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Exam FAM > Insurance and Reinsurance Coverages > Flashcards

Insurance and Reinsurance Coverages Flashcards

1
Q

What are the two main principles that enable the insurance mechanism?

A
  1. The law of large numbers
  2. The decreasing marginal utility of money
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2
Q

What is the law of large numbers?

A

The law of large numbers states that as the number of observations increases, the average of the results should converge to the expected value. (so, by insuring a large number of risks, predicting claims becomes much easier for the insurer)

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3
Q

What is the decreasing marginal utility of money?

A

As extra units of wealth or income or added, the utility, or satisfaction, derived from such units decrease. (hence, risk avoiders are willing to pay more than the expected loss in insurance premium, as additional units of wealth have decreasing utility to them, relative to the utility derived from not incurring large losses)

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4
Q

What are the six criteria that make a risk insurable?

A
  1. It should be economically feasible.
  2. The economic value of the insurance should be calculable.
  3. The loss must be definite.
  4. The loss must be random in nature.
  5. The exposures in any rate class must be homogeneous.
  6. Exposure units should be spatially and temporally independent.
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5
Q

What is Section A auto insurance?

A

Section A is liability insurance, also known as third-party liability. It consists of bodily injury (BI) and property damage (PD). This section provides compensation / indemnification to the third party for an accident if the insured is liable.

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6
Q

What is Section B auto insurance?

A

Section B is medical benefits, also known as medical payments (MP) in a tort jurisdiction, personal injury protection (PIP in a no-fault jurisdiction, and accident benefits in Canada. Section B provides medical benefits such as income replacement, medical care, and rehabilitation to the insured if they are injured during an accident. This is an example of first-party coverage.

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7
Q

Describe the difference between at-fault (tort) jurisdiction and no-fault jurisdiction.

A

In at-fault (tort) jurisdiction
* If you’re at-fault in an accident and get insured, you’re insured up to the policy limit.
* If you’re not at-fault and are injured, your insurer will cover your medical expenses up to the policy limit while fault is being legally established, you are waiting for compensation from the at-fault party, etc.

In no-fault jurisdiction
* Since each insurer pays for the injuries of their policyholders, your medical payments will be limited to your PIP (personal injury protection) coverage.

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8
Q

What is uninsured and underinsured motorist coverage?

A

In the case of an accident from unidentified, underinsured, or uninsured motorists, the insured is covered by their own insurer for the amount that the liable motorist is personally responsible for.

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9
Q

What is Section C auto insurance?

A

Section C provides protection to the policyholder’s vehicle under two subsections: Collision and Other than Collision (hail, theft, fire, or vandalism).

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10
Q

What is subrogation?

A

Subrogation is the ability of the insurer to assume their insured’s rights to sue an at-fault party to recover indemnification costs. Insurers are not allowed to profit from subrogation.

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11
Q

What typically occurs when an insurer needs to indemnify the full value of the vehicle?

A

The insurer has the right to salvage the vehicle to recover any remaining value. Insurers are not allowed to profit from salvaging the vehicle.

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12
Q

What is the doctrine of proximate cause?

A

The principal states that a loss is covered if and only if a covered peril is the proximate cause of a covered consequence. Note that both the peril and consequence have to be covered under the policy and the peril must be the proximate cause.

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13
Q

Summarize the coverages under each section of homeowners insurance

A

Section I (Property):
A = Dwelling
B = Other Structures
C = Personal Property
D = Loss of Use

Section II (Liability):
E = Personal Liability
F = Medical Payment to Others

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14
Q

What is the valued benefit in homeowners insurance?

A

If items such as jewelry, silverware, and art are damaged or stolen, the insurer will pay the appraised values, not the market values.

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15
Q

Prior to the passage of workers comp laws, what are three reasons why it difficult for workers to get compensation for injury/illness?

A
  1. Doctrine of contributory negligence
  2. Fellow-servant doctrine
  3. Assumption-of-risk doctrine
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16
Q

In workers comp, what 4 benefits can workers expect?

