial burden on the insured
almost all auto policies are ACV

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48
Q

Copayment

A

in addition to deductibles
insured pays a portion of the losses incurred
80/20

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49
Q

Coinsurance

A

if coverage meets/exceeds the coinsurance reqs (usually 80%) then the insurer pays the lesser of: face value of the policy, replacement cost, or actual expenditures

if coverage is < the coinsurance req, then the insurer pays the > of ACV or:

= (face val / coinsurance) * Loss - deductible

Coinsurance = 80% * Replacement Cost

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50
Q

AM Best’s Ratings

A

Highest: A++ to A/A-
Lowest: C/C- to D

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51
Q

Moodys Ratings

A

Highest: Aaa to Aa1/Aa2
Lowest: B1/B2/B3 to Caa

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52
Q

S&Ps Ratings

A

Highest: AAA to BBB
Lowest: BB to CC

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53
Q

NAIC

A

has no regulatory power over the insurance industry

regulation occurs @ state level

54
Q

6 Steps of Risk Management

A

Determine the objectives of the risk management program
identify the risks to which the client is exposed
Evaluate the identified risks as to probability of occurence and potential loss
Determine alternatives for managing risks, and select the most appropriate alternative for each
implement the program
evaluate, monitor, and review

DIE DIE Dont Insure Everything (squared)

55
Q

Risk Transfer

A

using insurance where the financial risk is severe but frequency is low

56
Q

Insurance Issued Underwriting Policy Ratings

A

preferred
standard
rated
decline

57
Q

Preferred Insurance Rating

A

lowest policy premiums
exceed reqs for a standard rating
above average ratings in underwriting factors

58
Q

Standard Insurance Rating

A

reflects an average risk for the insurance company

59
Q

Rated Insurance Rating

A

scale for rated policies

scale represents health issues

60
Q

Decline Insurance Rating

A

insurance company will not accept the risk of issuing a policy

61
Q

Factors Effecting Premiums

A 
Health
Fam health history
risk factors (sky diving, scuba)
credit rating
driving record
62
Q

Needs Approach

A
  • evaluate the income replacement and lump-sum needs of survivors in the event of an income producers untimely death
63
Q

Most Common Needs in Needs Approach

A
  • lump sum cash needs
  • final expenses
  • debt repayment
  • education expense needs
  • emergency expense needs
    income needs
    readjustment period needs
    dependency period needs
    spousal life income needs
64
Q

Human Life Value Approach

A
  • uses projected future earnings less self-maintenance costs as the basis for measuring the life insurance needs
65
Q

Term Life Insurance

A
  • pure insurance protection which pays a predetermined sum if the insured dies during specific period
  • ceases at end of term or death or unless renewed
  • premium may be level or increasing or decreasing
  • no cash value
  • very inexpensive at young ages- can be renewable, convertible and has a waiver of premium
66
Q

Term Life Policies

A
  • Annual Renewable Term (ARM)
  • Level Term
  • Decreasing Term
67
Q

Annual Renewable Term

A
  • premiums increase annually
  • every year the policy become more expensive
  • no cash value
    DB is fixed
  • inexpensive pure death protection
  • can be converted to a permanent policy without providing insurability
  • can be too costly at older ages
68
Q

Level Term

A
  • level premiums for a period of time such that the insured prepays some of the later, more expensive premiums earlier in the policy
  • no cash value
    DB is fixed at face amount
  • level premiums help with budgeting
  • can be converted to a permanent policy
  • overpays premiums annually
69
Q

Decreasing Term

A

premiums are level
no cash value
DB decreases over term of the policy

70
Q

Whole Life Insurance

A
  • provide lifetime protection if premiums are paid as agreed
  • pre-fund future higher mortality costs using PV analysis
  • premium patterns vary
  • have savings or investment componen
  • CVs may be used for loans
  • provide tax-deferred growth of cash value
  • permanent protection until 120
71
Q

