FIN 361
Special damages
(economic damages) compensate for those harms that generally are easily quantifiable into dollar measures (tangible)
Defenses against liability:
1) Assumption of risk: doctrine that holds that if the plaintiff knew of the dangers involved in the act that resulted in harm, but chose to act in that fashion nonetheless, the defendant will not be held liable 2) Contributory Negligence: situation that disallows any recovery by the plaintiff if the plaintiff is shown to be negligent to any degree in not avoiding the relevant harm 3) Comparative Negligence: situation in which the court compares the relative negligence of the parties and apportions recovery on that basis 4) Last clear chance: doctrine under which a plaintiff who assumed the risk or contributed to an accident through negligence is not barred from recover if the defendant had the opportunity to avoid the accident but failed to do so.
The Principle of Indemnity is implemented and supported by several legal principles and policy provisions including:
1) Insurable Interest: financial interest in life/property that is subject to loss 2) subrogation: pool collects from responsible party 3) actual cash value provision: the replacement cost at the time of the loss 4) other insurance provisions: purpose is to prevent insureds from making a profit by collecting from more than one insurance policy
Provisions that violate the Principle of Indemnity
1) Replacement cost coverage- because better off after a loss 2) Valued policy provision (appraisal) 3) valued policy laws 4) cash payment policy provision
Negligence is determined by proving the existence of four elements:
1) a duty to act/ not act in some way 2) breach of that duty 3) damage or injury 4) causal connection; proximate cause
Exclusions exist to:
1) avoid financial catastrophe for the insurer 2) limit coverage of non fortuitous events (not random) 3) avoid duplication of coverage by policies specifically intended to insure the exposure
Insurance contracts are:
1) based on utmost good faith "full disclosure"- implemented by doctrines of representations and concealment 2) personal- meaning they insure against loss to a person, not tho the persons property 3) contracts of adhesion- situation in which insureds have no input in the design of a policy's term ** if it's unclear/ambiguous then it will always favor the PH 4) contracts of indemnity- meaning the insurer agrees to pay no more (and no less) than the actual loss suffered by the insured
Two factors that influence the grant of binding authority to an agent:
1) companies preference for specialists in the underwriting department 2) cancelable policies (no consideration)
Main categories of global risk exposures:
1) destabilized international political environment 2) heightened terrorism risk 3) lack of data risk: currency inconvertibility risk
Benefits of reinsurance
1) increases the financial stability of insurers by spreading risk (tail exposure) 2) facilitates placing large or unusual exposures with one company 3) helps small insurance companies stay in business, thus increasing competition in the industry
Legally liable if:
1) negligent: failure to act as a reasonable person (prudent person) 2) there is damage or loss 3) there is proximate cause: unbroken chain of events leading to the damage or loss
Requirements of a contract:
1) offer and acceptance: the process of two parties entering into a contract 2) consideration: the price each party demands for agreeing to carry out his/her part of the contract (premium) 3) competent parties: individuals of undiminished mental capacity (minors 4) legal purpose: must not be for the performance for an activity prohibited by law 5) legal form: appropriate language
Three Parties of Agency:
1) principal- individual who creates an agency relationship with a second party by authorizing him/her to make contacts with third parties (PH) not he principal's behalf 2) agent- individual who is authorized to make contacts with a third party 3) apparent authority- the implied authority of the agent to fulfill the principal's responsibilities
alien insurers
Lloyd's of london doing business in the US
PROP&LIABILITY vs. LIFE INSURANCE
P/L: can call agent over phone and have binding agreement (binding authority) Life: cannot call over phone and request coverage, need to know more information (conditional binder)
Coinsurance clause: "Insurance to Value"
PARTICIPATION: 1) requires one to carry an amount of insurance equal to a specified % of the value of property in order to be paid the full amount of loss incurred 2) stipulates a proportional payment of loss for failure to carry sufficient insurance
Deductibles
RETENTION 1) Straight deductible- requires payment for all losses less than a specified dollar amount **per occurrence basis 2) Disappearing deductible- one whose amount decreases as the amount of the loss increases
Paul vs. Virginia
US Supreme court decision that defined insurance as intra-state commerce
