Insurance Flashcards Preview

A condition where there is a possibility of loss (a situation where exposure to loss exists). At least two outcomes and one of those is undesirable.

• Starting a business
• Buying real estate

Insurable Risk is not Subjective, but rather objective (condition of the real world)

Degree of risk may or may not be measurable. (However remember that the loss must be measurable and definite: time, place, form and monetarily measurable for it to be an insurable risk)

Types (not all insurable):

1. Financial (loss of money vs. Non-Financial (Pain and Suffering)
2. Static (non-economy) vs. Dynamic (economic - inflation, business cycle)
3. Fundamental (large group - recession, earthquake) vs. Particular (individual or small group)
4. Pure Risk vs. Speculative
   1. Pure = may be insurable
      1. Personal, Property, Liability, Failure of others (breach)
   2. Speculative = not insurable

The cause of a loss, the event insured against:

• Fire
• Windstorm
• Theft
• Flood
• illness
• etc.

A condition that may create or increase the chance of loss arising from a peril.

• Owning a home on an earthquake fault
• Owning a home by a river

Physical Hazard: physical characteristics of the person or property that increase the chance of loss (e.g. oily rags left near a furnace or high blood pressure)

Moral Hazard: the chance of loss from dishonesty (e.g. person intentionally causes a loss or overstates the amount of the loss when a peril occurs)

Morale Hazard =  Extra Careless: Indifference to loss (due to the existence of insurance), which creates carelessness and increases the chance of loss (e.g. failure to lock car doors)

• Large number of homogeneous exposure units
• Loss must be definite and measurable
• Must be fortuitous or accidental
• Must not be catastrophic (for the insurance company)

Adverse Selection?

1. the likelihood that people with the highest risk of loss are also most likely to purchase insurance
2. High-risk persons seeking insurance coverage at standard rates
3. Common:
   1. insurance policies with premiums that increase with age

• Avoidance: Do not drive, Do not purchase a home but rent. Most Extreme. May not be practical
• Diversification: Duplication of assets or activities at different locations
• Risk Sharing: entity using a corporation/limited partnership form/hold harmless agreement
• Transference: INSURANCE
• Retention: Voluntary - Recognizes that the risks exist and assume losses (deductible, coinsurance, self-insurance - large corporations)
• Risk Reduction: Sprinkler system, safety programs, alarm system, hand rails

1. Increase Deductible (P&C or Health)
2. Increase elimination period (Disability or LTC)
3. Install an Alarm (Property)
4. Improve Health and diet (Life and Health)
5. Avoid Tobacco (Life and Health)
6. Choose safer occupation (disability)
7. Reduce # of years of coverage (LTC or Disability

• Property and Casualty: At inception and at time of claim
• Life: At inception, but need not be at time of claim

Social

1. Social Security
2. Medicare
3. Workers Compensation
4. Medicaid

Public

1. FDIC
2. PBGC
3. SIPC

Private

1. Life
2. Health
3. Disability
4. LTC
5. Property
6. Liability

• Declarations Page: Factual Statements that identify the specific person, property or activity being insured.
• Definitions: Explanation of key policy terms
• Insuring Agreements: Spells out the basic promise of the insurance company
• Conditions: Spells out in detail the duties and rights of both parties.
• Exclusions: Circumstances when the insurer will NOT pay.

Five Elements:

1. Offer and acceptance
2. Consideration
3. Legal Object
4. Legal Capacity
5. Legal Form

Offer and Acceptance:

1. Generally offer is a person applying for insurance (contract of adhesion) through application
2. Submission of completed insurance application + payment = binding contract if the application would pass standard underwriting requirements

Consideration:

1. Most insurance - promise to pay is sufficient
2. Life insurance - premium must be received 

Legal Object:

1. must be legal purpose; can't have insurance to cover interruption of illegal business purpose

Legal Capacity

1. minors and incompetents not sufficient; voidable by such party.

Legal Form

1. state law; must be filed and approved by state regulatory before sales can proceed

• Negligence:
  • failure to act in a way that a reasonably prudent person would have acted under the circumstances
• Attractive Nuisances:
  • Swimming pool, vacant lot
• Negligence per se: no need to prove negligence
  • violation of a statute is a common example
• Strict Liability: no need to prove negligence
  • Extraordinarily Dangerous Activities - blasting
  • Product Liability - defective product
  • Workers Comp - injured on job
• Vicarious Liability: Respondeat superior (principal's liability for their agents).

