TOPICS 4-6 Application Questions
Nicholas owns a laptop computer that was stolen. The laptop cost $1000 when it was purchased five years ago. A similar laptop computer today can be purchased for $500. Assuming that the laptop was 50 percent depreciated at the time the theft occurred, what is the actual cash value of the loss?
Actual Cash Value= Replacement Cost - Depreciation =500 -(1000*50%) =0
Ken, age 52, works only part-time and has no health insurance. The cartilage in both his knees is severely eroded from osteoarthritis, which causes severe pain during his daily activities. As a result, Ken requires major surgery and a total knee replacement for both knees. He has been unable to obtain health insurance because of this condition. Explain one or more provisions in the new Affordable Care Act that will enable Ken to obtain health insurance.
(a) Ma gets hospitalized. The primary plan is Ma's employers' group medical insurance. The Mi's plan is in excess. If all the expenses are not reimbursed, then the policy of Mi can be used. Such as deductibles or co-insurance. Not more than 100% of the eligible medical expenses is paid by insurance company under both the plans. (b) If son is hospitalized. If parents are married, the person whose birthday comes first is the primary plan. In this case, the birthday of Ma comes first. The primary plan is Ma's employers' group medical insurance. The Mi's plan is in excess. (c) If son is hospitalized and parents are separated. Here, the court decree states that Mi is required to provide for the health insurance. The primary plan is Mi's employers' group medical insurance. The Ma's plan is in excess.
Ashley has an individual medical expense insurance policy with a $1000 calendar-year deductible and a 20 percent coinsurance clause. Ashley had outpatient surgery to remove a bunion on her foot and incurred medical bills of $10,000. How much will Ashley's insurer pay? How much will Ashley have to pay?
A has taken a policy which has straight deductible clause of $1,000 and a 20% co-insurance clause. Moreover, the medical bill of $10,000 is known. Calculate the share of the insurer and of Ms. A by constructing the table and carry out the following calculations as given in the table. The Performa is give below: Particulars Amount A Medical Bill $ 10,000 B Less: Straight Deductible $ 1,000 C Eligible Expense (A-B) $ 9,000 D Insurer's Share (80% of C) $ 7,200 E Share of Ms. A (A-D) $ 2,800 Hence, the insurer's share comes out to be $7,200 and the share of Ms. A would be $2,800.
a. A manufacturing firm incurred the following insured losses, in the order given, during the current policy year. Loss Amount of Loss A $ 2500 B 3500 C 10,000 How much would the company's insurer pay for each loss if the policy contained the following type of deductible? 1. $1000 straight deductible 2. $15,000 annual aggregate deductible b. Explain the coordination-of-benefits provision that is typically found in group medical expense plans.
A straight deductible is generally used when the insured is required to pay a certain sum of the loss before the insurer is required to pay. The deductible is applicable for each time, the loss is incurred. Calculate the loss that will be borne by the insurer by constructing a table given below. Subtract the straight deductible from the amount of loss to obtain the loss borne by the insurer. The desired result is given below: Loss Amount of Loss (A) Straight Deductible (B) Loss to be borne by insurer (A-B) A $ 2,500 $ 1,000 $ 1,500 B $ 3,500 $ 1,000 $ 2,500 C $ 10,000 $ 1,000 $ 9,000 Hence, the losses for A, B, C are $1500, $2,500, $9,000 that would be borne by the company's insurer. 2) Aggregate deductible refers to the total amount of losses that occurs during a specified time period, usually a policy year, are collected to satisfy the deductible amount. Calculate the loss that will be borne by the insurer by constructing a table given below. Add all the losses and find out the loss borne by the insurer by subtracting aggregate deductible from the total loss. The desired result is given below: Loss Amount of Loss A $ 2,500 B $ 3,500 C $ 10,000 Total Loss (1) $ 16,000 Aggregate Deductible (2) $ 15,000 Loss to be borne by insurer (1-2) $ 1,000 Hence, the loss to be borne by the insurer would be $1,000. b) The coordination-of-benefits provision in a group health insurance is a type of primary and excess coverage. The provision prevents duplicate claims and ensures that the claims do not exceed the actual medical expenses incurred.
Janet, age 28, is married and has a son, age 3. She wants to determine how much life insurance she should own based on the capital retention approach. She would like to provide $30,000 each year before taxes to her family if she should die. She owns a house jointly with her husband that has a current market value of $250,000 and a mortgage balance of $100,000. She also owes $16,000 on a car loan and credit cards. She would like to have the mortgage, car loan, and credit card debts paid off if she should die. She has no investments, and her checking account balance is only $1000. She owns an individual life insurance policy in the amount of $100,000 that her parents purchased for her when she was a baby. Estimated Social Security survivor benefits are $10,000 annually. Janet assumes the life insurance proceeds can be invested at 5 percent interest. Based on the capital retention approach, how much additional life insurance, if any, should Janet purchase to meet her financial goals?
