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FP512 > Mod 1: Principles of Insurance > Flashcards

Mod 1: Principles of Insurance Flashcards

1
Q

Represents the possibility of loss

A

Risk

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2
Q

Insurance

The cause of a loss

A

Peril

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3
Q

Insurance

Increases the potential for loss

A

Hazard

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4
Q

Risk Classifications

Risks that result from factors other than changes in the economy (earthquakes and floods)

A

Static Risks

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5
Q

Risk Classifications

Risks that are results of changes in the economy, such as changes in the business cycle or inflation.

A

Dynamic Risks

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6
Q

Risk Classifications

Risks that affect a large group of people (earthquakes and recessions)

A

Fundamental Risks

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7
Q

Risk Classifications

Risks that affect individuals or small groups of people

A

Particular Risks

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8
Q

Risk Classifications

Risk that involves only the chance of loss or no loss; in other words, there is no chance of gain. The possibility that a person’s home will burn represents this risk because there is no chance of gain but only the chance of loss or no loss.

A

Pure Risk

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9
Q

Risk Classifications

Risk that involves both the chance of loss and the chance of gain. Gambling is a classic example of this risk.

A

Speculative Risk

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10
Q

Risk Management

7 Steps in the Risk Management Process

A
  1. Identify and Establish Risk Management Goals
  2. Gather Pertinent Data to Determine Risk Exposures
  3. Analyze and Evaluate the Information to Identify Risk Exposures
  4. Develop a Risk Management Plan
  5. Communicate the Recommendations
  6. Implement the Recommendations
  7. Monitor the Recommendations for Needed Changes
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11
Q

The Risk Management Process

What 4 primary issues should be addressed in the 1st Step of the Risk Management Process: Identify and Establish Risk Management Goals

A
  1. How much loss could be tolerated in the current financial situation?
  2. What general and specific risks does the client face?
  3. Compare the potential financial loss and consequences to the probability of the risk. Then determine the appropriate action.
  4. Determine the amount of income that can be used for risk mitigation.
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12
Q

The Risk Management Process

Comprehensive risk management includes gathering client information in what areas for Step 2 of the risk management process?

A
  1. Property
  2. Personal Illness and Injury
  3. Liability
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13
Q

Risk Management Process

What should be considered in the gathering of Property Information as it relates to Step 2 of the risk management process?

A
  • Actual policies for homeowners, auto, watercraft, etc.
  • Inventory of possessions and animals in order to see what may exceed the internal policy limits/and or the amount of loss the client is willing to accept
  • Upgrades and changes to the home or possessions that may not have been communicated to the insurance company should be reviewed.
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14
Q

Risk Management Process

What should be considered in the gathering of Personal Illness and Injury Information as it relates to Step 2 of the risk management process?

A
  • Actual policies for medical, disability, accident, cancer, LTC, etc
  • You should evaluate medical payment sections of homeowners, auto, and umbrella policies
  • Know the hobbies and activities your clients and their families like to engage in, as they may be excluded by insurance or add additional risk
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15
Q

Risk Management Process

What should be considered in the gathering of Liability Information as it relates to Step 2 of the risk management process?

A
  • Auto, homeowners, watercraft, or other special forms of insurance and extended coverage policies all will impact liability protection
  • Statements of financial position, business valuations, tax returns, and pay stubs will allow you to asses the protection needed
  • Volunteer activities, hobbies, professional duties, and information about the jobs held will assist you with assessing the liability issues that could arise from non possessions
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16
Q

Risk Management Process

The three basic types of risk exposure

A
  1. Asset Related: Loss of the asset itself, loss of use of the asset, and other associated losses
  2. Risk of Liability based on contract law related to the asset or activity: ie acquisition of an asset resulting in liability to a lender, a club membership contra t putting certain responsibilities on the client, etc.
  3. Risk of Liability based on tort law: ie liability for a loss resulting from the use of an asset or from and activity–boating accident, practicing one’s profession, etc.
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17
Q

A risk management technique that seeks to minimize the risk of loss

A

Risk Control

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18
Q

What are the two options for Risk Control?

