Finance Exam 1 Flashcards
(296 cards)
1
Q
defined as uncertainty concerning the occurrence of a loss
A
RISK
2
Q
any situation or circumstance in which a loss is possible, regardless of whether a loss actually occurs
A
LOSS EXPOSURE
3
Q
defined as the relative variation of actual loss from expected loss.
A
OBJECTIVE RISK
4
Q
defined as uncertainty based on a person’s mental condition or state of mind
A
SUBJECTIVE (perceived) RISK
5
Q
defined as the probability that an event will occur.
A
CHANCE OF LOSS
6
Q
the relative variation of actual loss from expected loss OR refers to the long-run relative frequency of an event based on assumptions of an infinite number of observations and of no change in the underlying conditions
A
OBJECTIVE PROBABILITY
7
Q
the individual’s personal estimate of the chance of loss
A
SUBJECTIVE PROBABILITY
8
Q
defined as the cause of loss EXAMPLES: property damage because of fire, windstorm, or lightening, or damage to your car because of a collision with another vehicle.
A
PERIL
9
Q
a condition that creates or increases the frequency or severity of loss
A
HAZARD
10
Q
a physical condition that increases the frequency or severity of loss
A
PHYSICAL HAZARD
11
Q
dishonesty or character defects in an individual that increase the frequency or severity of loss
A
MORAL HAZARD
12
Q
carelessness or indifference to a loss, which increases the frequency or severity of a loss.
A
ATTITUDINAL HAZARD (MORALE HAZARD)
13
Q
refers to characteristics of the legal system or regulatory environment that increase the frequency or severity of losses.
A
LEGAL HAZARD
14
Q
defined as a situation in which there are only the possibilities of loss or no loss.
A
PURE RISK
15
Q
defined as a situation in which either profit or loss is possible.
A
SPECULATIVE RISK
16
Q
a risk that affects only individuals or small groups and not the entire economy
A
DIVERSIFIABLE RISK
17
Q
risk that affects the entire economy or large numbers of persons or groups within the economy. GOVERNMENT ASSISTANCE MAY BE NECESSARY TO INSURE THIS TYPE
A
NON-DIVERSIFIABLE RISK
18
Q
is a term that encompasses all major risks faced by a business firm. Such risks include pure risk, speculative risk, strategic risk, operational risk, and financial risk.
A
ENTERPRISE RISK
19
Q
refers to the uncertainty of loss because of adverse changes in commodity prices, interest rates, foreign exchange rates, and the value of money.
A
FINANCIAL RISK
20
Q
is the risk of collapse of an entire system or entire marked due to the failure of a single entity or group of entities that can result in the breakdown of the entire financial system.
THIS IS ESPECIALLY IMPORTANT WITH RESPECT TO LARGE FINANCIAL INSTITUTIONS THAT ARE CONSIDERED TOO LARGE TO FAIL WITHOUT DOING MAJOR FINANCIAL HARM TO THE US ECONOMY
A
SYSTEMIC RISK
21
Q
combines into a single unified treatment program all major risks faced by the firm.
A
ENTERPRISE RISK MANAGEMENT
22
Q
Describe the major social and economic burdens of risk on society.
A
- The size of an emergency fund must be increased.
- Society is deprived of certain goods and services
- Worry and fear are present
23
Q
a financial loss that results from the physical damage, destruction or theft of the property, such as fire damage to a home.
A
DIRECT LOSS
24
Q
Commerical risks to firms (5)
A
- PROPERTY RISKS
- LIABILITY RISKS
- LOSS OF BUSINESS INCOME
- CYPERSECURITY AND IDENTITY THEFT
- OTHER RISKS - HUMAN RESOURCES EXPOSURES, FOREIGN LOSS EXPOSURES, INTANGIBLE PROPERTY EXPOSURES, GOVERNMENT EXPOSURES
25
RISK CONTROL TECHNIQUE: you can avoid risks by not participating in associated activities. Examples include avoiding divorce by not getting married and avoiding car insurance claims by not driving.
AVOIDANCE
26
RISK CONTROL TECHNIQUE: a technique that reduces the probability of loss so that the frequency of losses is reduced
LOSS PREVENTION
27
RISK CONTROL TECHNIQUE: strict loss prevention efforts can reduce the frequency of losses; however some losses will inevitably occur.
LOSS REDUCTION
28
RISK CONTROL LOSS REDUCTION TECHNIQUE: This technique refers to having back-ups or copies of important documents or property available in case of loss.
DUPLICATION
29
RISK CONTROL LOSS REDUCTION TECHNIQUE: the assets exposed to loss are separated or divided to minimize the financial loss from a single event.
SEPARATION
30
RISK CONTROL LOSS REDUCTION TECHNIQUE: -this technique reduces the chance of loss by spreading the loss exposure across different parties
DIVERSIFICATION
31
RISK FINANCING TECHNIQUE: an individual or business firm retains part or all of the losses that can result from a given risk – risk retention can be active or passive
RETENTION
32
RISK FINANCING TECHNIQUE: the risk is transferred to a party other than an insurance company; it can be transferred by several methods including: transfer of risk by contracts, hedging for price risk, incorporation of a business firm
NONINSURANCE TRANSFERS
33
RISK FINANCING TECHNIQUE: the most practical method for dealing with major risks.____is a practice or arrangement by which a company or government agency provides a guarantee of compensation for specified loss.
INSURANCE
34
WHAT ARE THE 6 CHARACTERISTICS OF AN IDEALLY INSURABLE RISK?
1. LARGE NUMBER OF EXPOSURE UNITS
2. THE LOSS MUST BE ACCIDENTAL AND UNINTENTIONAL
3. THE LOSS MUST BE DETERMINABLE AND MEASURABLE
4. THE LOSS SHOULD NOT BE CATASTROPHIC
5. CHANCE OF LOSS MUST BE CALCULABLE
6. THE PREMIUM MUST BE ECONOMICALLY FEASIBLE
35
What 3 things do private insurers provide for social and economic benefits to society?
1. Indemnification for Loss
2. Enhancement of Credit
3. Source of Funds for Capital Accumulation
36
What are the 3 major costs of insurance?
1. COST OF DOING BUSINESS
2. FRAUDULENT CLAIMS
3. INFLATED CLAIMS
37
WHAT TYPE OF INSURANCE COVERAGE: Emily, age 28, is a single parent with two dependent children. She wants to make certain that funds are available for her children’s education if she dies before her youngest child finishes college.
LIFE INSURANCE
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WHAT TYPE OF INSURANCE COVERAGE: Danielle, age 16, recently obtained her driver’s license. Her parents want to make certain they are protected if Danielle negligently injures another motorist while driving a family car.
LIABILITY AUTO INSURANCE
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INSURANCE COVERAGE: Jacob, age 30, is married with two dependents. He wants his income to continue if he becomes totally disabled and unable to work.
DISABILITY COVERAGE
40
WHAT TYPE OF INSURANCE COVERAGE: Tyler, age 35, recently purchased a house for $200,000 that is located in an area where tornadoes frequently occur. He wants to make certain that funds are available if the house is damaged or destroyed by a tornado.
HOME OWNERS INSURANCE
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WHAT TYPE OF INSURANCE COVERAGE: Nathan, age 40, owns an upscale furniture store. He wants to be protected if a customer is injured while shopping in the store and sues him for the bodily injury.