A universal life insurance policy is a one, which has flexible premium and which unbundles the protection and savings components. The characteristics of the policy are as follows : • The policyholder determines the amount of premium payable and its frequency except the first premium. The policies have a target premium, which should be paid to keep the policy enforced for a certain number of years. Most policies have no lapse guarantee, which assures the policy to be in force, if the minimum premium is paid. • The insurance and savings component are kept separately. An annual statement is provided that shows the premium paid towards the insurance cover and towards the cash value benefits. The statement also shows the interest credited on the cash value and the mortality. • Interest rate is guaranteed at a minimum rate which may be as low as 3%. This is as per the contractual agreement of the insurance policy. However, the actual rate is higher and it depends on the market conditions and company experiences. • The back-end surrender charges are charged by the insurers to cover administrative charges. This is usually between 5 to 10%. These charges are usually higher in the initial years. However, the annual charges decline over the years. The surrender charges are normally not applicable for polices, who complete the tenure of 10 years or more.
Stephanie owns a small warehouse that is insured for $200,000 under a commercial property insurance policy. The policy contains an 80 percent coinsurance clause. The warehouse sustained a $50,000 loss because of a fire in a storage area. The replacement cost of the warehouse at the time of loss is $500,000. a. What is the insurer's liability, if any, for this loss? Show your calculations. b. Assume that Stephanie carried $500,000 of property insurance on the warehouse at the time of loss. If the amount of loss is $10,000, how much will she collect? c. Explain the theory or rationale of coinsurance in a property insurance contract.
Amount Paid by Insurer = Amount Of Insurance Taken/Amount of Insurance Required * Loss =$25,000 In the given situation, S has taken insurance for $500,000 which is 100% of the replacement value of the property. The co-insurance clause requires 80% coverage and therefore, the entire loss of $10,000 would be borne by the insurer. c) The fundamental purpose of a coinsurance clause is to attain equity in rating. Most property insurance losses are partial rather than total losses. Therefore, everyone should go for an insured amount which is lower than the actual value of the property. The purpose is to save the premium in the absence of coinsurance clause. The insured generally recovers the partial loss that is incurred by paying lower premium. This would reduce the income of the insurer and may also lead to losses. Hence, to avoid this situation, coinsurance clause is incorporated to make the loss recovery proportional to the amount insured
Michelle purchased a Homeowners 3 policy with no special endorsements to cover her home and personal property. A fire occurred and destroyed a big screen television. Michelle paid $4000 for the TV new, and it was 25 percent depreciated when the fire occurred. The replacement cost of a similar television is $3800. Ignoring any deductible, how much will Michelle collect for the loss?
Amount= Replacement Cost - Depreciation =$3,800 - (25% * 3,800) = 2,850
Jeff currently earns $3000 per month. He has an individual disability-income policy that will pay $2000 monthly if he is totally disabled. Disability is defined in terms of the worker's own occupation. The policy has a 30-day elimination period and also provides residual disability benefits. Benefits are payable until age 65. a. If Jeff is severely injured in an auto accident and cannot work for four months, how much will he collect under his policy? b. Assume Jeff returns to work but can only work part-time until he recovers completely. If he earns $1500 monthly, what is the amount, if any, that Jeff can collect under his policy? Explain your answer.
As it is stated in the question that Mr. J is severely injured in an auto accident and cannot work for four months. So, Mr J would collect an amount of $6,000($2,000 × 3).The policy will pay $2,000 monthly after meeting an elimination period of 30 days. b) The amount collected by J will be $2500. The earnings of Mr. J from the part-time work is $ 1,500. The benefit of the individual disability policy is $ 2,000 monthly, from which the insurer will provide 50 % of the actual benefit that is $ 1,000. Hence, the total earning would be $1500+$1000 = $2,500.
For the past calendar year, a property insurer reported the following financial information for a specific line of insurance: Premiums written $25,000,000 Expenses incurred 5,000,000 Incurred losses and loss-adjustment expenses 14,000,000 Earned premiums 20,000,000 a. What was the insurer's loss ratio for this line of coverage? b. Calculate the expense ratio for this line of coverage. c. What was the combined ratio for this line of coverage?