Cash flow underwriting
When the combined ratio is low, the industry lowers its underwriting standards in order to obtain more cash that can be invested
ceding commission
a fee paid by the reinsurer to the original insurer - cash flow directly to the IS - do not have to be reserved
Public adjuster
adjuster for the insured (you and me)
Binder
agreement that exists before a contact is issued - temporary contract to provide coverage until the policy is issued by the agent or the company - common p/l practice
Insuring clause
agreement, a general statement of the promises the insurer makes to the insured
Reinsurance
an arrangement by which an insurance company transfers all or a portion of its risk under a contract of insurance to another company
independent adjuster
an employee of an adjusting firm that works for several different insurers and receives a fee for each claim handled (independent contractor)
company adjuster
an employee of the insurer who handles claims
Punitive damages
are considered awards intended to punish an offender for exceptionally undesirable behavior (reckless behavior)
Rider
attachment to a life/health insurance policy that changes the terms of the policy
Endorsement
attachment to a property/casualty insurance policy that changes the terms of the policy - they require the payment of a risk premium
facultative arrangement
both the primary insurer and the reinsurer retain full decision-making powers (greater change for adverse selection)
standard fire policy (SFP):
came into effect during the late 1800s and came to be described as the generally accepted manner of underwriting for property loss due to fire
Excess and surplus lines insurers
companies that provide coverages that are not available from license insurers
General damages
compensation for harms that are not specifically quantifiable but that require compensation all the same (intangible)
Hard market
conditions occur when insurance losses are above expectations and reserves are no longer able to cover all losses - hurricane katrina - PHS is low, Reserves are high - insurance premiums are increasing
Soft market
conditions occur when the insurance losses are low and prices are very competitive - beneficial to policy holder - PHS is high
non admitted coverage
contracts issued by a company not authorized to write insurance in the country where a risk exposure is located * Lloyd's of London
incomplete contracts
contracts that contain terms that are implicit rather than explicit
relational contracts
contracts whose provisions are dynamic with respect to the environment in which they are executed
Admitted insurance
contracts written by companies authorized to write insurance in the country where a risk exposure is located
named-perils policy
covers only losses caused by the perils listed in the policy
Law of Agency
deals basically with the legal consequences of people acting on behalf of other people or organizations
NAIC
deals with the creation of model laws for adoption by the states to encourage uniformity - no regulatory authority - works for the benefit of state regulators
contract (policy)
document received when one transfer risks to the insurance company; is the only physical product received at the time of the transaction
Conditions
enumerate the duties of the parties to the contract, and in some cases define the terms used.
commissioner (superintendent) of insurance
executive in charge of monitoring insurance commerce
EXPLICIT vs. IMPLIED
explicit: agency agreement in a contact implied: public perception of what an agent should do
Negligence
failure to act reasonably, and that failure to act causes harm to others
Public Law 15
fed gov will defer it's right to regulate if states do an adequate job of regulation - answers the question "why do states regulate in the area of insurance" - was an act of congress
open-perils policy
formally called "all risk", covers losses caused by all perils except those excluded; most popular in property policies - usually requires a high premium than a named-perils, but is often preferable because it is less likely to leave gaps in coverage
Conditional binder
implies that coverage exists only if the underwriter ultimately accepts application for insurance - subject to all underwriting requirements
Twisting
inducing a policyholder to cancel one contract and buy another by misrepresenting the facts or providing incomplete policy comparisons EX: replacing a life policy without a complete policy comparison (don't know if it's financially in the best interest of the holder) - universal = fixed - variable = portfolio of equities
Principle of indemnity
insureds should not be able to profit from a loss
Application
is an offer to buy insurance - offer is made by YOU by providing info
prior approval
method of regulation in which an insurer or its rating bureau must file its new rates and have them approved by the commissioner before using them rate= unit of insurance cost IOWA: P/L- prior approval basis Life- competitive