A
  1. Risk Avoidance
  2. Risk Reduction
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19
Q

A risk management technique that pays the costs of losses incurred

A

Risk Financing

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20
Q

What are the two options for Risk Financing

A
  1. Risk Retention
  2. Risk Transfer
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21
Q

Requirements of self-insurance as a method of risk retention

A
  1. The organization should have enough homogeneous exposure units to make losses somewhat predictable
  2. Adequate funds must be accumulated to cover plan losses
  3. The self-insurer must be able to administer the insurance functions as efficiently as an insurance company would
  4. The self-insurer must be able to competently manage investment of the self-insurance fund
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22
Q

What are the two critical assumptions used in evaluating anticipated losses?

A
  1. The elements of an insurable risk have been met
  2. Adverse selection can be controlled
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23
Q

What are the elements of insurable risk?

A
  1. There must be a sufficiently large number of homogeneous exposure units to make losses reasonable predictable
  2. The loss resulting from the risk must be definite and measurable
  3. The loss must be fortuitous or accidental
  4. The loss must NOT be catastrophic to the company
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24
Q

The 7 factors that insurance companies use to limit an insurer’s liability covering losses

A
  1. Insurable Interest
  2. Actual cash value of the loss
  3. Policy limits on face value
  4. Other insurance
  5. Coinsurance
  6. Deductibles
  7. Subrogation
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25
Q

A mandatory insurance administered by the government

A

Social Insurance

26
Q

What is the purpose of social insurance and what are some examples

A

The purpose of social insurance is to protect people from large fundamental risks.

  • social security
  • medicare
  • medicaid
  • workers’ compensation
27
Q

Insurance that is designed to enhance public trust in financial institutions

A

Public Insurance

28
Q

Insurance that is marketed by private insurance companies

A

Private Insurance

29
Q

The 7 major types of insurance producers

A
  1. Independent Agents
  2. Captive Agents
  3. Career Agents
  4. Producing General Agents
  5. Brokers
  6. Surplus-Line or Excess-Line Brokers or Agents
  7. Solicitors
30
Q

Represents a prospective insured and generally cannot bind the prospective insured to an insurance contract

A

Broker

31
Q

How does the principle of Indemnity relate to insurance?

A

Insureds are restored to the financial position they were in before they suffered their losses. In other words, they have been put back in the position they would have been had the loss not occurred.

32
Q

A contract in which the outcome is controlled by chance, and the dollars the change hands are often of substantially unequal amounts

A

Aleatory Contract

33
Q

What elements must be present for a contract to be legally enforceable

A
  1. Offer and Acceptance
  2. Consideration: Payment
  3. Legal Object: Purpose of the contract
  4. Competent Parties
  5. Legal Form
34
Q

The 3 claims an insurance company can make if it believes utmost good faith was not maintained

A
  1. Misrepresentation: false statement that at least partially induces the company to issue the contract
  2. Warranties: a statement by the applicant that all of the information on the application is absolutely true
  3. Concealment: intentional withholding of material information
35
Q

The 4 basic sections of an insurance contract

A
  1. Declarations
  2. Insuring Agreement
  3. Exclusions
  4. Conditions
36
Q

How are insurance contract disputes handled by the court

A

First, the court has to determine what the parties intended.

Then, it has to seek an equitable way of implementing these intentions.

37
Q

Contract disputes

What is the parol evidence rule?

A
  • A rule used to guide the court in determining what the parties intended
  • Evidence of prior understanding will not be admitted to contradict the writing of the formal, written agreement
38
Q

Contract Disputes

What is the doctrine of waiver?

A

Means that a party, by their own actions (or the actions of their agent), has voluntarily relinquished or surrendered a known right.

EXAMPLE: ABC Insurance Company receives an application that does not meet its underwriting criteria but issues a policy anyway. If a subsequent claim is filed, ABC is barred from denying a claim because it waived its right to deny the claim by issuing the policy.

39
Q

Contract Disputes

What is the doctrine of estoppel?

A

Prevents a party from asserting a right to which he would otherwise be entitled where, because of the party’s own actions or behavior, he misled someone (even though unintentionally) who relied on this understanding to his own detriment.

