04 - Risk Management and Insurance Planning Flashcards
What is the difference between Moral and Morale hazards?
Moral = Dishonest Morale = Carelessness (more "e's" in the definition)
What is the difference between “pure risk” and “speculative risk”?
Pure risk represents a situation in which only one of two outcomes can occur: loss or no loss.
Speculative risk involves situations in which both gains and losses are present
Insurance is used to protect against a pure risk or speculative risk?
Insurance is used to protect against pure risk. Insurance is designed to indemnify an insured up to the amount of their economic loss.
In terms of insurance, what is “peril”?
Peril - A cause of a loss; typical perils include death, flooding, fire, disability, and so on
In terms of insurance, what is “physical hazard”?
Physical hazard - Something that increases the likelihood of a loss should a peril occur; for example, failing to maintain the brakes on a car
In terms of insurance, what is “moral hazard”?
Moral hazard - Is present when the use of insurance increases the likelihood that the insured will be dishonest when reporting a loss
In terms of insurance, what is “morale hazard”?
Morale hazard - Occurs when the presence of insurance causes the insured to become complacent or indifferent to a loss; for example, someone who knows that she is fully insured against theft may not take as many precautions to secure her property
Terrell lives in a two-bedroom cottage on the Gulf Coast in Texas. He is reviewing his homeowner’s insurance policy. Terrell wants to make sure that he is covered for losses brought about by a hurricane. When he reviews his policy, he notices that the insurance company uses multiple definitions to refer to different elements of the policy. Under what section of the policy can Terrell find information about hurricane coverage?
Terrell can learn about coverage related to hurricane damage under the policy section titled “Perils.” Keep in mind that Terrell’s choice to live on the Gulf Coast is a physical hazard. He can expect to pay higher premiums because the severity of losses associated with hurricane damage tends to increase losses.
What are four methods of dealing with pure risks?
- Avoiding the risk
- Retaining the risk
- Reducing the risk
- Transferring the risk
What concepts help a financial planner determine which risk management strategy is appropriate?
The concepts of frequency and severity help financial planners determine which risk management strategy is appropriate
In general, when you have a low severity, low frequency risk, what strategy should employed to manage the risk?
If the risk is low frequency, low severity, the party should retain the risk
In general, when you have a low frequency, high severity risk, what strategy should be employed to manage the risk?
If the risk is low frequency, high severity, the party should transfer the risk (e.g. through the purchase of insurance or contract).
In general, when you have a high frequency, low severity risk, what strategy should be employed to manage the risk?
If the risk is high frequency, low severity, the party should reduce the risk
In general, when you have a high frequency, high severity risk, what strategy should be employed to manage the risk?
If the risk is high frequency, high severity, the party should avoid the risk
What are the four characteristics of an insurable risk (characteristics an insurance company will provide insurance)?
An insurable loss is a CHAD:
- Losses cannot be Catastrophic for the insurance company
- The potential pool of insureds must be large and a Homogenous group
- Losses must be Accidental
- Losses must be Determinable and measurable
Mabel and Frank were married for 12 years before their divorce last year. When they were first married, Mabel purchased a life insurance policy naming Frank as the insured. She named herself as the policy beneficiary. As a couple, they also owned a homeowner’s insurance policy on their home. The home was titled joint tenants with right of survivorship (JTWROS). Although Frank gave up his interest in the home when they divorced, they did not change these policies.
Unfortunately, a series of negative events has since transpired. Six weeks ago, Frank died. The insurance company paid Mabel the face value of the life insurance policy. Frank’s new wife protested the payment by claiming that Mabel did not have an insurable interest in Frank at the time of death and, as such, Mabel was not eligible to receive payment. Around the same time, Mabel’s home (the one she owned jointly with Frank) burned down. Frank’s new wife filed a claim for Frank’s share of the insurance proceeds. In which situation will the insurance company side with Frank’s new wife?