Calculate the insurer's Loss ratio by using the data given below: Incurred losses = $5,000,000 Loss-adjustment expenses = $14,000,000 Compute the loss ratio by using the formula mentioned below: Loss Ratio = Incurred Losses + Loss Adjusted Expense / Premium earned Replace the values in equation (1). =.07 b) expense ratio Calculate the Expense ratio by using the data given below: Underwriting expenses = $5,000,000 Premium written = $25,000,000 The formula is mentioned below: Expense Ratio = Underwriting expense/Premium written =.02 c) Combined Ratio Calculate the combined ratio by using the data given below: Loss ratio = 0.7 Expense ratio = 0.2 The formula is mentioned below: Combined Ratio= Loss Ratio+ Expense Ratio =.09
A luncheon speaker stated that "the number of life insurers has declined sharply during the past decade because of the increase in company mergers and acquisitions, demutualization of insurers, and formation of mutual holding companies." a. Why have mergers and acquisitions among insurers increased over time? b. What is the meaning of demutualization? c. Briefly explain the advantages of demutualization of a mutual life insurer. d. What is a mutual holding company? e. What are the advantages of a mutual holding company to an insurer?
Due to mergers and acquisitions companies can enjoy economies of scale by reducing their operating and overhead expenses. Not only this, through mergers companies can take over new line of business or diversify their business in any area.b. Demutualization is the process of where many mutual insurers can convert themselves into stock insurers. This process is also called as stocking. In this process owners of Mutual Insurance Company receive payout in the form of cash, shares or both.c. The advantages of demutualization are given below. 1. The firm after this process can raise new capital and enjoy greater flexibility in diversification of business. 2. It also can take advantages of tax treatment and stock options, which can be offered to best employees to attract and retain them for longer period.d. The mutual holding company can be said a blended company, because it possess characteristics of both mutual institution and stock insurer. These types of companies are founded by the reorganization of mutual companies. This type of company directly or indirectly controls an authorized insurance company.e. The advantages of mutual holding company are stated below. 1. A mutual holding company can quickly and in a less expensive way raise new capital. 2. As an insurer it can enter new areas of insurance very easily. 3. Stock options can be offered to best employees to attract and retain them.
Compare the risks of (i) fire with (ii) war in terms of how well they meet the requirements of an ideally insurable risk.
Fire insurance policy protects against the loss and damages caused due to fire. The policy of risk against war protects the insured person against the damages from war. The comparison and contrast of these two policies are as follows:
Pablo traded in his 2000 Ford for a new Ford. One week later, he hit an oily spot in the road on his way to work and skidded into a parked car. The 2000 Ford was insured under the PAP with full coverage, including a $250 deductible for a collision loss. At the time of the accident, Pablo had not notified his insurer of the trade-in. The physical damage to the parked car was $8000. Damage to Pablo's car was $5000. Will Pablo's PAP cover either or both of these losses? Explain.
Full 8000 to parked car per sec. A If a newly acquired vehicle replaces an automobile shown in the declarations, the newly acquired auto is automatically covered on the date of ownership, but the insured must notify the insurer within 14 days of becoming owner for the collision coverage to continue. Nathan's PAP will cover the collision loss to the new Ford as the accident occurred during the 14-day period. The amount paid is $4,750
Heather owns a home with a replacement cost of $400,000 that is insured under a Homeowners 3 policy for $280,000. The roof was badly damaged in a severe windstorm, and it will cost $20,000 to repair the roof. The actual cash value of the loss is $10,000. Ignoring any deductible, how much will Heather collect from the insurer?
HO-3 also called Homeowner 3 policy is an insurance policy that covers any damage and liability occurs in the home. The money receives from insurer = HO-3 Policy amount / (80%*Replacement cost) = 280000 / (80%*400000) = 87.5% In Amount, Damage claim * 87.5% = 20000 * 87.5% Insurance recoverable= $17500
Jennifer, age 28, is divorced and has a son, age one. Six months ago, Jennifer purchased an individual medical insurance policy covering the entire family. Her son was recently diagnosed with congenital heart disease. When Jennifer submitted the medical bill for her son's treatment, the insurer attempted to deny payment on the grounds that Jennifer had concealed her son's heart condition because the condition was not disclosed in the application at the time the policy was purchased. Can the insurance company legally deny payment of the claim under the Affordable Care Act? Explain your answer.
