Insurance part 2
Paul vs. Virginia (1868)
Affirmed states rights to regulate insurance
Coinsurance Clause
in a property insurance contract encourages the insured to insure the property to a stated percentage of its insurable value
Deductible
is a provision by which a specified amount is subtracted from the total loss payment that otherwise would be payable
Negligence
is the failure to exercise the standard of care required by law to protect other from an unreasonable of harm
Dodd-Frank Act
legislation passed in 2010 aimed at reforming the banking industry and offering consumers greater protection. Reformed the financial industry
Assessment Methods
major method used to raise the necessary funds to pay unpaid claims also an assessment on other insurers to help pay claims
aggregate deductible
means that all losses that occur during a specified time period, usually a year, are accumulated to satisfy the deductible amount
Unilateral Contract
only the insurer makes a legally enforceable promise
pure rule
you can collect damages even if you are negligent, but your reward is reduced in proportion to your fault
50 percent rule
you cannot recover if you are 50 percent or more at fault
51 percent rule
you cannot recover if you are 51 percent or more at fault
Coinsurance Formula
(amount of insurance carried/amount of insurance required) x loss = amount of recovery
purpose of deductible
-Eliminate small claims that are expensive to handle and process -Reduce premiums paid by the insured -Reduce moral hazard and attitudinal (morale) hazard
Reasons for Insolvency
-Inadequate rates -Inadequate reserves for claims -Rapid growth and inadequate surplus -Problems with affiliates -Overstatement of assets -Alleged fraud -Failure of reinsurers to pay claims -Mismanagement -Catastrophic losses
Why are exclusions necessary?
-Some perils are not commercially insurable e.g., catastrophic losses due to war -Extraordinary hazards are present e.g., using the automobile for a taxi -Coverage is provided by other contracts e.g., use of auto excluded on homeowners policy -Moral hazard problems e.g., coverage of money limited to $200 in homeowners policy -Attitudinal hazard problems e.g., individuals are forced to bear losses that result from their own carelessness -Coverage not needed by typical insureds e.g., homeowners policy does not cover aircraft
Principle of Utmost Good Faith
A higher degree of honesty is imposed on both parties to an insurance contract than is imposed on parties to other contracts
all states require what?
All agents and brokers to be licensed
Foreign Insurer
An insurance company that is incorporated in another state.
Alien Insurer
An insurance company that is incorporated outside the United States.
Domestic Insurer
An insurer doing business in the jurisdiction in which it is incorporated.
Insurer's RBC depends on:
Asset risk Underwriting risk Interest rate risk Business risk
U.S. vs. South-Eastern Underwriters Association (1944)
Court ruled that insurance was an interstate commerce when conducted across sate lines and was subject to federal antitrust laws
Basic Parts of Insurance Contract
Declarations Page Definitions Agreement Exclusions Conditions Coinsurance Dead CC
Fair Plan
Fair Access to Insurance Requirements plan is a state-run program that makes insurance obtainable to those in high risk areas who have been unable to acquire insurance through other channels.
GAAP
Generally Accepted Accounting Principles
all states have what type of laws, funds, association to help pay the claims of policy holders of insolvent insurers
Guaranty
Statutory Acounting
How insurance companies keep track of money because insurance companies are more conservative
Requirements of an Insurance Contract
Offer and Acceptance Consideration Competent Parties Legal Purpose
The McCarren-Furguson Act (1945)
States that continued regulation and taxation of the insurance industry by the states in public interest
Contributory Negligence
The injured person collect damages if his or her care falls below the standard of care required for his or her protection
Principle of Insurable Interest
The insured must be in a position to lose financially if a covered loss occurs
Principle of Indemnity
The insurer agrees to pay no more than the actual amount of the loss
Is Flood Insurance nationally regulated?
Yes
Flood Insurance
a certain type of insurance that protects a home against damage or destruction caused by a flood
Aleatory Contract
a contract where the values exchanged may not be equal but depend on an uncertain event
state commissioners have the right to do what
approve or disapprove new policy forms before they are sold to the public
Declarations Page
are statements that provide information about the particular property or activity to be insured
Admitted Assets
assets that an insurer can show on its statutory balance sheet in determining its financial condition
Financial Modernization Act (1999)
changed federal law that earlier prevented banks, insurers, and investment firms from competing outside their core area
three major types of exclusions
excluded perils, excluded losses, excluded property
equity in rating
fundamental purpose of coinsurance
Conditional Contract
policy owner must comply with all policy provisions to collect for a covered loss
how insurance companies make money
premiums investments
what forms does rate regulation take
prior approval, file and use, flex rating law, state-made rates.
example of personal contract
property insurance policy which cannot be assigned to another party without insurers consent
conditions
provisions in the policy that qualify or place limitations on the insurer's promise to perform
principle of reasonable expectations
states that an insured is entitled to coverage under a policy that he or she reasonably expects it to provide, and that to be effective, exclusions or qualifications must be conspicuous, plain, and clear
Principle of Subrogation
substitution of the insurer in place of the insured for the purpose of claiming indemnity from a third party for a loss covered by insurance
Insuring Agreement
summarizes the major promises of the insurer
comparative negligence law
the financial burden of the injury is shared by both parties according to their respective degrees of fault
insurance twisting
the inducement of s policyholder to drop an existing policy to replace it with a new one with little or no economic value to client
Contract of Adhesion
the insured must accept the entire contract with all of its terms and conditions
straight deductible
the insured must pay a certain number of dollars of loss before the insurer is required to make a payment
Assessment Method
the major method used to raise the necessary funds to pay unpaid claims
insurance rebating
the practice of giving an individual a premium reduction or some other financial advantage not stated in policy
primary and excess insurance
the primary insurer pays first, and the excess insurer pays only after the policy limits under the primary policy are exhausted
Systematic Risk
the risk of collapse of an entire financial system or market
why are insurers subject to financial regulations
to maintain solvency
FSOC (Financial Stability Oversight Council)
treat systematic risk
Imputed Negligence
under certain conditions, the negligence of one person can be attributed to another