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Insurance Planning > Principles of Risk and Insurance > Flashcards

Principles of Risk and Insurance Flashcards

1
Q

Define “Risk”

A

Possibility of loss that is contrary to our desires or expectations

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2
Q

Define “Peril”

A

A peril is the direct cause of a loss

(e.g. Fire that burns down the house)

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3
Q

Define “Hazard”

A

A condition or act that increases the possibility that a loss may occur

(e.g. faulty wiring that causes fire)

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4
Q

4 types of hazards

A

Physical Hazard, Moral Hazard, Morale Hazard, & Legal Hazard

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5
Q

What is a “Moral Hazard?”

A

Refers to people with dishonest tendencies, character defects, bad reps, etc

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6
Q

What is a “Morale Hazard?”

A

Carelessness or indifference to a loss (e.g. not fixing broken stuff)

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7
Q

What is a “Pure Risk?”

A

No potential for gain

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8
Q

What is a “Speculative Risk?”

A

Potential for gain AND loss

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9
Q

3 Primary classifications of Risk Exposure for individuals and families

A
  1. Personal
  2. Property
  3. Liability
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10
Q

3 Primary classifications of Risk Exposure for Businesses and Business Owners

A
  1. Owner or Employee
  2. Property
  3. Liability
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11
Q

What is “Risk Control?”

A

Risk Control attempts to minimize the cost of certain risks.

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12
Q

3 Types of Risk Control

A
  1. Risk avoidance
  2. Risk Reduction
  3. Risk Diversification
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13
Q

What is “Risk Financing?”

A

Planning for guaranteed availability of funds to pay for financial losses that are projected to occur or possibility of loss too expensive to ignore

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14
Q

A few examples of “Risk Retention” strategy

A

Emergency fund, insurance deductibles, co-insurances, etc.

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15
Q

What is “Passive Retention?”

A

Risk may be retained either because the person has a callous disregard for the risk OR is ignorant of it.

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16
Q

What is “Active Retention?”

A

Individual is aware of risk and plans to embrace all or part of the risk

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17
Q

What is a “Risk Transfer?”

A

Transferring risk to another party

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18
Q

4 Uninsured (non-insurance) Risk Transfer strategies

A
  1. Hedging
  2. Contractual agreements
  3. Warranties/Guarantees
  4. Subcontracting
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19
Q

What is Subcontracting?

A

A primary contractor doesn’t want to assume the risk of some aspect of a contract that needs to be completed to satisfy a contract -> subcontractor

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20
Q

Name the severity and frequency of the MOST INSURABLE Risk

A

High Severity; Low frequency

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21
Q

Give some examples of Social Insurance

A

-Medicare
-Medicaid
-Social Security
-Unemployment insurance
-Freddie Mac, Fannie Mae, Sallie Mae

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22
Q

List 6 Risk Management Process Steps

A
  1. Determine client risk management objectives
  2. Identify Risk Exposures
  3. Evaluate Risk Exposures
  4. Selection of risk management
  5. Implementation
  6. Evaluation and review
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23
Q

True or False

Risk Management is concerned with both speculative and pure risk

A

False; Pure Risk ONLY

24
Q

What is an “Aleatory” contract?

A

Someone will end up taking a loss…

(i.e. premiums will be more than coverage OR coverage and claim payment will be more than premiums)

25
Q

What is a “Conditional” contract?

A

Both parties must abide by contractual conditions

26
Q

What are “Contracts of Utmost Good Faith?”

A

Everyone needs to be honest…

NO concealment or misrepresentation

27
Q

What is a “Unilateral Contract?”

A

Only insurer has committed to a legally enforceable promise when issuing an insurance policy

(i.e. insured can cancel any time; insurer cannot)

28
Q

What is a “Contract of Adhesion?”

A

Contract is imbalanced in favor of one party over the other, because on party has all the bargaining power

(i.e. if there’s ambiguity, courts generally rule in favor of the insured)

29
Q

What is “Indemnity?”

A

The restoration of the insured to his or her previous financial condition

30
Q

What is the “Law of Large Numbers?”

A

As the number of units in a group increase, the more closely the actual loss within the group for a given time period will approach the expected losses

31
Q

What is “Underwriting?”

A

Process that determines whether or not an applicant is insurable, and if so, under what conditions and premium level

32
Q

What does underwriting primarily guard against?

A

Adverse Selection

33
Q

What is “Adverse Selection?”