LIABILITY COMMERCIAL INSURANCE
42
is a corporation owned by the policyholders. There are no stockholders. The policyholders elect a board of directors who appoint executives to manage the corporation. A _____ insurer may pay dividends to the policyholders or give a rate reduction in advance.
MUTUAL INSURER CHARACTERISTICS
43
Identify the major types of mutual insurers.
- ADVANCE PREMIUM MUTUAL
- ASSESSMENT MUTUAL
- FRATERNAL INSURER
44
means that one insurer is absorbed by another insurer or that two or more existing insurers are blended into an entirely new company.
MERGER
45
means that a mutual insurer is converted into a stock insurer
DEMUTUALIZATION
46
is a company that directly or indirectly controls an authorized insurer
MUTUAL HOLDING COMPANY
47
EXPLAIN THE BASIC CHARACTERISTICS OF LLYODS OF LONDON
1. Lloyd’s technically is not an insurance company; rather, it is a group of members (corporations, individuals, and limited partnerships) who underwrite insurance in syndicates.
2. The insurance is written by the various syndicates that belong to Lloyd’s.
3. New individual members, or Names, who belong to the various syndicates now have limited legal liability.
4. corporations with limited legal liability and limited liability partnerships are also members of Lloyd’s of London.
5. members must also meet stringent financial requirements.
6. Lloyd’s is licensed only in a small number of jurisdictions in the United States.
48
can be defined as an unincorporated organization in which insurance is exchanged among the members (called subscribers).
RECIPROCAL EXCHANGE
49
someone who legally represents the principal and has the authority to act on the principal’s behalf.
AGENT
50
is someone who legally represents the insured even though he or she receives a commission from the insurer. Does not legally have the authority to bind the insurer.
BROKER
51
systems in which commissioned agents solicit and sell life insurance products to prospective insureds- majority of life insurance policies and annuities sold today are through this type of distribution
PERSONAL SELLING SYSTEMS
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use commercial banks and other financial institutions as a distribution system to market life insurance and annuity products.
FINANCIAL INSTITUTION DISTRIBUTION SYSTEM
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a marketing system by which life and health insurance products are sold directly to consumers without a face-to-face meeting with an agent. Potential customers are solicited by television, radio, mail, news-papers, and the Internet.
DIRECT RESPONSE SYSTEM
54
Life insurers also use a variety of additional distribution systems to sell their products. Including:
WORKSITE MARKETING
STOCK BROKERS
FINANCIAL PLANNERS
55
WHAT ARE THE CHARACTERISTICS OF AN INDEPENDENT AGENCY SYSTEM?
- A BUSINESS FIRM THAT USUALLY REPRESENTS SEVERAL UNRELATED INSURERS
- THE AGENCY OWNS THE EXPIRATIONS OR RENEWAL RIGHTS TO THE BUSINESS
- THE INDEPENDENT AGENT IS COMPENSATED BY COMMISSIONS THAT VARY BY LINE OF INSURANCE
56
the agent represents only one insurer or a group of insurers under common ownership.
____ _____ in the property and casualty industry are also called captive agents who represent a single insurer or a group of insurers under common management.
EXCLUSIVE AGENCY SYSTEM
57
an insurer in which sales representatives are employees and not independent contractors, such as salaried representatives. a _____is a term to identify insurers that use the exclusive agency system for selling insurance products
DIRECT WRITER
58
a plan for selling individually underwritten property and casualty coverage to group members; auto and homeowners’ insurance are popular lines that are frequently used in such plans.
MASS MERCHANDISING
59
THE BENEFITS OF DEMUTUALIZATION
- the ability to raise new capital is increased
- stock insurers have greater flexibility to expand by acquiring new companies or by diversification
- stock options can be offered to attract and retain key executives and employees
- conversion to stock insurer may provide tax advantages
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- Insurers have an easier and less expensive way to raise new capital to expand or remain competitive.
- Insurers can enter new areas of insurance more easily, such as a life insurer acquiring a property and casualty insurer.
- Stock options can be given to attract and retain key executives and employees.
THE ADVANTAGES OF MUTUAL HOLDING COMPANY TO AN INSURER
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refers to the pricing of insurance and the calculation of insurance premiums.
RATE MAKING
62
THE PRICE PER UNIT OF INSURANCE
RATE
63
THE UNIT OF MEASUREMENT USED IN INSURANCE PRICING WHICH VARIES BY LINE OF INSURANCE
EXPOSURE UNIT
64
REFERS TO THE PROCESS OF SELECTING, CLASSIFYING AND PRICING APPLICANTS FOR INSURANCE
UNDERWRITING
65
THREE IMPORTANT UNDERWRITING PRINCIPLES
- ATTAIN AN UNDERWRITING PROFIT
- SELECT PROSPECTIVE INSUREDS ACCORDING TO THE COMPANY'S UNDERWRITING STANDARDS
- PROVIDE EQUITY AMONG THE POLICYHOLDERS
66
RISK MANAGERS SOURCES OF INFORMATION TO IDENTIFY LOSS EXPOSURE:
- Risk analysis questionnaires and checklists
- Physical inspection
- Flowcharts
- Financial statements
- Historical loss data
67
POST-LOSS OBJECTIVES:
- Survival of the firm
- Continue operating
- Stability of earnings
- Continued growth of the firm
- Minimize the effects that a loss will have on other persons and on society
68
STEPS IN SETTLING A CLAIM
- NOTICE OF LOSS MUST BE GIVEN
- THE CLAIM IS INVESTIGATED
- A PROOF OF LOSS MAY BE REQUIRED
- A DECISION IS MADE CONCERNING PAYMENT
69
TYPE OF CLAIMS ADJUSTER: OFTEN HAVE AUTHORITY TO SETTLE SMALL FIRST-PARTY CLAIMS UP TO SOME MAXIMUM LIMITS
AGENTS
70
TYPE OF CLAIMS ADJUSTER: EMPLOYEES OF AN INSURER WHO ADJUST MOST CLAIMS. TYPICALLY SALARIED EMPLOYEES AND REPRESENT ONE INSURER
STAFF CLAIMS REPRESENTATIVES
71
TYPE OF CLAIMS ADJUSTER: AN ORGANIZATION OR INDIVIDUAL THAT ADJUSTS CLAIMS FOR A FEE
INDEPENDENT ADJUSTER
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TYPE OF CLAIMS ADJUSTER: REPRESENTS THE INSURED RATHER THAN THE INSURANCE COMPANY AND IS PAID A FEE BASED ON THE AMOUNT OF THE CLAIM SETTLEMENT
PUBLIC ADJUSTER
73
AN ARRANGEMENT BY WHICH THE PRIMARY INSURER THAT INITIALLY WRITES THE INSURANCE TRANSFERS TO ANOTHER INSURER PART OR ALL OF THE POTENTIAL LOSSES ASSOCIATED WITH SUCH INSURANCE
REINSURANCE
74
WHAT ARE THE REASONS FOR REINSURANCE?