Types of Whole Life Insurance

A
  • Ordinary Life
  • Limited Pay Life
  • Variable Life
  • Current Assumption Whole Life (CAWL)
72
Q

Current Assumption Whole Life (CAWL)

A
  • insurer uses new money rates and new mortality rates to establish premiums
  • the insurer reserves the right to adjust the premium once usually at a 5 yr mark
  • Lo CAWL: low premium assuming higher interest rate for crediting
  • Hi CAWL: assumes lower interest rate resulting in higher premium
  • interest rate sensitive insurance (Lo CAWL) is designed to create demand due to lower premiums
73
Q

Individual Life Insurance Policies

A
  • 1st to die

- 2nd to die

74
Q

1st to die

A
  • individual life insurance policy
75
Q

2nd to die

A
  • individual life insurance policy
76
Q

dividend options

A
  • Nonparticipating

- Participating

77
Q

Non-Participating Div Option

A
  • does “N”ot pay dividends
78
Q

Participating Dividend Option

A

-“P”ays dividends

79
Q

Types of Participating Dividend Options

A
  • Cash
  • Reduced Premiums
  • Accumulate @ Interest
  • Paid-up additions
  • One year Term

CRAPO

80
Q

Settlement Options for Life Insurance- lump sum payment

A
  • lump sum payment
  • interest only
  • annuity payments from life insurance
81
Q

Types of annuity payments from life insurance

A
  • fixed amount
  • life income
  • fixed period
82
Q

Terminally ill

A

24 months or less to live

83
Q

Chronically ill

A

unable to perform 2 ADLS

- eating, toileting, transferring, bathing, dressing, continence

84
Q

dynamic risk

A
  • the core of risk resides in the change in the environment caused by the changing human condition
85
Q

pure risk

A
  • when a circumstance exists where there is an uncertain possibility of loss and no chance of gain
86
Q

blackout period

A
  • occurs after the youngest child leaves home
87
Q

dependency period

A

the amount of money that would be calculated before the kid turning 18 if 1 adult member of a family with kids were to die today

AKA the critical period

88
Q

Cancelable Disability Insurance

A
  • NOT renewable
89
Q

Non-Cancelable Disability Insurance

A
  • renewable
90
Q

modified any occupation

A

insures an individual when “the insured is unable to perform the duties pertaining to any gainful occupation for which they are suited by education, experience, or training

91
Q

if group coverage for disability income insurance has been canceled

A

coverage is still continued

92
Q

adjuster

A

assists the insured in the prep of the proof of loss statement
determine whether there was a loss covered by the policy

93
Q

indirect federal government involvement

A

IRC: Internal Revenue Codes.
SEC: Securities Exchange Commission.
ERISA: Employees Retirement Income Security Act.

94
Q

duties of insurance commissioners

A

To conduct financial investigations of insurers operating in the state
To determine if an insurer meets the requirements to obtain a license

95
Q

The National Association of Insurance Commissioners (NAIC) regulates insurance industry by:

A

Indirectly by providing for the exchange of information and preparation of recommendation.
Accrediting state insurance regulatory offices.

96
Q

Universal policies

A

provide for unbundled premiums

97
Q

unbundled

A

= universal

98
Q

Probation period in a disability income policy

A
  • period of time the insured must wait before specified illnesses or injuries are covered
99
Q

Group long-term care plans

A
  • cannot be included in a cafeteria plan
100
Q

Commercial General Liability Contract

A
  • Coverage A: Bodily injury and property damage liability
  • Coverage B: personal and advertising liability
  • Coverage C: medical payments
101
Q

Social Security Survivor Benefits

A
  • available to a surviving spouse beginning at age 60, divorced or not
  • benefits available to former spouse if the marriage lasted at least 10 years and surviving spouse has not remarried
102
Q

policy values and benefits of a split-dollar life insurance policy

A

subject to the claims of company general creditors

103
Q

Medicare Advantage

A

acts like and HMO, PPO or POS plan

It will cover vision, dental and hearing that are not covered under part A or B

104
Q

modified no-fault coverage

A

the plan where injured parties do not give up the right to sue, but simply refrain from such action until either a dollar threshold or a verbal threshold is reached