A

Tendency of individuals/businesses that have higher risks per type of insurance to be more inclined to apply for and retain their insurance.

34
Q

All insurable risks must possess at least SOME of these characteristics (8 things)

A
  1. Large risk groups/law of large numbers
  2. Identifiable & Measurable loss
  3. Fortuitous or accidental losses
  4. Loss cannot be catastrophic
  5. Economically affordable premiums
  6. Pure Risk
  7. Low frequency; high risk
  8. Random selection vs Adverse Selection
35
Q

A valid insurance contract must include…(6 things)

A
  1. Offer & Acceptance
  2. Consideration
  3. Legal Object or Purpose
  4. Competent parties
  5. Legal Form
  6. A voidable insurance contract
36
Q

“Insurable Interest” Explained

A

To be a policy owner, you need to be incentivized to protect insured thing

(e.g. my own life, my own house, my spouse’s life, etc)

37
Q

4 most significant characteristics of insurance contracts

A
  1. Principle of Indemnity
  2. Doctrine of Insurable Interest
  3. Doctrine of Actual Cash Value
  4. Subrogation Rights
38
Q

What does “Estoppel” mean?

A

If an agent tells a client something that is not necessarily true

(e.g. skydiving won’t affect your disability insurance premium)

they have to follow through on that.

39
Q

Subrogation Rights Explained

A

If a third party causes the loss, insurer has priority rights of recovery against responsible 3rd party

40
Q

What is a “Waiver?”

A

Intentional relinquishment by an insurer of a known legal right

41
Q

Describe the differences between Agents and Brokers

A

Agents represent companies

Brokers represent applicant/insured

42
Q

7 basic parts of an Insurance Policy

A
  1. Declarations
  2. Definitions
  3. Insuring Agreement
  4. Exclusions
  5. Conditions
  6. Miscellaneous Provisions
  7. Endorsements & Riders
43
Q

Describe the “Declarations” part of an insurance policy

A

1st or 2nd page; contains

-name of insurer
-name of insured
-property/activity being insured
-amount of coverage provided
-premium
-dates
-policy number
-etc

44
Q

Describe the “Definitions” part of an insurance policy

A

A section for defining terms (e.g. accidental death, total disability, etc)

45
Q

Describe the “Insuring Agreement” part of an insurance policy

A

Explains promises & obligations of the insurer to the owner of the policy

Typically called “Named Perils” or “Open Perils” agreement

46
Q

Describe the “Exclusions” part of an insurance policy

A

Lists perils not covered in policy agreement

47
Q

Describe the “Endorsements” part of an insurance policy

A

They clarify some aspect of the policy in response to varied state laws

-may alter exclusions or policy conditions
-may enhance or expand coverage under certain conditions

48
Q

Describe the “Riders” part of an insurance policy

A

Added to life insurance and expand coverage for an extra premium

(e.g. once you become disabled, you can waive life insurance premiums)

49
Q

What is an “Open Perils” Agreement?

A

Covers ALL perils EXCEPT those specifically excluded

aka All Risk Perils

50
Q

What is a “Named Perils” Agreement?

A

Covers ONLY those perils NAMED in the policy

aka Specified Perils

51
Q

Primary cost-control provisions in insurance policies (4 things)

A
  1. Benefit limits
  2. Deductibles
  3. Insurance to Value Provisions
  4. Coinsurance Provision
52
Q

What is a “Straight Deductible?”

A

Requires the insured to pay a certain amount of money per occurrence before the insurer will make a payment

(i.e. Subtracts the deductible amount from each separate occurrence of loss.)

53
Q

What is an “Aggregate Deductible?”

A

Paid throughout the policy year; insured will pay any losses up to the aggregate amount of the deductible, and insurance pays the rest

54
Q

3 most commonly used provisions when you have multiple insurances covering the same loss

A
  1. Pro-rata liability
  2. Contribution by equal shares
  3. Primary & Excess
55
Q

What does “Pro Rata Liability” mean?

A

Each insurer covers its share of loss in proportion to insurance provided

(e.g. Providing 10% coverage; pay 10% of loss)

56
Q

What does “Contribution by Equal Shares” mean?

A

Multiple insurance companies split payouts down the middle (according to coverage amounts)

57
Q

What does “Primary and Excess Clause” mean?

A

One insurance policy is PRIMARY (coverage applied first); Other(s) applied second as Excess (coverage covers remaining if any)

Insurance Planning (16 decks)

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