- INCREASE UNDERWRITING CAPACITY
- STABILIZE PROFITS
- REDUCE THE UNEARNED PREMIUM RESERVE
- PROVIDE PROTECTION AGAINST A CATASTROPHIC LOSS
- RETIRE FROM BUSINESS OR FROM A LINE OF INSURANCE OR TERRITORY
- OBTAIN UNDERWRITING ADVICE ON A LINE FOR WHICH THE INSURER HAS LITTLE EXPERIENCE
75
Mans that insurable risk is transferred to the capital markets through creation of a financial instrument, such as a catastrophic bond, futures contract, options contract or other financial instrument
SECURITIZATION OF RISK
76
OPTIONAL, CASE BY CASE METHOD THAT IS USED WHEN THE CEDING COMPANY RECEIVES AN APPLICATION FOR INSURANCE THAT EXCEEDS IT'S RETENTION LIMIT.
FACULTATIVE REINSURANCE
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MEANS THE PRIMARY INSURER HAS AGREED TO CEDE INSURANCE TO THE REINSURER AND THE REINSURER HAS AGREED TO ACCEPT THE BUSINESS
TREATY REINSURANCE
78
THE CEDING COMPANY AND REINSURER AGREE TO SHARE PREMIUMS AND LOSSES BASED ON SOME PROPORTION. STATED AS A PERCENTAGE RATHER THAN THE DOLLAR AMOUNT
QUOTA SHARE TREATY
79
THE REINSURER AGREES TO ACCEPT INSURANCE IN EXCESS OF THE CEDING INSURER'S RETENTION LIMIT, UP TO SOME MAXIMUM AMOUNT. REFERRED TO AS A LINE AND IS STATED AS A DOLLAR AMOUNT.
SURPLUS- SHARE TREATY
80
DESIGNED LARGELY FOR PROTECTION AGAINST A CATASTROPHIC LOSS. THE REINSURER PAYS PART OR ALL OF THE LOSS THAT EXCEEDS THE CEDING COMPANY'S RETENTION LIMIT UP TO SOME MAXIMUM LEVEL
EXCESS OF LOSS REINSURANCE
81
AN ORGANIZATION OF INSURERS THAT UNDERWRITES INSURANCE ON A JOINT BASIS
- Each pool member agrees to pay a certain percentage of every loss.
- Each pool member pays for his or her share of losses below a certain amount; losses exceeding that amount are then shared by all members in the pool.
REINSURANCE POOL
82
EXTREMELY IMPORTANT IN THE DAILY OPERATIONS OF INSURERS, INFORMATION CAN QUICKLY BE OBTAINED ON PREMIUM VOLUME, CLAIMS, LOSS RATIOS, INVESTMENTS AND UNDERWRITING RESULTS
INFORMATION SYSTEMS
83
RESPONSIBLE FOR THE FINANCIAL OPERATIONS OF AN INSURER
ACCOUNTING
84
ATTORNEYS ARE WIDELY USED IN ADVANCED UNDERWRITING AND ESTATE PLANNING. THEY ALSO DRAFT THE LEGAL LANGUAGE AND POLICY PROVISIONS IN INSURANCE POLICIES AND REVIEW ALL NEW POLICIES BEFORE THEY ARE MARKETED TO THE PUBLIC
LEGAL SERVICES
85
THESE SERVICES INCLUDE ADVICE ON ALARM SYSTEMS, AUTOMATIC SPRINKLER SYSTEMS, FIRE PREVENTION, OCCUPATIONAL SAFETY AND HEALTH, PREVENTION OF BOILER EXPLOSIONS, AND OTHER LOSS-PREVENTION ACTIVITIES
LOSS CONTROL
86
WHAT ARE THE THREE MAJOR SECTIONS OF A BALANCE SHEET?
ASSETS, LIABILITIES AND OWNERS EQUITY
87
WHAT IS THE BALANCE SHEET EQUATION?
TOTAL ASSETS=TOTAL LIABILITIES + OWNER EQUITY
88
WHAT ARE THE PRIMARY ASSETS FOR AN INSURANCE COMPANY?
- BONDS
- COMMON STOCK
- REAL ESTATE
- CASH
- SHORT TERM INVESTMENTS
- MORTGAGE BACKED SECURITIES
- PREMIUM RECEIVABLE
- DATA PROCESSING EQUIPMENT
89
WHY ARE THE LIABILITIES OF A PROPERTY AND CASUALTY INSURANCE COMPANY DIFFICULT TO MEASURE?
THEY ARE MORE COMPLEX BECAUSE PREMIUMS ARE PAID IN ADVANCE BUT THE PERIOD OF PROTECTION EXTENDS INTO THE FUTURE
90
WHAT ARE THE TWO MAJOR SOURCES OF REVENUE FOR A PROPERTY AND CASUALTY INSURANCE COMPANY?
1. PREMIUMS
| 2. INVESTMENT INCOME
91
WHAT ARE THE MAJOR EXPENSES OF A PROPERTY AND CASUALTY INSURANCE COMPANY?
1. COST OF ADJUSTING CLAIMS
2. PAYING THE INSURED LOSSES
3. UNDERWRITING EXPENSES
92
HOW IS THE COMBINED RATIO OF A PROPERTY AND CASUALTY COMPANY CALCULATED?
COMBINED RATIO = LOSS RATIO + EXPENSE RATIO
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THIS RATIO IS AN OVERALL MEASURE OF UNDERWRITING PERFORMANCE
COMBINED RATIO
94
HOW CAN A PROPERTY AND CASUALTY INSURANCE COMPANY BE PROFITABLE IF IT'S COMBINED RATIO EXCEED 1 (OR 100 PERCENT)
IF THE INVESTMENT INCOME OFFSETS THE UNDERWRITING LOSS
95
NAME 3 WAYS IN WHICH THE ASSETS OF A LIFE INSURANCE COMPANY DIFFER FROM THE ASSETS OF A PROPERTY AND CASUALTY INSURANCE COMPANY
1. AVG DURATION OF THE INVESTMENTS - PROPERTY & CASUALTY ARE SHORT
2. THE SAVINGS ELEMENT IN CASH VALUE - LIFE INSURANCE
3. LIFE INSURANCE MAY HAVE SEPARATE ACCOUNT ASSETS
96
WHAT DO THE RESERVES ON A LIFE INSURANCE COMPANYS BALANCE SHEET REPRESENT?
THEY REPRESENT AN OBLIGATION OF THE INSURER TO PAY FUTURE POLICY BENEFITS
97
WHAT ARE THE MAJOR CATEGORIES OF EXPENSES FOR A LIFE INSURANCE COMPANY?
CLAIM PAYMENTS - DEATH BENEFITS, ANNUITY BENEFITS, MATURED ENDOWMENTS, BENEFITS PAID UNDER HEALTH INSURANCE POLICIES
98
WHAT ARE THE MAJOR REGULATORY OBJECTIVES IN INSURANCE RATE MAKING?