A
  1. Medical care benefits
  2. Disability income benefits
  3. Death benefits
  4. Rehabilitation services and benefits
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17
Q

What is a no-fault system?

A

The injured party doesn’t need to prove fault to receive compensation.

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18
Q

What does a standard fire policy (SFP) cover?

A

A standard fire policy covers direct loss from fire and lightning, and at least one of the following:
* Personal coverage
* Commercial coverage
* Increased covered perils
* Increased covered loss

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19
Q

What are allied lines?

A

Allied lines are types of coverages written on a separate policy instead of being attached to the SFP. Examples include:
* Earthquake insurance
* Water damage insurance
* Crop hail insurance
* Sprinkler leakage insurance

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20
Q

What does inland marine insurance cover?

A
  • Domestic shipments
  • Instrumentalities of transportation and communication (bridges, tunnels, etc.)
  • Personal property floater risks
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21
Q

What does ocean marine insurance cover?

A

For basic policies, coverage only applies to cargo after it is loaded onto the ship. However, most policies allow the addition of an endorsement to cover cargo that is in transit.

22
Q

What are two ways that liability insurance protected insureds?

A
  1. It provides defense in cases where the policyholder is alleged to be responsible for injuring and/or damaging property of a third party, as the insurer will represent the insured in court.
  2. If the policyholder is found guilty, the insurer will be responsible for the damages up to the policy limit.
23
Q

What are the two distinctive characteristics of liability coverages?

A
  1. Low frequency, but high severity claims.
  2. They have a potential for high litigation cost.
24
Q

What is a claims-made basis?

A

Losses are covered only if reported during the policy period; insurer may offer tail coverage (extended coverage after the policy end date).

25
Q

What is occurrence basis?

A

Losses are covered even if reported after policy period.

26
Q

What services are usually covered by major medical insurance?

A
  • Inpatient services
  • Outpatient services
  • Ancillary services
  • Prescription druges
27
Q

What are ancillary services?

A

Ancillary services refer to a wide range of medical services that support the work of a primary physician. Ancillary services can be categorized into diagnostic, therapeautic, and custodial.

28
Q

What can prescription drugs be classified as?

A

Prescription drugs can be classified as generic, brand-name, or specialty, as well as preferred or non-preferred.

29
Q

What is a provider network?

A

A provider network is a collection of doctors and other health care professionals, hospitals, and clinics who have agreed to collaborate with insurers by servicing their insureds.

30
Q

Why might a carrier chose to build their own provider network or contract with existing networks for hire?

A
  • Building your own network is common for carriers with geographically concentrated insureds.
  • Contract with existing networks for hire is common for carriers with geographically diverse insureds.
31
Q

What are the two main types of health insurance plans?

A
  1. Health Maintenance Organization (HMO)
  2. Preferred Provider Organization (PPO)
32
Q

Describe an HMO plan.

A

Under an HMO plan, the insured is required to have a primary care provider. All health services must be rendered or approved by that doctor. This type of insurance typically does not cover health services outside of the network.

33
Q

Describe a PPO plan.

A

Under a PPO plan, the insured is not required to have a primary care provider. Insureds can visit providers outside of the network. However, visiting providers within the network guarantees a lower cost and higher coverage for insureds.

34
Q

What components are included as part of health insurance benefit calculations?

A
  1. Provider discounts
  2. Deductibles
  3. Coinsurance
  4. Out-of-pocket limits (aka stop-loss provision)
  5. Maximum limits
  6. Internal limits
  7. Copays
35
Q

What is the difference between out-of-pocket limits and maximum limits?

A

Out-of-pocket limits refer to the maximum amount that the insured pays.

Maximum limits refer to the maximum amount that the insurer pays.

36
Q

What are two advantages to an insurer of using copays instead of deductibles as a means of cost sharing?