105
Q

Skilled nursing care

A

the highest level of care provision which calls for services where residents are seen regularly by physicians is known as

106
Q

cross purchase buy-sell agreement

A

should be selected if the surviving partners expect to sell their interests during their lifetimes

107
Q

entity buy-sell agreement

A

may solve the affordability problem if one partner is significantly older than the other
becomes more desirable as the number of partners included in the agreement increases

108
Q

if the owner of a LI policy is not the insured, and the insured dies

A

A taxable gift of the life insurance proceeds has been made from the owner to the beneficiary

109
Q

Amount insurance company will pay for damage

A

= (face val / coinsurance) * loss - deductible

= (insurance I have / what i should have) * loss - deductible

110
Q

Contributory negligence

A

if both parties are to blame in a given accident, each is guilty and may not collect against the other even if the defendant was 90% to blame and the plaintiff only 10% to blame

111
Q

Errors and Omissions

A
  • provides coverage for negligence related issues
112
Q

qualified LTC benefit

A
  • completely non taxable
113
Q

inland marine insurance

A

a category of insurance that protects against property losses to goods in transit

114
Q

“E”xecutive level of government

A
  • “e”nforces the law
115
Q

Guaranteed Renewable

A
  • not level premiums
116
Q

non-cancelable

A
  • level premiums
117
Q

Personal Auto Policy

A
  • Part A: Laurel - Liability coverage
  • Part B: May - Medical Payments
  • Part C: Un - Uninsured Motorists
  • Part D: Cover - Coverage for Damage to Auto
  • Part E: Doug - Duties after accident or loss
  • Part F: Gard - General Provisions
118
Q

waiver of premium

A
  • if the insured becomes totally disabled, premiums are waived during period of disability
119
Q

the effects on the disability coverage if an insured under a disability income insurance policy moves to a more hazardous job and receives an increase in compensation

A

the change of occupation provision will allow the insurer to reduce benefits payable

120
Q

one characteristic of a comprehensive personal liability (CPL) policy

A
  • it may be part of a standard ISO homeowners policy or a stand-alone policy
121
Q

Comprehensive Personal Liability CPL Policy

A
  • never used to cover E&O

- not used to cover biz pursuits

122
Q

Discontinuation of COBRA

A
  • ER terminated health plan
  • ER went out of biz
  • EE terminated for gross misconduct
123
Q

leasehold insurance

A
  • covers favorable terms in a lease agreement should a fire render a building uninhabitable
124
Q

Contingent Extra Expense Insurance

A
  • covers expenses caused by the occurence of a loss to a covered peril which the insured does not own
125
Q

Business Interruption Insurance

A
  • covers indemnity for businesses during the period where they are rebuilding and restoring after covered losses have forced a halt of business as usual
126
Q

Extra Expense Insurance

A
  • covers any extra expenses incurred to continued operation
127
Q

Direct Recognition Programs used with Life Insurance Ploicies

A
  • any amount of cash that is removed from the policy is reflected in a decrease in the amount of divs and interest paid on that policy
128
Q

Participating Non-taxable Dividends

A
  • dividends that are less than the amount of premiums paid are considered a return of that excess premium to the payor
129
Q

Participating Taxable dividends

A
  • divs paid to the premium payor above the amount of premium paid are fully taxable as income when earned
130
Q

Misstatement of age DB payout

A

= (premium paid / premium should have paid) * DB

131
Q

the most restrictive definition of disability

A
  • the inability of an EE to engage in any occupation for compensation
132
Q

Qualified LT Care Policy

A
  • benefit received is nontaxable

GTPR Flashcards (11 decks)

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