- ADEQUATE RATES
- RATES MUST NOT BE EXCESSIVE
- RATES MUST NOT BE UNFAIRLY DISCRIMANOTORY
99
RATING SYSTEM BUSINESS OBJECTIVES:
```
SIMPLICITY
RESPONSIVENESS
STABILITY
ENCOURAGEMENT OF LOSS CONTROL
EASY TO UNDERSTAND
```
100
REFERS TO THE PORTION OF THE RATE NEEDED TO PAY LOSSES AND LOSS ADJUSTMENT EXPENSES
PURE PREMIUM
101
PAID BY THE INSURED - CONSISTS OF THE GROSS RATE MULTIPLIED BY THE NUMBER OF EXPOSURE UNITS
GROSS PREMIUM
102
WHAT IS THE FORMULA FOR THE PURE PREMIUM METHOD
DOLLAR AMOUNT OF INCURRED LOSSES + LOSS ADJUSTMENT EXPENSES / NUMBER OF EXPOSURE UNITS
103
WHAT IS THE FORMULA FOR LOSS RATIO METHOD
LOSS RATIO = INCURRED LOSSES + LOSS ADJUSTMENT EXPENSES / PREMIUMS EARNED
104
WHAT IS THE FORMULA FOR THE EXPENSE RATIO
EXPENSE RATIO = UNDERWRITING EXPENSES / PREMIUMS WRITTEN
105
WHAT ARE THE 4 REASONS THE INSURANCE INDUSTRY IS REGULATED?
1. MAINTAIN INSURER SOLVENCY
2. COMPENSATE FOR INADEQUATE CUSTOMER KNOWLEDGE
3. ENSURE REASONABLE RATES
4. MAKE INSURANCE AVAILABLE
106
THIS WAS THE LANDMARK DECISION THAT AFFIRMED THE RIGHT OF STATES TO REGULATE INSURANCE
PAUL v. VIRGINIA
107
IN THIS LANDMARK CASE, THE SUPREME COURT RULED THAT INSURANCE WAS INTERSTATE COMMERCE WHEN CONDUCTED ACROSS STATE LINES AND WAS SUBJECT TO FEDERAL REGULATION
SOUTH EASTER UNDERWRITERS ASSOCIATION CASE
108
THIS ACT STATES THAT CONTINUED REGULATION AND TAXATION OF THE INSURANCE INDUSTRY BY THE STATES ARE IN THE PUBLIC INTEREST. IT ALSO STATES THAT FEDERAL ANTITRUST LAW APPLY TO INSURANCE ONLY TO THE EXTENT THAT THE INSURANCE INDUSTRY IS NOT REGULATED BY STATE LAW.
McCarran Ferguson Act
109
This act had significant impact on several areas of insurance regulation
Financial Modernization Act of 1999
110
What are the principle methods of regulating insurance companies?
1. Legislation
2. Courts
3. State Insurance Departments
111
These laws regulate the operation of insurers, formation of insurance companies, licensing of agents and brokers, financial requirements for maintaining solvency, insurance rates, sales and claim practices, taxation and rehabilitation or liquidation of insurers
Legislation
112
They periodically hand down decisions concerning the constitutionality of state insurance laws, the interpretation of policy clauses and provisions, and the legality of administrative actions by state insurance departments
Courts
113
An insurance commissioner, who is elected or appointed by the governor, has the responsibility to administer these laws
State Insurance Departments
114
Identify the principal areas of insurance company operations that are regulated by the states.
- Formation and licensing of insurers
- Solvency REgulation
- Rate Regulation
- Policy Forms
- Sales practices and consumer protection
- taxation of insurers
115
What are the major types of rating laws?
- Prior Approval Laws
- Modified Prior Approval Law
- File and Use Law
- Use and File Law
- Flex rating law
- State made rates
- no filing required
116
All states forbid this - it is the inducement of a policy holder to drop an existing policy and replace it with a new one that provides little or no economic benefit to the client
Twisting
117
Majority of states forbid this- it is giving an individual a premium reduction or some other financial advantage not stated in the policy as an inducement to purchase the policy.
Rebating
118
What are the major arguments for federal regulation of the insurance industry?
- uniform state laws and regulations
- more effective negotiations of internal insurance agreements
- more effective treatment of systemic risk
- greater efficiency of insurers
119
What are the major arguments in support of state regulation of the insurance industry?
- quicker response to local insurance problems
- increased costs from dual regulation
- poor quality of federal regulation
- promotion of uniform laws by NAIC
- greater opportunity for innovation
- unknown consequences of federal regulation
120
What are the shortcomings of state regulation?
- inadequate protection of consumers
- improvements needed in handling complaints
- inadequate market conduct examinations
- insurance availability
- regulators overly responsive to the insurance industry
121
Explain the major arguments for repeal of the McCarren Ferguson Act.
- the insurance industry no longer needs broad anti trust exemption
- federal regulation is needed because of the defects in state regulation
122
What are the major arguments against the repeal of the McCarren Ferguson Act?
- the insurance industry is already competitive
- small insurers may be harmed
- insurers may be prevented from developing common coverage forms
123
Explain the major techniques that regulators use to monitor insurance company solvency.
1. captive standards
2. risk based capital standards
3. reserve requirement
4. restrictions on investments
5. annual financial statements
6. field examinations
7. early warning system
8. FAST system
124
states that the insurer agrees to pay no more than the actual amount of the loss; stated differently, the insured should not profit from a loss
Principle of Indemnity
125
What is the formula for actual cash value?
Actual Cash Value = Replacement Cost - Depreciation
126
A policy that pays the face amount of the insurance if a total loss occurs.
Valued Policy
127
A law that exists in some states that requires payment of the face amount of the insurance to the insured if a total loss to real property occurs from a peril specified in the law.
Valued Policy Law
128
means that there is no deduction for physical depreciation in determining the amount paid for a loss
Replacement Cost Policy
129
This principle states that the insured must be in a position to lose financially if a covered loss occurs
Insurable Interest
130
Why is an insured interest required in every insurance contract?
- to prevent gambling
- to reduce moral hazard
- to measure the amount of the insured's loss in property insurance
131
This principle means substitution of the insurer in place of the insured for the purpose of claiming indemnity from a third party for a loss covered by insurance.
Stated differently, the insurer is entitled to recover from a negligent third party any loss payments made to the insured.
Principle of Subrogation
132
What are the 3 purposes of subrogation:
- prevents the insured from collecting twice for the same loss
- used to hold the negligent person responsible for the loss
- helps to hold down insurance rates
133
Legal Doctrine: when the statements made by the applicant are inaccurate - make the contract voidable
Misrepresentation
134
Legal Doctrine: intentional failure of the applicant for insurance to reveal a material fact of to the insurer
Concealment
135
Legal Doctrine: a statement that becomes part of the insurance contract and is guaranteed by the maker to be true in all respects
WARRANTY
136
List the four requirements that must be met to form a valid insurance contract.
1. offer and acceptance
2. exchange of consideration
3. competent parties
4. legal purpose
137
Legal iNSURANCE Characteristic: a contract where the values exchanged may not be equal but depend on an uncertain event
Aleatory Contract
138
Legal INSURANCE Characteristic: only one party makes a legally enforceable promise
Unilateral Contract
139
Legal INSURANCE Characteristic: an insurance contract is a conditional contract, that is the insurers obligation to pay a claim depends on whether the insured or the beneficiary has compiled with all policy conditions
Conditional Contract
140
Legal INSURANCE Characteristic: in property insurance, insurance is ___ which means the contract between the insured and the insurer
Personal Contract
141
Legal INSURANCE Characteristic: the insured must accept the entire contract, with all of it's terms and conditions
Contract of adhesion
142
Explain the general rules of agency that govern the actions of agents and their relationship to insureds
- there is no presumption of an agency relationship
- an agent must have authority to represent the principal
- a principal is responsible for the acts of agents acting within the scope of their authority
- limitations can be placed on the powers of agents
143
refers to powers specifically conferred on the agent, these are normally stated
express authority
144
refers to the authority of the agent to perform all incidental acts necessary to fulfill the purposes of the agency agreement
implied authority
145
if the agent acts with ___ to do certain things, and a third party is led to believe that the agent is acting within the scope of reasonable and appropriate authority, the principal can be bound by the agents actions
Apparent Authority
146
Is defined as the voluntary relinquishment of a known legal right
Waiver
147
Is the loss of a legal defense because of previous actions that are now inconsistent with that defense. If one person makes a statement of fact to another person who then reasonable relies on the statement to his or her detriment, the first person cannot later deny the statement was made.