• Assumption of Risk (skiiing, car racing)
• Contributory (jay walking, being drunk)
• Comparative (A is 20% negligent, B is 80%)
• Last Clear Chance (Rear end someone when you could have avoided it by swerving, braking in time) - an exception to contributory negligence: Driver 1's negligence caused the accident, Drive 2 had last clear chance to avoid the accident and failed to do so. Driver 1 can recover injuries despite his own contributory negligence

Evaluating a person's need for capital resources upon death. Lack of life insurance on either spouse is a weakness in a case study

• Capital Retention Approach: Uses interest only, so the original capital is still left at the end of the period 
  • It does NOT consider inflation.
• Human Value Method
  • projects income of the individual uses the discount rate to net present value of the life
  • Cash flows can be adjusted downward for taxes
• Financial Needs Analysis Method
  • analyzes the needs of survivors and dependents.
  • Calculated two ways:
    • Annuity Approach - death benefit and the interest consumed by investors
    • Purchasing Power Preservation Model: death benefit not consumed
      • part of the interest is consumed and the rest of interest is used to preserve the purchasing power of the death benefit

• A.M. Best: A++ to F (Public information and interviews with management)
• Standard & Poor: AAA to CCC (only upon request)
• Moody's: may assign ratings on the basis of public information alone.
• Fitch: uses public information and management interviews; public information alone may be used

Section I (Coverage: A B C D)

• A - Dwelling and Attached Structures
  • includes materials and supplies intended for use in construction
  • Land is excluded
  • Partial Loss:
    • 80%: replacement cost basis provided the amount of insurance coverage is 80% of the replacement cost of the building (90% for commercial)
    • Under 80%: Higher of Actual Cash Value OR % of the replacement cost of the partial loss the insurance company represents as a co-insurer
  • Partial Loss Example:
    • House replacement cost (excluding land): $350,000
      • Insurance Coverage = $210,000
      • Flood Damage = $200,000
    • 80% = $240,000
    • 60% = $210,000 / $350,000
    • Replacement Coverage = 210,000 / $240,000 = 87.5% Coverage
  • NOTE - Won't pay out higher than face amount (i.e. if you get 80% above, then $240,000 is max. Always recommend full coverage)
• B - Other structures, separate from dwelling (detached garage, fences, sheds)
  • ​Generally, 10% of the amount of insurance on the dwelling applies as insurance on detached structures
  • For Example, the home is insured for $150,000, the detached structures are insured for $15,000
  • Exclusions:
    • Land
    • Structures used for business purpose
    • does not apply to structure rented to someone who is not a tenant of the dwelling, except for a private garage if it's used as a private garage.
• C - Contents and Personal Property
  • ​Personal property, either owned or used by the insured, is covered; this coverage extends worldwide!
  • 50% of the dwelling
  • May be reduced to 40% if the personal property doesn't equate to 50% of value of the dwelling. May not be reduced below 40% for HO-1, HO-2, HO-3, HO-5
  • Exclusions
    • separately insured property (jewelry, furs, boats)
    • animals, birds fishes
    • motor vehicles, cars, motorcycles, golf carts, snowmobiles
    • aircrafts
    • property of tenants not related to insured
    • property in a unit that is rented or held for rental (refrigerator, stove, furniture)
    • property held for rentals (bikes and motor scooters)
    • Business data such as papers, software, drawings
    • Credit Cards / ATM Cards
  • Limitations
    • $200 cash, currency, bank coins, bullions
    • $500 property for things used for business purposes
    • $1,500 securities, manuscripts, personal records, stamp collections, 
• D - Loss of Use
  • ​20% of the amount of insurance on the dwelling for H0-2, HO-3, HO-5 policies (HO-1 and HO-8 policies are limited to 10%)
  • THREE BENEFITS:
    • Additional living expenses
    • Fair rental value
    • Prohibited Use

Section II

• E - Liaiblity
• F - Medical Payments

• Animals, Birds, or Fish
• Motorized Land Vehicles and Aircraft
• Property of roomers, boarders or other tenants
• Property contained in an apartment regularly rented or held of rental to others by the insured (unless specifically endorsed)

The policy lists perils covered:

• Windstorm
• Hail
• Aircraft
• Riot
• Vandalism
• Vehicles
• Explosion
• Smoke
• Fire
• Lightning
• Theft

Study Hint: Remember: WHARVVES/FLT

• Rupture of a System
• Artificially Generated Electricity
• Falling Objects
• Freezing of Plumbing

Study Hint: Remember Basic plus RAFF

• Earthquake
• Flood
• Neglect
• Intentional Loss
• Ordinance/Law
• Power Failure
• War
• Nuclear Hazard

Note: Sinkhole is a covered peril for the exam

• Replacement Cost x Coinsurance Percentage = Insurance Required
• Insurance Carried ÷ Insurance Required x Loss - Deductible = Amount Paid by Insurance

• Be owned by an individual or by a husband and wife living in the same household
• Be private passenger auto
• Not be used as public or livery conveyance
• Not be rented to others

• Part A - Liability to third parties
• Part B - Medical payments
• Part C - Uninsured/Underinsured motorists
• Part D - Damage to the covered auto