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CFP Risk Mgmt, Insurance & Employee Benefits > Principles of Insurance > Flashcards

Principles of Insurance Flashcards

1
Q

What is a risk or what does risk represent?

A

The possibility of loss - or a negative deviation from a desired outcome

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2
Q

What are risks that result from factors other than changes in the economy?

A

Static Risks

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3
Q

What are risks that result from changes in the economy?

A

Dynamic risks

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4
Q

What are fundamental risks?

A

Risks which affect large groups of people

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5
Q

What are particular risks?

A

Risks which affect individuals or small groups of people

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6
Q

What are pure risks?

A

These are risks that have only the chance at loss or no loss, but there is no chance at gain. Being in a car wreck is an example. You either are or aren’t, but there is no chance at gain here. These are insurable.

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7
Q

What are speculative risks?

A

These are risks which involve loss or gain. Gambling is an example. These types of risks are not insurable.

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8
Q

What is a peril?

A

The cause of loss

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9
Q

What is a hazard?

A

The increased potential for loss

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10
Q

Explain tort law

A

Loss as a result from the negligence of another party. Insurance usually covers unintentional or negligent torts. Intentional torts are usually expressly NOT covered

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11
Q

Explain contract law

A

Clients may be liable because of a contract they signed.

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12
Q

What is a risk management technique that seeks to minimize risk of loss?

A

Risk control

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13
Q

What is risk avoidance?

A

Part of Risk Control. The elimination of risk by avoiding. If you don’t want your windows broken, don’t have windows.

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14
Q

What is risk reduction?

A

Part of Risk Control. The attempt to minimize risk through controls. If you don’t want your windows broken, but you want windows, consider a material more difficult to break.

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15
Q

What is risk financing?

A

A risk management technique that pays for the cost of losses incurred

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16
Q

What is risk retention?

A

Part of risk financing. Situations where the loss is small enough and/or less than the cost of transferring risk to insurance, so the loss is paid out of pocket.

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17
Q

What is risk transfer?

A

Part of risk financing. Situations where the loss is perceived large enough, that insurance is used to pay for the loss, vice an out-of-pocket expense.

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18
Q

What is the term used to define a businesses use of risk retention?

A

Self-insurance

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19
Q

What is underwriting?

A

An evaluation of risk exposure which:

  • determines if the exposure meets the requirements of an insurable risk
  • decides if it is practical to insure this risk
  • establishes how the insurance should be priced
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20
Q

The law of large numbers, loss resulting from risk must be definite and measurable, loss must be fortuitous or accidental, and the loss must not be catastrophic to the company are all…

A

Elements of an insurable risk

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21
Q

What is insurable interest?

A

Exists when the party interested in insurance, will experience a financial loss if the insured loss occurs.

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22
Q 
Insurable interest
Actual cash value (ACV)
Policy limits or face value
Other insurance
Coinsurance 
Deductibles
Subrogation

…are all what?

A

Ways that insurance companies limit their liabilities.

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23
Q

What is subrogation?

A

The right of an insurance company to recover its payments if a different person and/or insurance company is found liable

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24
Q

Given client life cycles, what are the typical types of insurance per life cycle?

A

Asset accumulation: health, life, disability, property, and casualty
Conservation: health, life, disability, property, and casualty. Start looking at LTC
Distribution: health, LTC, property

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25
Q

What is social insurance?

A

insurance administered by the government to protect people from large fundamental risks. Social security, Medicare, Medicaid, workers comp are all examples

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26
Q

What is public insurance?

A

Designed to enhance public trust in financial institutions. FDIC, PBGC, SIPC

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27
Q

What is private insurance?

A

Insurance marketed by private companies. Health, LTC, property, etc.

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28
Q

As insurance producers, what is an independent agent?

A

These individuals usually work for several insurance companies under the American or Independent agency insurance system. They decide based on the needs of the client and the appropriateness of the insurance company, where to place the policy.

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29
Q

As insurance producers, what are Captive agents AKA direct writers?

A

Captive agents work for one company or one group of companies.

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30
Q

As insurance producers, what are career agents?