Unfortunately for Frank’s new wife, the insurance company will rule against her on both issues. First, an insurable interest in a life insurance contract only needs to exist at the time the policy is issued. Second, at the time of the house fire, neither Frank nor his new wife had an insurable interest in the property. For these reasons, Mabel was entitled to receive the life insurance policy payment and reimbursement for the home fire.
What are the six elements that must be in place in order for an insurance contract to be valid?
COAL CIL:
- Consideration must be given by one party in the contract to the other. A premium payment is considered an insured’s consideration. The promise to pay in the event of a loss is the insurance company’s consideration.
- There must be an offer. Although it may seem illogical, the offer is made by the person seeking insurance coverage
- There must be an acceptance of the coverage
- The contract must have a lawful purpose
- The parties must be competent
- The person or entity that will receive the proceeds from an insurance policy must have an insurable interest. Insurable interest is a financial or emotional interest.
- The contract must be written in a legal manner that matches state contract law
What is an aleatory contract?
An aleatory contract is one in which the dollars exchanged between parties is not equal. The owner of a policy typically pays a small premium in relation to the potential amount that could be received with a claim.
Dasani works as an insurance agent for a national property and casualty insurance firm. She has been working with a recent college graduate to establish a new automobile and renter’s policy. To whom does Dasani owe a fiduciary responsibility, the insurance company or the client? Would her obligation change if Dasani were an insurance broker?
As an agent, Dasani owes her fiduciary responsibility to the insurance firm. Had Dasani been an insurance broker, her duty of care would have changed to that of the policy applicant.
Whom does an insurance agent represent? The insurance company or an insurance applicant?
An insurance agent represents the insurance company, not the insurance applicant or insured
What are the three ways an agent can represent and bind an insurance company?
- Express authority - An authority that is specifically granted by the insurer in the agency contract or agreement. Express authority can be either written or oral.
- Implied authority - This is the authority consumers may reasonably believe the agent possesses
- Apparent authority - This authority occurs when an agent oversteps his or her actual authority and the insurer takes no action to counter the impression that such authority exists.
Laverne is a single 32-year-old female. Laverne has no dependent children. She is slightly overweight and a smoker. When evaluating her risk exposures, should her financial planner conclude that Laverne’s primary need is life or disability insurance?
Several factors come into play when evaluating Laverne’s situation. First, as a young female, her life expectancy is longer than that of a male of a similar age. This means she will need replacement income for a longer period of time, making a compelling case for disability insurance coverage. Second, she is single. Third, she is a smoker, and fourth, she is slightly overweight. The last two personal factors increase Laverne’s chances of needing disability coverage sometime in her lifetime. Given her situation (she has no dependents) and her health factors, the financial planner should recommend disability coverage as a top priority.
The number of deaths among a group of people is also known as?
The number of deaths among a group of people is known as the “Mortality rate”
What is the “Morbidity rate”?
The Morbidity rate is the ratio of the occurrence of sickness to the number of healthy persons among a group of people over a given period of time
What are some factors to look for that increase the need for disability insurance coverage?
- Excess body weight
- Tobacco use
- Participation in high-risk activities
- Chronic conditions, including diabetes, high blood pressure, back pain, depression, excessive alcohol consumption, or substance abuse
What are the four conditions for negligence to exist?
- Have a duty to act
- Engage in a breach of their duty to act
- Cause injury or damage due to their breach of duty to act
- The injury/damage must be a direct result of the negligence
If any of these elements are absent, the courts will rule that negligence does not exist and the client will not be liable
What is the difference between “strict” and “absolute” liability?
“Strict” liability refers to the accountability of a firm when a product or service is used by consumers. “Absolute” liability arises from a client’s dangerous activities
What is an “attractive nuisance”?
An attractive nuisance is something owned by a client that may attract children to the person’s property and requires the client to use special care to protect trespassers. Some insurance policies will limit the amount of liability coverage for these types of property
Mackenzie is a CFP professional. She is in the process of reviewing a client’s current homeowner’s policy. Under what section of the policy can she find information about the client’s responsibilities in case of a claim?