Health insurance policy: Patent Protection and Affordable Care Act was formulated in 2010 to health coverage to more than 35 million people who were without any health insurance. B wants to purchase a life insurance policy which will allow him to cover health. The provisions of Affordable Care Act will enable him to meet the needs of health insurance. Health insurance under Affordable Care Act: The provisions of Affordable Care Act are as follows: 1. Wide coverage: Affordable Care Act envisaged covering more than 35 million people who were deprived of any health insurance benefits. 2. Provide quality of health care: It aimed to provide quality health care and access to innovative medical therapies to all people of United States. 3. No discrimination: No discrimination will be made on the basis of salary to access health care benefits. 4. Lowering the cost of health insurance: This act provides that the health insurance companies will declare the rate and amount of premium charged on health insurances. It will ensure transparency in the premium charged by insurance companies and will help to lower down the cost of health insurances.
Buildings in flood zones are difficult to insure by private insurers because the ideal requirements of an insurable risk are difficult to meet. a. Identify the ideal requirements of an insurable risk. b. Which of the requirements of an insurable risk are not met by the flood peril? a. Identify the ideal requirements of an insurable risk. b. Which of the requirements of an insurable risk are not met by the flood peril?
If a risk meets the ideal criteria of the insurance then it called the insurable risk. There are 6 ideal requirements for insurable risk, these are as follows: - Large number of Exposure units - Accidental and Unintentional Loss - Determinable and Measurable Loss - No catastrophic Loss - Calculable chance of loss - Economically Feasible premium b. Calculable chance of loss is one of the important criteria of insurable risk, and the flood does not meet this requirement. The chances of occurring of flood cannot be calculated accurately because the chance of occurring of flood does not depend on past trend or data. It is totally uncertain and depend upon the nature.
Compare a stock insurer to a mutual insurer with respect to each of the following: a. Parties who legally own the company b. Right to assess policyholders additional premiums c. Right of policyholders to elect the board of directors
In stock insurers it is the stockholders who own the company legally. However in case of mutual insurers it is the policyholders who legally own the company. b. Only mutual insurers company has the right to assess policyholders' additional premiums. This means that premiums are assessed in advance which covers all the claims and expenses. c. In case of stock insurance, it is the stockholders who select the board of directors to run the company. However, in case of mutual insurers, it is the policyholders who select the board of directors to run the company.
a. Private insurers provide social and economic benefits to society. Explain the following benefits of insurance to society. (1) Indemnification for loss (2) Enhancement of credit (3) Source of funds for capital investment and accumulation b. Explain the major costs of insurance to society.
Indemnification of Loss: Indemnification of loss allows individual or firm to be come back in their actual financial position after the loss as they are in position before the loss occurred. Enhancement of credit: Insurance gives the option to the insured person to take high credit or exceed the credit limit. If the insured person unable to pay off his or her debt then insurance policy will mature and debt can be paid from that. Source of investment fund: Insurance is a good option of investment as well. Insured has to pay premium time to time to the insurance firm. This amount will help the insured in future if any loss occurred, and at that time higher fund need not to be required by the insured, because the insurance company compensate for the loss. b. There are various costs which an insurance company imposes on like cost of doing the business as insurance companies need land, labor, building etc. Fraudulent claim is another cost associated with the insurance business. Lastly, inflated claim is also one of the costs of insurance to the society which is related with it.
A newspaper reporter wrote that "Lloyds of London is an association that provides physical facilities and services to the members for selling insurance. The insurance is underwritten by various syndicates who belong to Lloyd's." Describe Lloyd's of London with respect to each of the following: a. Liability of individual members and corporations b. Types of insurance written c. Financial safeguards to protect insureds
Initially the members of the syndicate of LOL have unlimited legal liability to share the losses on agreed terms. In early 1990s many Names with unlimited legal liability did not paid off their share of losses, and they declared as bankrupt, so that no new members have unlimited legal liability.b. LOL does not write insurance rather it is written by syndicates that are member of LOL. It provides additional services to its members and market place for insurance like marine, aviation, catastrophe, professional indemnity and auto insurance coverage's. Therefore, LOL provides a marketplace to buy and sell insurance policies.c. LOL provides strong financial support to its insured. Each individual member or corporate supplies capital to LOL, they supply it to support their underwritings and this amount goes into a premium trust fund. A central guarantee fund is also available (in case of emergency) which will be used if the members go bankrupt and fails to meet their obligations.
James, age 18, lives at home and occasionally drives the car of his friend, Mary. Mary carries $300,000 of liability insurance on her car under a PAP. James is also insured under his mother's PAP, which provides $500,000 of liability coverage. Assume that James has an accident while using Mary's car and is found to be legally liable in the amount of $400,000. How much, if any, will each policy pay? Explain your answer
Insurance company of Mary Lynn will pay the complete liability amount of $ 300,000 whereas Insurance policy of mother of Jamison will pay only Rs. 100,000 (500,000 - 400,000) i.e., amount remaining after meeting the liability of $ 400,000.
