FIN 522 Midterm

Desirable Properties for an Insurable Risk:

-Risk is important enough -Accidental nature -Probability of a loss should be relatively small -Calculability Losses must be determinable -No excessively catastrophic loss

3 Building Blocks of Personal Insurance

1. Individual Insurance 2. Employer Sponsored Insurance 3. Social Insurance

Steps in Risk Management

1. Risk identification 2. Risk measurement 3. Choice of method to address risk 4. Implementation and review

Max age young adults can stay on parent's health coverage

26 - as long as the either live with parents, is a student, or is considered a dependent of his/her parents

Premium Ratio for age

3:1, older individuals pay no more than 3X what a younger individual pays

Medicare SELECT Policy

A Medigap policy, can exclude or limit benefits for medical services if they are not received from network providers; can reduce cost by 15-25%

Preferred-Provider Organization (PPO)

A benefit plan that contract w/preferred providers to obtain lower-cost care for plan members; pay for care on a fee-for-service basis (similar to traditional indemnity plans) but negotiate discounted prices w/some providers (network or preferred providers); insured has choice of using network or non-network providers; pay deductibles and coinsurance - reduce moral hazard; ONLY finance care; do not use gatekeepers (primary care physician); can provide care out of one's region; patient pays greater share of cost than HMO

Risk Identification

A careful and systematic discovery of all risks that confront a household or organization

Medicaid

A combined federal and state health insurance program; govm't pay at least 50% of the cost; A means-tested program; applicant must have limited income and resources

Mutual Insurance Company

A corporation owned by its policyowners; organized to provide low-cost policies b/c n/a profit; participants share in the company's success/failure

Point-of-Sevice (POS)

A hybrid arrangement that combines aspects of a HMO & PPO; -Open-ended HMO - participant can decide to be treated in the plan's network or outside -Gatekeeper PPO -

Direct-Selling System

A system in which the insurer deals directly with the applicant without agents or brokers, through employees of the insurer; cheaper b/w n/a commission; mostly for simple products

Health Savings Account (HSA)

A tax-advantage medical savings account which is used in conjuction w/a High-Deductible-Health-Plan to pay for reimbursed medical expenses; can be est. by individuals or employers; contributions can be made by individual and employers, funds contributed are exempt from federal income tax; left over funds get carried over, can be invested

Flexible Spending Account (FSA)

A tax-favored vehicle that can be used to pay for unreimbursed medical expenses; offered in combination w/traditional health plans; employee chooses an amount that is periodically deducted from pay, amount not taxable income; "use it or lose it"

Exclusive Provider Organization (EPO)

A variation of a PPO, does not provide coverage outside the preferred-provider network, except when the network does not have an appropriate specialist

Hazard

Act or condition that increases the likelihood of the occurrence of a peril and/or the severity of loss if a peril does occur (can be of physical and moral nature)

Loss Prevention

Activities that reduce the probability of a loss

Loss Reduction

Activities that reduce the severity of a loss

Independent Agencies

Agency that can sell the products of several insurers

Exclusive Agencies

Agency that sells the products of only one insurer

Open-Perils Coverage

All perils are covered except those specifically excluded

Qualified Beneficiary

An employee, or the spouse or dependent child of the employee, who on the day of a qualifying event was covered under the employee's group health plan

Stock Insurance Company

An incorporated business organized as a profit making venture owned by stockholders;

Reinsurer

An insurance company that insures other insurance companies

Health Maintenance Organization (HMO)

An organized system of health care that provides a comprehensive array of medical services on a prepaid basis to voluntarily enrolled persons living w/in a specified geographic region; finance health care and deliver medical services (insurers only finance care); contract with providers - pay fixed pmt to physicians/medical group for each plan member regardless of service provided

Medicaid Benefits

Benefits covered are similar to those provided by regular health insurance programs; hospitalization, doctor's visits, drugs, etc; no premiums to pay, small co-pmt may be required

Covered CA

California state-based marketplace exchange; can compare health plans, can subsidize private insurance

Personal Risks

Concerned with death, injury, illness, old age and unemployment

Social Insurance

Consists of govm't programs in which the elements of the insurance technique are present; makes coverage compulsory; does not require assets/income to be below a specified level to be paid (Social Security)

Intermediary

Contact with this entity essential to the sale of most insurance; an agent, broker, financial planner