File- and- use
method of regulation that allows an insurer to begin using a new rate as soon as it is filed with the commissioner - utility model
Open competition
method of regulation that requires no rate filings by an insurer, as the underlying assumption is that market competition is a sufficient regulator of rates - life insurance in iowa
Remedy
monetary compensation for a person who has been harmed in some way
Valued policies
most life insurance contracts - contracts that agree to pay a stated sum upon the occurrence of the event insured against, rather than to indemnify for loss sustained ** insurable interest in life insurance is 100%
GAAP vs. SAP
net worth of an insurer using GAP accounting would be GREATER relative to the net worth determine under the SAP system - SAP allows companies to account differently for accrued losses
non proportional reinsurance
obligates the reinsurer to pay losses when they exceed a designated threshold (75/25)
Estoppel
occurs when the insurer or its agent has let the insured to believing that coverage exists and, as a consequence, the insurer cannot later claim that no coverage existed
exclusions
perils, risks, losses, and properties that are not covered in an all-risk policy
surplus lines agents or brokers
persons who hold special licenses to provide access to non admitted insurers
Conditional receipt
policy that does not bind the coverage of life insurance at the time it is issued, but it does put the coverage into effect retroactive to the time of application if one meets all the requirements for insurability as of the date of application
Domestic insurers
principal financial group
Binding receipt
proceeds payable if death occurs while one's application for life insurance is being processed, regardless of insurability. - once the process has been completed, then it becomes binding
Rebating
providing substantial value as an inducement to purchase insurance - advantages agents that have been in the business a long time - can't rebate in IA, can in FL - prevents an agent from sharing commissions with a policyholder
Real property vs. personal property
real: permanent structures personal: physical property that is mobile
excess-loss reinsurance
requires the reinsurer to accept amounts of insurance that exceed the ceding insurer's retention limit (most common)
risk-based capital
risk goes up then capital must go up
Binding authority
secures (binds) coverage for an insured without any additional input from the insurer - coverage starts immediately
State guaranty fund associations
security deposit pools made up of involuntary contributions from solvent, state-regulated insurance companies doing business in their respective states to ensure that insureds do not bear the entire burden of losses when an insurer becomes insolvent - similar to FDIC but not backed by federal gov
misappropriation of funds
situations in which the agent keeps funds belonging to the company, policy holder, or a beneficiary
Foreign insurers
state farm doing business in IA
Declarations
statements that identify the person(s) or organization(s) covered by the contract, give information about the loss exposure, and provide the basis upon which the contract is issued and the premium determined
assuming reinsurer
the company taking over the risk in a reinsurance arrangement
ceding insurer
the company transferring risk in a reinsurance arrangement
Waiver
the intentional relinquishment of a known right - to waive a right, a person must know he/she has the right and must give it up intentionally
Break-even combined ratio level
the level of combined ratio that is required for each line of business to avoid losing money
Combined ratio
the loss ratio plus the expense ratio below 1 = profitable above 1 = not profitable equal to 1 = breakeven (equation in notes)
Underwriting cycle
the movement of prices in time - chart (soft to hard to soft)
treaty arrangment
the original insurer is obligated to automatically reinsure any new underlying insurance contract that meets the terms of a prearranged treaty, and the reinsurer is obligated to accept certain responsibilities for the specified insurance (reinsurance coverage is provided automatically for many policies)
claims adjuster
the person who represents the insurer when the policyholder presents a claim for payment
Claims Adjusting
the process of paying insureds after they sustain losses
proportional (pro rata) reinsurance
the reinsurer assumes a respecified percentage of both premiums and losses (50/50)
Legal Liability
the responsibility, based in law, to right some wrong done to another person or organization
Global Risk
the unique problems that arise when companies cross national borders
Replacement cost new
the value of the lost or destroyed property if it were bought new or rebuilt not eh day of the loss
Political risk
unanticipated political events that disrupt the earning or profit-making ability of an enterprise