Estoppel
148
Identify the basic parts of an insurance contract.
- Declarations
- Definitions
- Insuring Agreement
- Exclusions
- Conditions
- Miscellaneous Provisions
149
Describe the major types of exclusions typically found in insurance contracts.
1-excluded perils
2-excluded loses
3-excluded property
150
Why are exclusions used by insurers?
- Certain perils considered uninsurable
- Presence of extraordinary hazards
- Coverage provided by other contracts
- Moral hazard problems
- Attitudinal hazard problems
- Coverage not needed by typical insureds
151
DEFINITION: provisions in the policy that qualify or place limitations on the insurers promise to perform
Conditions
152
COMMON POLICY CONDITIONS INCLUDE:
notifying the insurer if a loss occurs, protecting the property after a loss, preparing an inventory of damaged personal property, and cooperating with the insurer in the event of a liability suit.
153
the person or party named on the declarations page of the policy.
"NAMED INSURED"
154
Can other parties be insured under a policy even though they are not specifically named? Explain your answer.
Yes, for example a home owners policy covers resident relatives of the named insured or any person under age 21 who is in the care of an insured
155
often used interchangeably and mean the same thing. In property and casualty insurance, an endorsement is a written provision that adds to, deletes from, or modifies the provisions in the original contract. In life and health insurance, a rider is a provision that amends or changes the original policy.
ENDORSEMENTS (ADDS TO) AND RIDERS (AMENDS)
156
If an endorsement conflicts with a policy provision, how is this problem resolved?
An endorsement attached to a policy generally takes precedence over any conflicting terms in the policy.
157
TYPE OF DEDUCTIBLE: ¬the insured must pay a certain number of dollars of loss before the insurer is required to make a payment.
STRAIGHT DEDUCTIBLE
158
TYPE OF DEDUCTIBLE: is a type of aggregate deductible that is found in individual and group medical expense policies, eligible expenses are accumulated during the calendar year and once they exceed the deductible amount, the insurer must then pay the benefits promised under the contract.
CALENDAR - YEAR DEDUCTIBLE
159
TYPE OF DEDUCTIBLE: means that all losses that occur during a specified time period, usually a policy year, are accumulated to satisfy the deductible amount.
AGGREGATE DEDUCTIBLE
160
Explain the purposes of deductibles in property insurance contracts.
- to eliminate small claims
- to reduce premiums
- to reduce moral hazard and attitudinal hazard
161
in a property insurance contract encourages the insured to insure the property to a stated percentage of its insurable value. If this requirement is not met at the time of loss, the insured must share in the loss as a coinsurer.
COINSURER CLAUSE IN PROPERTY INSURANCE
162
What is the fundamental purpose of a coinsurance clause?
ACHIEVE EQUITY IN RATING
163
Explain how a coinsurance percentage clause functions in an individual or group medical expense insurance policy.
It is a provision that requires the insured pay a specified percentage of covered medical expenses in excess of the deductible the purpose is to reduce premiums and to prevent overutilization of policy benefits
164
What is the purpose of other-insurance provisions?
The purpose is to prevent profiting from insurance and violating the principle of indemnity.
165
a generic term for a provision that applies when two or more policies of the same type cover the same insurable interest in the property. Each insurer’s share of the loss is based on the proportion that its insurance bears to the total amount of insurance on the property.
PRO RATA LIABILITY
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can be defined as the death of a family head with outstanding unfulfilled financial obligations, such as dependents to support, children to educate, and a mortgage to pay off.
PREMATURE DEATH
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Identify the costs associated with premature death.
- the family’s share of the deceased breadwinner’s future earnings are lost forever
- additional expenses are incurred because of funeral expenses, uninsured medical bills, higher child care expenses and estate settlement costs.
168
Explain the economic justification for the purchase of life insurance.
The purchase of life insurance is economically justified if the insured has earned income, and others are dependent on those earnings for part or all of their financial support.
169
FINANCIAL IMPACT OF PREMATURE PEOPLE:
| SINGLE PEOPLE
This group does not need large amounts of life insurance – they only need to cover funeral and medical expenses
170
FINANCIAL IMPACT OF PREMATURE DEATH: TWO INCOME EARNERS W/ CHILDREN
Because both incomes are necessary to maintain the standard of living, both income earners need substantial amounts of life insurance.
171
FINANCIAL IMPACT OF PREMATURE DEATH: TRADITIONAL FAMILY
the working parent in the labor force needs substantial amounts of life insurance.
172
FINANCIAL IMPACT OF PREMATURE DEATH: BLENDED FAMILIES
both individuals need substantial amounts of life insurance
173
FINANCIAL IMPACT OF PREMATURE DEATH: SANDWICHED FAMILY
A working spouse in a sandwiched family needs a substantial amount of insurance.
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defined as the present value of the family’s share of the deceased breadwinners future earnings.
HUMAN LIFE VALUE
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Describe the steps in determining the human life value of a family head.
1. estimate the individuals average annual earnings over his or her productive lifetime
2. deduct federal and state income taxes, social security taxes, life and health insurance premiums, and the costs of self-maintenance
3. determine the number of years from the person’s present age to the contemplated age of retirement
4. using a reasonable discount rate, determine the present value of the family’s share of earnings for the period determined in step 3
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NEEDS APPROACH: CASH NEEDS
Cash for funeral expenses, uninsured medical expenses, car loans, credit card debt, and attorney fees
177
NEEDS APPROACH: INCOME NEEDS
How much money does your family need monthly to maintain their current standard of living if you’re deceased?
178
NEEDS APPROACH: SPECIAL NEEDS
Special needs include – Mortgage redemption fund, educational fund, emergency fund, mentally, emotionally or physically challenged family members.
179
Briefly explain the basic characteristics of term insurance.
- The period of protection is temporary
- most term insurance policies are renewable
- most term insurance policies are also convertible
- term insurance policies have no cash value or savings element
180
Identify the major types of term insurance sold today.
- Yearly renewable term
- 5, 10, 15, 20, 25, or 30-year term
- term to age 65
- decreasing term
- reentry term
- return of premium term insurance
181
Explain the situations that justify the purchase of term insurance.
- if the amount of income that can be spent on life insurance is limited, term insurance can be effectively used
- if the need for protection is temporary
- to guarantee future insurability
182
What are the major limitations of term insurance?
- term insurance premiums increase with age at an increasing rate and eventually reach prohibitive levels
- term insurance is inappropriate if you wish to save money for a specific need
183
TYPE OF WHOLE LIFE INSURANCE: a level-premium policy that accumulates cash values and provides lifetime protection to age 121.