A

Usually life insurance agents in a general agency or a company-owned office under the agency management. They can also be captive agents, but many maintain selling contracts with other companies to better serve clients

31
Q

As insurance producers, what are Producing General agents (PGA)?

A

PGAs generally produce a majority of their own income by selling insurance. They do not have specified territories, and they have the authority to hire agents to work for them if they want. PGAs are generally found in life insurance

32
Q

As insurance producers, what are brokers?

A

Brokers are individually licensed and represent many insurers. Insurance agencies will often use brokers when they lack or do not have field agents as a way to sell their products without the overhead of having agents. Clients benefit from brokers because of the wide availability of products with what should be little loyalty to any one company

33
Q

As insurance producers, what are surplus-line, excess-line brokers or agents?

A

These agents handle any type of insurance that cannot be purchased using normal distribution channels within a given state. These agents can obtain insurance from another excess-line broker from another state. These are almost exclusively casualty and property brokers.

34
Q

What is ratification?

A

An agreement between the agent and the insurer can be modified if the agent writes a policy that is outside the scope of the original agreement, but the insurer accepts it. If they accept it, the agreement is modified (or ratified) and now that agent can write new polices using the newly modified terms.

35
Q

How do the branches of state government affect insurance?

A

It is really no different than any other lawmaking process:

The legislative branch makes the insurance law

The executive branch enforces the insurance law (State insurance commissioner - compliance)

The judicial branch interprets the insurance law, particularly in dispute.

36
Q

What is the purpose of the National Association of Insurance Commissioners?

A

As a committee of all 50 states, their accreditation increases the reliability of state oversight to reduce the likelihood of federal regulation

37
Q

What is an aleatory contract?

A

A contract in which the outcome is controlled by chance

38
Q

What is a contract of adhesion?

A

A contract that is prepared by one party and either accepted or rejected by another party

39
Q

What does it mean to say that insurance contracts are conditional?

A

They are conditional because insurance only pays when a covered loss occurs

40
Q

What does indemnity mean?

A

Indemnity means that the insureds are only restored back to their pre-loss financial position. There are no profits.

41
Q

What is the collateral source rule?

A

An exception to indemnity - stating that if others cause you to suffer loss, their liability is not reduced just because you have insurance in place to cover that loss.

42
Q

Insurance contracts are personal contracts. What does that mean?

A

Personal contracts are made between the individual and insurance company and they cannot be transferred without written permission from both parties.

43
Q

Insurance contracts are unilateral. What does that mean?

A

That the insurance contract can be enforced by the insured, but the premium cannot be forced by the insurance company. HOWEVER, contracts are conditional so if you don’t pay the premium, they don’t pay the contract.

44
Q

How are misrepresentation, warranties, and concealment related to “Utmost Good Faith”?

A

Insurance companies rely on the insured to provide the most accurate information possible when applying for insurance. Deviation from accurate info can be misrepresenting or concealing the truth. Insurance companies, if they so choose, could settle on the warranty clause that is, if ANY portion of the application is deemed misrepresentation or concealment, the policy is void.

45
Q

What is the contract difference between the following two statements:

  • If I promise to paint the fence on Tuesday, you promise to pay me $75.
  • If you paint the fence on Tuesday, I will pay you $75
A

The first statement is bilateral: two parties can enforce

The second statement is unilateral: one party only, can enforce

46
Q

In insurance, what is an offer and acceptance?

A

The offer is the first party’s offer to insure via contract

The acceptance is the second party’s acceptance of the contract

47
Q

In insurance, what is consideration?

A

Consideration is the act of payment. The insured pays the premium and the insurer binds the coverage

48
Q

In insurance, what is legal object?

A

It is the purpose of the contract. No contract can be enforced if it asks someone to do something illegal.

49
Q

In insurance, what are competent parties?

A

Both parties must be capable of entering a contract. Minors entering contracts are voidable.

50
Q

What is the difference between a void and voidable contract?

A

A void contract is not enforceable
A voidable contract is one where one party has the option to void - a minor for example, can void a contract until the age of consent

51
Q

In insurance, what is legal form?

A

Certain contracts must be in a form prescribed by law in order to be enforceable

52
Q

What are declarations, insuring agreements, exclusions, and conditions in an insurance contract?