40
Q

Contract Disputes

What are two equitable remedies a court may use?

A
  1. Rescission: the original contract is deemed null from the beginning
  2. Reformation: the written instrument between the two parties is changed to express the original intentions of the parties
41
Q

What is a tort?

A

When someone causes physical, emotional, or financial harm to another

42
Q

Activities that involve negligence (the reasons people purchase liability insurance)

A

Unintentional torts

43
Q

Refers to something about a property (e.g. a swimming pool) that is likely to attract and possibly injure children.

A

Attractive Nuisance

44
Q

The duty of care owed by the defendant in a lawsuit is determined by reference to a statute

A

Negligence per se

45
Q

The standard imposed when a person or organization is held responsible for any damages, even when there has been no negligence.

This generally is a case in which people cause extra-hazardous situations through their activities (e.g. keeping wild animals, blasting)

A

Absolute Liability or Strict Liability

46
Q

When someone is held liable for the acts of another (e.g. the person’s child, employee, or agent)

A

Vicarious Liability

47
Q

Legal defenses to liability

A
  • Assumption of the Risk
  • Contributory Negligence
  • Comparative Negligence
  • Last Clear Chance
48
Q

Underwriting

Gatekeeper mechanisms set up by an insurance company

A
  • Guidelines: creates risk categories and guidelines that, if followed, when selecting risks to be insured, will minimize the possibility of issues
  • Deductibles, Coinsurance, and Limits: risk-sharing techniques established to discourage moral hazard and morale hazard
49
Q

A result of the insured being unethical or misrepresenting himself in order to obtain insurance or to induce the payment of a claim

A

Moral Hazard

50
Q

The type of hazard that could simply be defined as indifference.

An insured might leave her car unlocked in a bad part of town, or leave the car running while she runs into the convenience store with the attitude that, “it’s okay, it’s insured”

A

Morale Hazard

51
Q

Occurs when people with higher risk are more likely to purchase insurance.

A

Adverse selection

52
Q

The two concepts that are the cornerstones of the actuarial basis of life and health policies.

A
  1. Mortality: refers to the incidence of death
  2. Morbidity: refers to the incidence of losing one’s health through illness or injury
53
Q

From an underwriting perspective, how are life insurance policies and disability insurance policies affected by mortality and morbidity?

A
  • Life Insurance underwriters are concerned with mortality rates
  • Disability insurance underwriters are concerned with morbidity rates
54
Q

An essential part of the claim process. This person is responsible for investigating insurance claims and determining the amount of payment to be made.

A

The Adjuster

55
Q

The series of steps that are taken when an insured property loss occurs.

A

The loss adjustment process

56
Q

What are the 7 provisions regarding the insured’s duties during the loss adjustment process most insurance polices contain?

A
  1. Notice of loss
  2. Protection of property
  3. Inventory
  4. Evidence
  5. Proof of loss
  6. Assistance and cooperation
  7. Appraisal
57
Q

The 3 steps that a claims adjuster, on behalf of the insurer, follows in the loss adjustment process.

A
  1. Investigation
  2. Proof of loss
  3. Payment or denial of the claim
58
Q

For a property loss, an insurer generally has what 3 options in settling claims?

A
  1. Replacement: repair or replace damaged property with that of a like kind & quality
  2. Abandonment & Salvage: Surrendering ownership to the insurance company so that a total loss can be claimed. Salvage is when the insurer takes the abandoned property and sells it to reduce its loss.
  3. Pair or Set Option: gives the insurer the right to repair or replace any part, to restore a pair (earrings)
59
Q

7 Factors that should be considered when selecting a good insurance agent

A
  1. Competence
  2. Inclination to Service
  3. Experience
  4. Training
  5. Education
  6. Specialization
  7. Reputation
60
Q

The two primary forms of insurance company ownership

A
  1. Mutual Companies: Owned by the policy owners
  2. Stock Companies: Owned by stockholders
61
Q

What is the only ratings agency that specializes in rating insurance companies?

A

A.M. Best

FP512 (2 decks)

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