International Travel Medical Insurance

Coverage can be purchased by itself or as part of travel insurance by: U.S. citizens traveling abroad and foreigners traveling to the U.S.; 15 days to 1 yr.; meant to over emergency care, provides medical evacuation to home country

Medigap

Coverage that is a supplement to Medicare - helps pay for the deductible & coinsurance

Benefit Carve-Out

Coverage under a medical expense plan that has been singled out for individual mngmt by a party other than the employer or the employer's primary health plan provider

Grace Period

Coverage will not be lost if the premium is late, no more than 30/31 days

Part A - Medicare

Covers hospital stays, skilled nursing facility care, home health care and hospice care; does NOT include custodial care

Medicare Advantage Plans - Part C

Covers the benefits of Part A & B; use a managed care approach w/64% HMOs and 24% PPOs; Most provide prescription drug coverage & lower co-payments, but choice of doctors may be restricted

Healthcare.gov

Department of Health and Human Services for Federally-facilitated marketplace

Property Risks

Direct & indirect losses that arise from the destruction or loss of property, such as from fire, lightning, windstorm, flood, theft, collision, etc.

Deductible

Dollar amount that has to be paid before the insurer starts paying

Defined-Contribution Medical Expense Plan

Employer makes two or more medical expense plans available to their employees; employee contribution is a fixed dollar amount unless choose a more expensive plan

Dental Insurance

Employers can offer dental insurance/dental discount plans; often on a voluntary basis (employee pays); can be structured similar to HMO or PPO; puts more emphasis on reimbursing routing care than reimbursing lrg expenses; adverse selection normally a problem, use deductibles and coinsurance to control costs

Direct Loss

First or immediate loss that arises from an event

Open Enrollment Period

For 2017, from Nov. 1 2016 to Jan. 31st 2017; if b/w 1-15th, coverage starts next month, if b/w 16-31st, coverage starts after next month

Guaranty Funds

Funds to protect consumers against the insolvency of insurers

Managed Care

HMOs and PPOs; a response to high cost of traditional indemnity plan

Medicare

Health insurance program for: Age 65 or older; Under age 65 if entitled to Social Security disability for 24 mo

If worker is over 65, which is primary: employer's plan or Medicare?

If employer has more than 20 employees, employer's plan is primary and Medicare secondary

Captives

Insurance company formed to insure the parent company/other companies

Pure Risks

Insurance contracts deal with this type of risk, that involves only the chance of a loss

Financial Risks

Insurance is designed to treat this kind of risk (monetary loss) vs. non-financial risk (emotional distress)

Nonadmitted

Insurer that is not licensed or authorized to do business in the policy owner's home state; may provide surplus lines of coverage

Broker

Intermediary that represents the applicant

Agent

Intermediary that represents the insurance company

Speculative Risks

Investments have this type of risk b/c they involve both the chance of a gain or loss

Liability Risks

Involve the operation of the law of liability

Indirect Loss

Loss that occurs only as a secondary result following the occurrence of a peril (consequential) ex: hotel expenses after a fire or loss of profits when business is interrupted

ACA

Makes it mandatory to get health insurance; prevents discrimination based on pre-existing conditions, offer premium subsidies for those w/lower incomes

Pharmacy Benefits Managers (PBMs)

Manage prescription drug plans; a type of benefit carve-out; cover cost of drugs required by law to be dispensed by prescription, may not cover lifestyle drugs; use formularies

Caps

Maximum amount paid by the insurer

Medi-Cal

Medicare in the state of CA; covers custodial care

Expected Loss Calculation

Multiply each possible value ($ amount) for the loss by its probability

Adverse Selection

Natural tendency for those who know they are highly vulnerable to loss from a specific risk are most inclined to acquire and retain insurance to cover related losses

Replacement Cost Basis

No deduction is made for depreciation

Concealment

Occurs when an applicant fails to disclose all relevant information

Warranty

Occurs when the applicant makes a false statement (does not need to be material)

Misrepresentation

Occurs when the applicant makes a false statement or material fact

Named-Perils Coverage

Only the perils specifically listed are covered

Part D

Open to all people w/Medicare; participation is optional; must pay a premium; if don't enroll when first eligible, premium inc by 1% each month of delay; uses a formulary that specifies which drugs are covered; have choice in plans

Risk Retention

Pay for the losses yourself as they occur. Can involve pre-funding; common when insurance is unavailable or too expensive

Coinsurance

Percentage of the claim paid by the insured

Traditional Indemnity (Fee-for-service) Plans

Plans based on a traditional insurance design where medical expenses were reimbursed as they were incurred; high cost