A
  1. Prevent over-utilization: Insureds have significant control over their usage/visits. The existence of copays reduces the number of non-essential visits.
  2. Separate administration of benefit: Insurers typically use copays instead of deductibles to share costs for prescription drugs to avoid needing access to claim records for determining the amount of cost sharing.
37
Q

What is comprehensive major medical coverage?

A

Comprehensive major medical coverage covers both smaller frequent costs and large unexpected costs, resulting in lower deductibles.

38
Q

What is catastrophic major medical coverage?

A

Covers expenses higher than regular major medical expenses; very high deductibles. This product has ceased to exist.

39
Q

What is short-term medical coverage?

A

Single limited term; simpler underwriting; lower insurer cost

40
Q

What is high risk pool plan?

A

Insures people with no insurance due to pre-existing condition. High risk pool plans have been terminated.

41
Q

What is a consumer directed plan?

A

A high-deductible plan + personal spending account
* HSA can only be opened with a HDHP
* Tax-free contributions, earnings, and wtihdrawals (for medical purchases)

42
Q

Under the Affordable Care Act (ACA), why are restrictions on plan design important?

A
  1. The restrictions define what constitute as a health insurance policy.
  2. The restrictions partially standardize health insurance, which makes it easier for consumers to compare health insurance policies.
43
Q

What are 7 restrictions put in place by the ACA?

A
  1. Individual mandate (must have insurance)
  2. Partially standardized insurance
  3. Plans must cover 10 EHBs (essential health benefits)
  4. No cost sharing for preventive services
  5. Plans must mee AV (actuarial value) metal level
  6. Plans must set out-of-pocket limit that is below the government limit
  7. Plans sold on public exchanges must satisfy certain tests/standards
44
Q

What are the 10 categories of essential health benefits?

A
  1. Ambulatory patient services
  2. Emergency services
  3. Hospitalization
  4. Pregnancy, maternity, and newborn care
  5. Mental health and substance use disorder services, including behavioral health treatment
  6. Prescription drugs
  7. Rehabilitative and habilitative services and devices
  8. Laboratory services
  9. Preventive and wellness services and chronic disease management
  10. Pediatric services, including oral and vision care
45
Q

Why is dental insurance typically issued under group policies?

A
  1. They are high frequency, low severity.
  2. Under the U.S. tax code, there is a tax subsidy if dental insurance is issued as a group policy.
46
Q

What are the 4 product design drivers of dental insurance?

A
  1. Induced utilization: over-utilize benefits because insurance coverage is present.
  2. Accumulated untreated conditions: ability to postpone treatment until insurance is present.
  3. Anti-selection: individuals choose dental coverage that benefits them the most.
  4. ACA: pediatric dental coverage required.
47
Q

What are 7 reasons why reinsurance is important?

A
  1. Capital relief
  2. Increase underwriting capacity
  3. Catastrophe protection
  4. Stabilize loss experience
  5. Risk diversification
  6. Technical expertise
  7. Market withdrawal
48
Q

Describe the difference between treaty reinsurance and facultative reinsurance.

A

Treaty reinsurance: the cedant and reinsurer agree that all risks in a specific line or class of business will be ceded to the reinsurer. Under this agreement, the reinsurer is usually unable to underwrite each risk individually.

Facultative reinsurance: the primary insurer determines the risks to be ceded, then the reinsurer underwrites each risk individually and decides which to accept and which to reject.

49
Q

What is pro rata reinsurance?

A

Pro rata reinsurance is also referred to as proportional reinsurance. This is when both the cedant and reinsurer share the risk, premium, and losses.

50
Q

Describe the two types of pro rata reinsurance.

A
  1. Quota share: both parties share a percentage of the total risk.
  2. Surplus share: both parties share a percentage of the total risk only for policies whose coverage exceeds a specified amount. The specified amount is the primary insurer’s net retention or retention limit, and also known as the reinsurer’s attachment point.
51
Q

What is excess of loss?

A

The reinsurer is responsible for claim amounts exceeding the retention limit.

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