Property and casualty insurance policies share at least five common elements:
A declarations section
A definition section
An insurance agreement section
A conditions section
An exclusions section
Mackenzie can find information about her client’s responsibilities in the conditions section of the policy. Generally, the client must maintain the property prior to a loss. When a loss does occur, the client must take steps to notify the insurance company, protect the damaged property, and provide access for evaluation and repair.
The declarations section provides details about the type and amount of insurance as well as who is insured. The definitions section provides the insurance company’s definition of terms such as insured, disability, deductible, and so on. The insurance agreement section describes whether the policy is an all-risk or a named-perils agreement. The exclusion section outlines what is specifically excluded in the policy. Typical exclusions include losses due to flooding and earthquakes.
As it relates to insurance, what is an “exclusion”?
An exclusion is a contractual provision in an insurance policy that denies coverage for certain perils, persons, property, or property locations.
What are the two factors insurance companies use to price insurance during the actuarial and underwriting process?
Insurance companies use two concepts to price insurance during the actuarial and underwriting processes: estimated maximum possible loss (EMPL) and estimated probable loss (EPL).
An indemnity plan is sometimes also called what? What type of healthcare coverage does it provide?
A fee-for-service plan is sometimes called an indemnity plan. This type of health coverage will either pay the medical provider directly or reimburse the client after costs have been filed with an insurance claim for each covered medical expense. With a fee-for-service plan, a client may visit the doctor or hospital of their choice. Typically, this flexibility increases the yearly premium paid for coverage.
What is the difference between copayment and coinsurance?
One way to remember the difference between a copayment and coinsurance is to think of a copayment as a fixed expense (fixed dollar amount) and coinsurance as a variable expense (a percentage of a bill). Copayments can be used to meet a plan deductible; coinsurance is paid after a deductible has been met.
What is the difference between an HMO and an EPO
A health maintenance organization (HMO) is a health plan that provides care through a network of physicians and hospitals in a particular geographic or service area.. An Exclusive Provider Organization is a health care plan where services are covered only if a client uses doctors, specialists, or hospitals in the plan’s network (except in an emergency
What is a POS plan?
A point-of-service (POS) plan is one that combines elements of a fee-for-service PPO plan with aspects of a managed care plan
What type of plan is an example of a consumer-driven health plan?
A high-deductible health plan (HDHP) is health coverage in which the client pays a deductible of at least $1,300 (individually) or $2,600 (family).
What is a health savings accounts?
A health savings account (HSA) generally is available to those who enroll in an HDHP. An HSA allows clients to pay for current health expenses and save for future qualified medical expenses on a pretax basis. Contributions to HSAs are limited to $3,400 for individuals and $6,750 for families in 2017. Those aged 55 or older may increase their contribution by $1,000. Funds deposited into an HSA are not taxed.
Lucy is covered by an employer-provided health care plan. She is worried that her coverage will be canceled because over the past two years she has incurred significant medical expenses due to a life-threatening disease. Explain to Lucy how the concepts of guaranteed renewability and noncancellability apply to her situation.
Besides tax and cost benefits, an advantage associated with purchasing health insurance coverage through an employer-provided health plan is that this type of coverage is guaranteed renewable and noncancellable. Guaranteed renewable means that Lucy may renew her coverage without proof of insurability. Noncancellable in this case means that Lucy cannot be singled out based on her health history and denied coverage. Since she is part of a group plan, the insurance company must cover her.
What is a HRA?
A health reimbursement arrangement (HRA) is sometimes called a personal care account. These accounts are available to enrollees in HDHPs who are ineligible for HSAs. HRAs are like HSAs except an enrollee cannot make deposits into an HRA, a health plan may impose a ceiling on the value of an HRA, interest is not earned on an HRA, and the amount in an HRA is not transferable if the enrollee leaves the health plan.
What is a HCFSA?
A general-purpose health care flexible spending account (HCFSA) is an arrangement a client sets up through an employer to pay for many out-of-pocket medical expenses with tax-free dollars (cafeteria plan). These expenses include insurance copayments and deductibles, and qualified prescription drugs, insulin, and medical devices. In 2017, clients can contribute up to $2,600 from their pay into an HCFSA