ORDINARY LIFE INSURANCE
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Why does an ordinary life insurance policy develop a legal reserve?
The excess premiums paid during the early years are accumulated at compound interest and are then used to supplement the inadequate premiums paid during the later years of the policy. Because the state law regulates the method of investing and accumulating the fund, it is referred to as a legal reserve.
185
Explain the situations that justify the purchase of ordinary life insurance.
- appropriate when lifetime protection is needed
| - can also be used to save money
186
What is the major limitation of ordinary life insurance?
-The major limitation of ordinary life insurance is that some people are still substantially underinsured after the policy is purchased
187
VARIATION OF WHOLE LIFE INSURANCE: A fixed premium policy in which the death benefit and cash values vary according to the investment experience of a separate account, which is similar to a mutual fund maintained by the insurer.
VARIABLE LIFE INSURANCE
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Explain the basic characteristics of universal life policies.
- unbundling of protection and saving component
- two forms of universal life insurance
- considerable flexibility
189
WHAT IS ANOTHER NAME FOR UNIVERSAL LIFE POLICIES?
FLEXIBLE PREMIUM LIFE INSURANCE
190
Explain the limitations of universal life insurance.
- misleading rates of return
- decline in interest rates
- right to increase the mortality charge
- lack of firm commitment to pay premiums
191
What is a variable universal life insurance policy?
This is a variation of whole life insurance, often sold as investments or tax shelters.
192
How does variable universal life insurance differ from a typical universal life insurance policy?
Similar to universal life policy, with the exception of : the policy holder determines how the premiums are invested, and the policy does not guarantee a minimum interest rate or minimum cash value
193
Identify the various expense charges that policy-holders must pay under a variable universal life insurance policy.
- Front end load
- back end surrender charge
- state premium taxes and federal taxes
- investment management fees
- mortality and expense charges
- administrative costs
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- an accumulation account reflects the cash value under the policy
- if the policy is surrendered, a surrender charge is deducted from the accumulation account
- a guaranteed interest rate and current interest rate are used to determine cash values
- a fixed death benefit and maximum premium level at the time of issue are stated in the policy
- the premium is periodically redetermined or adjusted based on the actual experience of the block of policies since the last redetermination date. Depending on the policy, the redetermination can be done annually, every two years, or every five years
CURRENT ASSUMPTION WHOLE LIFE INSURANCE CHARACTERISTICS
195
What is a preferred risk policy?
Most life insurers sell policies at lower rates to individuals known as preferred risks. These people are individuals whose mortality experience is expected to be lower than average.
196
CONTRACTUAL PROVISION: states that if the insured commits suicide within two years after the policy is issued, the face amount of insurance will not be paid; there is only a refund of the premiums paid.
SUICIDE CLAUSE
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CONTRACTUAL PROVISION: the policyholder has a period of 31 days to pay an overdue premium, the policy remains in force during the grace period, if the insured dies within the grace period, the overdue premium is deducted from the policy proceeds.
GRACE PERIOD
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CONTRACTUAL PROVISION: If a policy lapses, the reinstatement clause permits the owner to reinstate a lapsed policy if certain requirements are met
REINSTATEMENT PROVISION/ CLAUSE
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This clause states that the insurer cannot contest the policy after it has been in force 2 years during the insured’s lifetime.
INCONTESTABLE CLAUSE
200
The purpose is to protect the beneficiary if the insurer tries to deny payment of the claim years after the policy was first issued.
PURPOSE OF THE INCONTESTABLE CLAUSE
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Explain the requirements for reinstating a lapsed life insurance policy.
- evidence of insurability is required
- all overdue premiums plus interest must be paid from their respective due dates
- any policy loan must be repaid or reinstated, with interest from the due date of the overdue premium
- the policy must not have been surrendered for its cash value
- the policy must be reinstated within a certain period, typically 3 or 5 years from the date of lapse
202
What are the disadvantages of reinstating a lapsed life insurance policy?
The major disadvantage of reinstating lapsed policy is that a substantial cash outlay is required if the policy lapsed several years earlier.
203
BENEFICIARY DESIGNATION:
| PRIMARY AND CONTINGENT BENEFICIARY
The primary beneficiary who is first entitled to receive the policy proceeds on the insured’s death.
The contingent beneficiary is entitled to the proceeds if the primary beneficiary dies before the insured.
204
BENEFICIARY DESIGNATION: REVOCABLE AND IRREVOCABLE BENEFICIARY
Revocable beneficiary means that the policyholder reserves the right to change the beneficiary designation without the beneficiary’s consent.
Irrevocable beneficiary is one that cannot be changed without the beneficiary’s consent
205
BENEFICIARY DESIGNATION: SPECIFIC AND CLASS BENEFICIARY
Specific beneficiary means the beneficiary is specifically named and identified
Class beneficiary – a specific person is not named but is a member of a group designated as beneficiary such as “children of the insured.”
206
TYPE OF ASSIGNMENT: all ownership rights in the policy are transferred to a new owner
ABSOLUTE ASSIGNMENT
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TYPE OF ASSIGNMENT: the policyholder temporarily assigns a life insurance policy to a creditor as collateral for a loan. Only certain rights are transferred to the creditor to protect its interest and the policyholder retains the remaining rights.
COLLATERAL ASSIGNMENT
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Policy loan provision that allows the policyholder to borrow the cash value.
CASH-VALUE LIFE INSURANCE POLICY PROVISION
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Why is interest charged on a policy loan?
A policy holder must pay interest on the loan to offset the loss of interest to the insurer.
210
LIST THE ADVANTAGES OF A POLICY LOAN
there is a relatively low interest rate that is paid, there is also no credit check for the policyholder, there is no fixed repayment schedule, the policyholder has complete financial flexibility in determining the amount and frequency of loan repayments
211
LIST THE DISADVANTAGES OF A POLICY LOAN
the policyholder is not legally required to repay the loan, and the policy could lapse if the total indebtedness exceeds the available cash value. If the loan has not been repaid by the time the policy matures, the face amount of the insurance is reduced by the amount owed.
212
A POLICY THAT PAYS DIVIDENDS IS KNOWN AS WHAT
PARTICIPATING POLICY
213
Identify the sources from which dividends can be paid.
- a favorable difference between expected and actual mortality experience
- higher than anticipated interest earnings on the assets required to maintain legal reserves
- a favorable difference between expected and actual operating expenses
214
List the various dividend options in a typical life insurance policy.
- Cash
- Apply to Payment of Premiums
- Dividend Accumulations
- Paid-up additions
- Term insurance (fifth dividend option)
215
Can an insurer guarantee the payment of a dividend? Explain your answer.
No, because dividends are determined by the insurers actual operating experience, they cannot be guaranteed.