Utility Thory; risk averse individuals should be willing to pay an amount that corresponds to:

Premium Willing to Pay = Expected Losses Paid by Insurance Contract + Risk Premium

Demutualization

Process in which Mutual Companies become Stock Companies; motivated by ability to gain capital, mergers and acquisition and executive compensation (stock options)

Extension of Benefits

Provided by plans to employees who are totally disabled at the time of termination (max extension of 12 mo)

Part B - Medicare

Provides benefits for most medical expenses not covered under Part A (physician & surgeons fees, diagnostics, x-rays, medical supplies, rental of medical equipment, ambulance service, etc); If don't enroll when first eligible, premium increases 10% each yr of delay; pay monthly premiums

Temporary Medical Insurance

Provides coverage for a period of time b/w one month and one year

Subrogation

Provides that an insurer who has paid a claim under a contract of indemnity takes over any right of recovery that the insured might have against another party responsible for the loss

Conversion

Provision in medical expense contracts where most covered persons whose group coverage terminates are allowed to purchase individual medical expense coverage w/out evidence of insurability and w/out limitations or preexisting-conditions; policy purchased at individual rates, usually higher than group rates

Coordination-of-Benefits (COB)

Provision in most group medical expenses under which priorities are established for the pmt of benefits by each plan covering an individual; if covered under multp policies, a person will receive benefits equal to 100% of medical expenses; primary coverage pays first and the secondary coverage picks up the difference; employee coverage is usually primary

Peril

Refers to the cause of loss: ex: illness, death, theft, fire, flood, etc.

Actual Cash Value Basis

Replacement cost minus physical depreciation

COBRA (Consolidated Omnibus Budget Reconciliation Act)

Required group health plans to allow employees to extend current health insurance up to 36 mo following a "qualifying event" that results in loss of coverage; only applies to employers w/20+ employees; covers qualified beneficiaries; must be elected w/in 60 days

Particular risks

Risk that affects only individuals or small groups

Deductive Reasoning

Risk that can be measured precisely: ex: the probability that tossing a fair coin gives "heads"

Inductive Reasoning

Risk that can only be estimated with statistics: ex: the probability of having a car accident

Fundamental Risks

Risks that can affect large segments of a society at the same time (market risks, catastrophic risks, or correlated risks)

Co-payments

Similar to coinsurance, but expressed in dollars

Risk Averse

Someone's risk tolerance level who is not willing to take a gamble at fair odds without compensation

Risk Neutral

Someone's risk tolerance level who would be indifferent to that a gamble

Risk Seeking

Someone's risk tolerance level who would be willing to pay to take a gamble

Valued Contracts

Specify the amount the insurer will pay in the event of a loss, regardless of the actual value of the loss (exception to the principle of indemnity) ex: life insurance

American Health Benefit Exchanges

State-based programs, administered by a govm't agency or non-profit org, through which individuals and small businesses (up to 100 employees) can purchase qualified coverage

Principle of Indemnity

States that the insurer agrees to pay no more than the actual amount of the loss

Risk Measurement

Step in the Risk Management Process to evaluate the frequency and severity of losses.

Risk Control Methods

Techniques that minimize losses

Risk Financing Methods

Techniques that pay for the losses

Qualifying Event

Termination of employment (quitting, retiring, or being fired for something other than gross misconduct), reduction in hrs, death of employee, divorce, employee being eligible for Medicare, child ceasing to be a dependent

Subsidies

The amount of the tax credit varies with income such that the premium a person would have to pay for the second lowest cost silver plan would not exceed a specified % of their income; based on the applicant's estimated income for the applicable year; if qualify can pay reduced premiums every month OR apply for a refund on next tax returns

Utmost Good Faith

The applicant for insurance must make full and fair disclosure of the risk to the agent and the company; gives insurer right to cancel the contract

Principle of Insurable Interest

The insured must be in a position to lose financially if a covered loss occurs

Law of Large Numbers

The more observations we have about past realizations of potential loss, the better our estimate of average losses in the future

Contract of Adhesion

The policyholder gets the benefit of the doubt in case the contract is ambiguous

Liquidation

The process of dissolving a financially troubled insurer

Rehabilitation

The process of restoring an insurer to financial stability through reorganization

Underwriting

The selection and classification of insurance applications that are offered to an insurer

Risk Transfer

Transfer some or all of the losses to another party (insurer)