A

They form the four basic sections of an insurance contract.
Declarations: information about the insured
Insuring agreement: identifies what is insured
Exclusions: What would preclude the company from paying a policy
Conditions: Rights and duties of the insurance company

53
Q

What is the doctrine of waiver?

A

This means that a party, by her own actions, has voluntarily relinquished or surrendered a known right. (An insurance company issues a policy for something that does not meet its underwriting minimums, will still have to pay)

54
Q

What is the doctrine of Estoppel?

A

This prevents an insurance company from denying a claim after either they, or their representative, led the insured to believe that they were insured either verbally or in writing. (If an insurance company issued a claim that did not meet its underwriting policy, they would be “estopped” from denying that claim because the 2nd party was relying on that policy)

55
Q

What is the equitable remedy: recession?

A

When a contract is deemed null and void from its inception due to fraud, misrepresentation, etc.

56
Q

What is the equitable remedy: Reformation?

A

This changes the original contract to be worded in such a manner that reflects the original intent of the contract - to gain mutual and agreed upon understanding by both parties.

57
Q

What is a wavier provision?

A

A provision in the insurance contract that prevents an agent of the company from altering a benefit or privilege of the company

58
Q

What is a tortfeasor?

A

The person who commits wrongdoing

59
Q

What for the four elements of negligence in unintentional torts?

A

A duty is owed: have the duty to drive safe

The duty was breached: the driver rear-ended another car

There were actual damages: the taillight was broken

There was proximate cause: the driver was texting and didn’t see the other driver, therefore rear-ending him (the cause of the accident)

60
Q

In torts, what is an attractive nuisance?

A

A hazard which draws attention and greater chance of harm (i.e. a swimming pool, trampoline)

61
Q

What is negligence per se?

A

This is where the duty of care is determined by a specific statute meant to protect a class of people. For instance, a driver hit a child in a school zone and is guilty of negligence per se, but not if the driver hit her parents.

62
Q

What is absolute liability?

A

This is imposed, even if there was no negligence, if extra-hazardous conditions are created by their activities (blasting, keeping wild animals)

63
Q

What is vicarious liability?

A

When someone is held liable for the acts of another (child hits a baseball through a neighbors window).

64
Q

If you are speeding and another car cuts you off and causes an accident, what type of negligence would prevent you from filing a claim against the driver that cut you off?

A

Contributory

65
Q

What is the alternative to contributory negligence that divvies blame by percentage?

A

Comparative negligence

66
Q

What is a modification to contributory negligence in where the injured party can claim 100% negligence if the injuring party had an opportunity to prevent the accident and failed to do it?

A

Last clear chance

67
Q

What is the difference between moral hazard and morale hazard?

A

Moral hazard are individuals who would consider misrepresenting themselves in order to obtain insurance or induce a claim

Morale hazard is indifference - the attitude that “it’s okay, insurance will pay for it”

68
Q

What is the difference between mortality and morbidity?

A

Mortality rates have to do with the death rate and are life-insurance centered

Morbidity rates have to do with losing ones health and are disability insurance centered.

69
Q

What is the loss adjustment process?

A

The process of making the insured, whole. Indemnification.

70
Q

What is the most reliable rating service for insurance companies?

A

A.M. Best

71
Q

What is the pair or set option?

A

When the insured has a single loss of a pair or set, the insurance company has the option to replace the value of the single, or replace the entire set and take the remaining item as salvage.

72
Q

What are the types of negligent damages?

A

Special: measurable damages
General: immeasurable pain / suffering
Punitive: punishment for damages

73
Q

What is adverse selection?

A

Those individuals who are the highest risk who actively seek out insurance

74
Q

Which of the following are important when selecting an insurance company?

  1. Competence
  2. Training
  3. Ratings by the ratings companies
  4. History
A

Options III and IV, along with the NAIC Watchlist, the size and age of the company, operating ratios, persistency, average policy size, lines of business, investment returns, and direct recognition, are all things one should look at when evaluating an insurance company.

Competence and training are important when evaluating insurance producers, not companies.

CFP Risk Mgmt, Insurance & Employee Benefits (6 decks)

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