216
laws that require the payment of a cash-surrender value when a cash-value policy is surrendered
NONFORFEITURE LAWS
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NONFORFEITURE OPTION TYPE: the policy can be surrendered for its cash value, at which time all benefits under the policy cease
CASH-VALUE OPTION
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NONFORFEITURE OPTION TYPE: the cash surrender value is applied as a net single premium to purchase a reduced paid-up policy
REDUCED PAID-UP INSURANCE
219
NONFORFEITURE OPTION TYPE: the net cash-surrender value is used as a net single premium to extend the full face amount of the policy (less any indebtedness) into the future as term insurance for a certain number of years and days
EXTENDED TERM INSURANCE
220
LIFE INSURANCE DEATH BENEFITS OPTION: the policy proceeds are retained by the insurer, and interest is periodically paid to the beneficiary
INTEREST OPTION
221
LIFE INSURANCE DEATH BENEFITS OPTION: the policy proceeds are paid to a beneficiary over some fixed period of time
FIXED PERIOD OPTION
222
LIFE INSURANCE DEATH BENEFITS OPTION: -a fixed amount is periodically paid to the beneficiary
FIXED AMOUNT OPTION
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LIFE INSURANCE DEATH BENEFITS OPTION: ¬installment payments are paid only while the beneficiary is alive and cease on the beneficiary’s death.
LIFE INCOME OPTION
224
Explain the definition of total disability that is found in a typical waiver-of-premium provision.
Under this provision, if the insured becomes totally disabled from bodily injury or disease before stated age, all premiums due during the period of disability are waived.
225
WHAT IS The sale of a life insurance policy by a terminally ill insured to another party, typically to investors or investor groups who hope to profit by the insureds early death?
VIATICAL SETTLEMENT
226
DEFINITION: a financial transaction by which a policyholder who no longer needs or wants to keep a life insurance policy sells the policy to a third party for more than its cash value.
LIFE SETTLEMENT
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DEFINITION: a large policy acquired by a group of investors with the specific intention of selling the policy in the secondary life insurance market and ultimately making a substantial profit when the insured dies.
STRANGER-OWNED LIFE INSURANCE (STOLI)
228
METHOD FOR DETERMINING COST OF LIFE INSURANCE: the cash value and expected dividends are subtracted from annual premiums to obtain a net cost per year figure
-This method does not consider the time value of money
TRADITIONAL NET COST METHOD
229
Under this method, the time value of money is taken into consideration by applying an interest factor to each element of the cost calculation.
INTEREST ADJUSTED COST METHOD
230
This method measures the cost of life insurance if you surrender the policy at the end of some time period, such as 10 or 20 years, and takes compound interest into account.
SURRENDER COST INDEX
231
This method measures the relative cost of a policy if death occurs at the end of some specified time period, such as 10 or 20 years. It is based on the assumption that you will not surrender the policy.
NET PAYMENT COST INDEX
232
Why is the rate of return on the saving component in most cash-value policies negative during the early years of the policy?
reflects the relatively high first-year acquisition expenses when the policy is first sold.
233
the average annual rate of return on a cash-value policy if it held for a specified number of years. It is based on the assumption that a cash-value policy can be viewed as a combination of insurance protection and a savings fund.
CURRENT INFO IS NOT AVAILABLE, SO LIMITED USE
LINTON YIELD FOR RETURNING THE RATE OF RETURN ON THE SAVING COMPONENT OF A CASH-VALUE POLICY
234
FEDERAL INCOME-TAX TREATMENT OF A CASH-VALUE POLICY WITH RESPECT TO: PAYMENT OF PREMIUMS
premiums paid for individual life insurance policies generally are not deductible for income-tax purposes
235
FEDERAL INCOME-TAX TREATMENT OF A CASH-VALUE POLICY WITH RESPECT TO: ANNUAL DIVIDENDS
dividends on life insurance policies generally are received income-tax free until total dividends exceed the net premiums paid for the policy
236
FEDERAL INCOME-TAX TREATMENT OF A CASH-VALUE POLICY WITH RESPECT TO: annual increase in the cash value
currently income-tax free, however if the policy is surrendered for it’s cash value, any gain is taxable as ordinary income
237
FEDERAL INCOME-TAX TREATMENT OF A CASH-VALUE POLICY WITH RESPECT TO: payment of death proceeds to a stated beneficiary
this is received income-tax free by the beneficiary
238
Explain the federal estate-tax treatment of life insurance death proceeds.
The entire proceeds are included in the gross estate of the insured for federal estate tax purposes. THERE IS A UNIFIED TAX CREDIT AND OTHER DEDUCTIONS
239
Describe the suggestions that consumers should follow when life insurance is purchased.
1. Determine whether you need life insurance
2. Estimate the amount of life insurance
3. Decide on the best type of life insurance for you
4. Decide whether you want a policy that pays dividends
5. Shop around for a low-cost policy
6. Consider the financial strength of the insurer
7. Deal with a competent agent
240
refers to uncertainty regarding the firm’s financial goals and objectives.
STRATEGIC RISK
241
are risks that directly affect an individual or family. They involve the possibility of a loss or reduction in income, extra expenses or depletion of financial assets,
PERSONAL RISKS
242
PERSONAL RISKS ARE DUE TO
Premature death
Inadequate retirement income
Poor health
Unemployment
243
involve the possibility of being held legally liable for bodily injury or property damage to someone else
- There is no maximum upper limit with respect to the amount of the loss
- A lien can be placed on your income and financial assets
- Legal defense costs can be enormous
LIABILITY RISKS
244
TYPE OF RISK: involve the possibility of losses associated with the destruction or theft of property
PROPERTY RISK
245
TYPE OF LOSS: is a financial loss that results indirectly from the occurrence of a direct physical damage or theft loss (e.g., the additional living expenses after a fire).
INDIRECT OR CONSEQUENTIAL LOSS
246
TYPE OF RISK FINANCING- RETENTION: means that an individual is aware of the risk and deliberately plans to retain all or part of it
ACTIVE RETENTION
247
TYPE OF RISK FINANCING- RETENTION: means risks may be unknowingly retained because of ignorance, indifference, or laziness
PASSIVE RETENTION
248
is the pooling of fortuitous losses by transfer of such risks to insurers, who agree to indemnify insureds for such losses, to provide other pecuniary benefits on their occurrence, or to render services connected with the risk
INSURANCE
249
RISK REDUCTION IS BASED ON THE LAW OF WHAT?
LAW OF LARGE NUMBERS: the greater the number of exposures, the more closely will the actual results approach the probable results that are expected from an infinite number of exposures.
250
A ____ IS A LOSS that is unforeseen, unexpected, and occur as a result of chance
FORTUITOUS LOSS
251
DEFINITION: The insured is restored to his or her approximate financial position prior to the occurrence of the loss
Indemnification
252
is the tendency of persons with a higher-than-average chance of loss to seek insurance at standard rates
ADVERSE SELECTION
253
refers to insurance that covers whatever is not covered by fire, marine, and life insurance
CASUALTY INSURANCE
254
SOCIAL INSURANCE PROGRAMS ARE:
SOCIAL SECURITY, UNEMPLOYMENT AND WORKERS COMP
255
is the amount needed to pay all expenses, including commissions, general administrative expenses, state premium taxes, acquisition expenses, and an allowance for contingencies and profit
EXPENSE LOADING
256
RATES AND PREMIUMS ARE DETERMINED BY AN ____, USING THE COMPANY'S PAST LOSS EXPERIENCE AND INDUSTRY STATISTICS. These individuals also determine the adequacy of loss reserves, allocate expenses, and compile statistics for company management and state regulatory officials.
ACTUARY
257
Information for underwriting comes from where?
- The application
- The agent’s report
- An inspection report
- Physical inspection
- A physical examination and attending physician’s report
- M I B report
258
WHAT ARE THE OBJECTIVES OF CLAIMS SETTLEMENT:
- Verification of a covered loss
- Fair and prompt payment of claims
- Provide personal assistance to the insured
259
THE PRIMARY INSURER IS THE ____
CEDING COMPANY
260
THE INSURER THAT ACCEPTS THE INSURANCE FROM THE CEDING COMPANY IS THE ____
REINSURER
261
is the amount of insurance retained by the ceding company
RETENTION LIMIT
262
The amount of insurance ceded to the reinsurer is known as a
CESSION
263
is when a reinsurer insures part or all of a risk with another insurer
RETROCESSION
264
are corporate bonds that permit the issuer of the bond to skip or reduce the interest payments if a catastrophic loss occurs
-THEY ARE GROWING IN IMPORTANCE AND ARE NOW CONSIDERED BY MANY TO BE A STANDARD SUPPLEMENT TO TRADITIONAL REINSURANCE
CATASTROPHE
265
are a liability item on the balance sheet that must be offset by assets equal to that amount
State laws specify the minimum basis for calculating THESE
POLICY RESERVES
266
is a statutory account designed to absorb asset value fluctuations not caused by changing interest rates
ASSET VALUATION RESERVE
267
consists of the pure premium and a loading element
GROSS RATE
268
THERE ARE THREE BASIC RATE MAKING METHODS IN PROPERTY & CASUALTY INSURANCE:
1. JUDGMENT RATING
2. CLASS (OR MANUAL RATING) --[2 TYPES: PURE PREMIUM & LOSS RATIO]
3. MERIT RATING [TYPES: SCHEDULE RATING, EXPERIENCE RATING, RETROSPECTIVE RATING]
269
UNDER MERIT RATING the insured’s loss experience during the current policy period determines the actual premium paid for that period
RETROSPECTIVE RATING
270
UNDER MERIT RATING the class or manual rate is adjusted upward or downward based on past loss experience
EXPERIENCE RATING
271
UNDER MERIT RATING each exposure is individually rated
SCHEDULE RATING
272
was enacted to address abuses in the financial services industry. It has numerous provisions designed to:
- Reform the financial services industry
- Deal with destabilizing practices of commercial banks, investment firms, mortgage companies and credit-rating agencies
- Provide protection for consumers
THE DODD FRANK WALL STREET REFORM AND CONSUMER ACT (2010)
273
means that the determination of A C V should include all relevant factors an expert would use to determine the value of the property
BROAD EVIDENCE RULE
274
WHEN MUST INSURABLE INTEREST EXIST?
Property insurance: at the time of the loss
| Life insurance: only at inception of the policy
275
states that an insured is entitled to coverage under a policy that he or she reasonably expects it to provide, regardless of policy provisions.
PRINCIPLE OF REASONABLE EXPECTATIONS
276
are statements that provide information about the particular property or activity to be insured
- Usually on the first page of the policy
- In property insurance, it contains name of the insured, location of property, period of protection, amount of insurance, premium and deductible information
DECLARATIONS
277
PROVISION: in group health insurance is designed to prevent over insurance and the duplication of benefits if one person is covered under more than one group health insurance plan
COORDINATION OF BENEFITS PROVISION
278
Under the needs approach, the amount needed depends on the financial needs that must be met if the family head should die
The calculation should consider:
-An estate clearance fund
Income needed for a one- or two-year readjustment period
-Income needed for the dependency period, until the youngest child reaches age 18
-Life income to the surviving spouse, including income during and after the blackout period.
-Special needs, e.g., funds for college education and emergencies
-Retirement needs
279
TYPE OF WHOLE LIFE INSURANCE: pays the face amount of insurance if the insured dies within a specified period. If the insured is still alive at the end of the period, the face amount is paid to the policyholder
ENDOWMENT INSURANCE
280
is a variation of universal life insurance with certain key characteristics:
- There is a minimum interest rate guarantee-
- Additional interest may be credited to the policy based on investment gains of a specific stock market index
- The amount credited is based on a formula which is usually capped
INDEXED UNIVERSAL LIFE INSURANCE
281
VARIATION OF WHOLE LIFE INSURANCE: is a nonparticipating whole life policy in which the cash values are based on the insurer’s current mortality, investment, and expense experience
CURRENT ASSUMPTION WHOLE LIFE INSURANCE
282
There are two forms of current assumption whole life products:
- Low-premium products, with a low initial premium and a redetermination provision that allows the insurer to recalculate the premium after the initial guaranteed period expires
- High-premium products, with a provision that allows the policyholder to discontinue paying premiums after a certain time period.
283
TYPE OF LIFE INSURANCE:
policy is a whole life policy in which premiums are lower for the first three to five years and higher thereafter
-One advantage is that applicants can purchase permanent insurance immediately even though they cannot afford the higher premiums for a regular whole life policy
MODIFIED LIFE INSURANCE
284
TYPE OF LIFE INSURANCE: is a policy written on the lives of two or more people and is payable at the time of death of the first person to die
JOINT LIFE INSURANCE
285
TYPE OF LIFE INSURANCE -insures two or more lives and pays the death benefit upon the death of the second or last insured
- The insurance is usually whole life, but it can be term
- This form of life insurance is widely used in estate planning
SECOND TO DIE LIFE INSURANCE
286
TYPE OF LIFE INSURANCE: is a type of insurance in which the policies are sold in small amounts and an agent of the company collects the premiums at the insured’s home
INDUSTRIAL LIFE INSURANCE
287
CONTRACTUAL PROVISION: , the policyholder possesses all contractual rights in the policy while the insured is living
Rights include naming beneficiaries and surrendering the policy for its cash value
The policyholder can designate a new owner by filing an appropriate form
OWNERSHIP CLAUSE
288
CONTRACTUAL PROVISION
states that the life insurance policy and attached application constitute the entire contract between the parties
-Prevents the insurer from making amendments without the policyholder’s knowledge
ENTIRE CONTRACT CLAUSE
289
LIFE INSURANCE PROVISION: allows policyholders to exchange their present policies for different contracts
CHANGE OF PLAN PROVISION
290
INSURANCE PROVISION: an overdue premium is automatically borrowed from the cash value after the grace period expires
AUTOMATIC PREMIUM LOAN PROVISION
291
ADDITIONAL BENEFITS (RIDER) permits the policyholder to purchase additional amounts of life insurance at specified times in the future without evidence of insurability
GUARANTEED PURCHASE OPTION
292
RIDER: allows the policyholder to increase the amount of insurance on the occurrence of some event, such as a birth
ADVANCE PURCHASE PRIVILEGE
293
RIDER: doubles the face amount of life insurance if death occurs as a result of an accident
ACCIDENTAL DEATH BENEFIT RIDER
294
RIDER: allows the policyholder to purchase one-year term insurance equal to the percentage change in the consumer price index with no evidence of insurability
COST OF LIVING RIDER
295
RIDER: allows insureds who are terminally ill to collect part or all of their life insurance benefits before they die
ACCELERATED DEATH BENEFITS
296
NAME THREE TYPES OF PROFESSIONALLY QUALIFIED LIFE INSURANCE AGENTS:
- CHARTER LIFE UNDERWRITER (CLU)
- CHARTERED FINANCIAL CONSULTANT (ChFC)
- CERTIFIED FINANCIAL PLANNER (CFP)