A drunk driver ran a red light and smashed into Kristen's car. The cost to repair the car is $8000. She has collision insurance on her car with a $500 deductible. a. Can Kristen collect from both the negligent driver's insurer and her own insurer? Explain your answer. b. Explain how subrogation supports the principle of indemnity.
K will get the amount of physical damage and a deduction from her insurer. On the other hand, K can try to collect the requisite amount from the drunken driver directly. Principle of subrogation will not apply till the insurer makes a loss payment. b) This principle of subrogation is based on the principle of indemnity. It means the substitution of the insurer in place of the insured from a third party for a loss covered by insurance. This principle is used to safeguard the interest of insurer and the principle of indemnity because if the damaged property has left with some value or if the insured is allowed to retain that property, he can realize more than the actual loss which is against the principle of indemnity. The insured is allowed to proceed against the third party and is relived of liability.
a. Why are property and casualty insurance companies required to maintain loss reserves? b. Briefly explain the following methods for determining loss reserves: 1. judgment method 2. average value method 3. tabular method c. What is the incurred-but-not-reported (IBNR) loss reserve?
Loss reserves are one of the main liabilities of the property and casualty insurance companies. It is an estimated cost of those losses which are settled and have already occurred but yet to be paid on the specific date. These loss reserves are important to maintain for the property and casualty insurance companies because it is possible that damaged property or injured body claim might take a long time to settle. b) The methods for determining loss reserves are as follows : • Judgment method is a method wherein reserves are created for each claim individually and the claim amount is based on the judgment of someone in the claims department. • Under the average value method, an average value is created for each claim individually. This method is best to use when the claim amount is small and number of claims are high. • Under the tabular value method, reserves depend on the life expectancy, disability, and any other relative factor. Moreover, this method is often used to establish loss reserves involving permanent disability, partial permanent disability and similar claims. c) Incurred but not reported (IBNR) reserve is a reserve which is established for claims that are already occurred but yet to be reported in the balance sheet of the insurer. For example, some accidents may occur on the final day of the accounting period. Hence, a loss reserve is needed for these losses that will not be reported until the next accounting period.
Michael owns a small plane that he flies on weekends. His insurance agent informs him that aircraft are excluded as personal property under his homeowners policy. As an insured, he feels that his plane should be covered just like any other personal property he owns. a. Explain to Michael the rationale for excluding certain types of property, such as aircraft, under the homeowners policy. b. Explain some additional reasons why exclusions are present in insurance contracts.
Mr. M wants to cover his aircraft under a homeowner's insurance policy; however, the same cannot be covered under the policy. Aircraft is generally falls under exclusion in a homeowner's policy because of the following reasons: • Aircraft is subject to extraordinary hazards and therefore, subject to higher risks. • Separate insurance policies are available to cover aircraft. • Aircraft is normally not a part a common household, hence, homeowners policy are not designed to cover the risks. • Premium payable on homeowner's policy would not justify the risks covered and therefore, would provide gains to the insured. b) Exclusions are common part of insurance policies and are incorporated because of the following reasons: • Some perils are uninsurable. • Some risks are better covered through different category of insurance. • Existence of extraordinary hazards may also be present. • Existence of moral or attitudinal hazard problems. • Coverage not required by the insured. Hence, Exclusions are necessary because the risk may be considered uninsurable by commercial insurers.
Based on the following information, determine the policyholders' surplus for XYZ Insurance Company: Total invested assets $50,000,000 Loss reserves 40,000,000 Total liabilities 70,000,000 Bonds 35,000,000 Unearned premium reserve 25,000,000 Total assets 90,000,000
Policy holder's surplus is the difference of assets and liabilities of an insurance company. Calculate the Policy holder's surplus of XYZ Company with the help of the data given below: Total Assets = $ 90,000,000 Total Liabilities = $ $70,000,000 The formula is mentioned below: Total Assets - Total Liabilities Replace the values in the above equation 1. Hence, the policy holder's surplus for XYZ Company is $20,000,000.
Group term life insurance and group universal life insurance have different characteristics and objectives. Compare (1) group term insurance with (2) group universal life insurance with respect to each of the following: a. Period of protection provided b. Right to continue the coverage after termination of employment c. Availability of employer contributions
Preferred provider organizations (PPO) plan is where health care benefit is provided on certain medical services. These services are provided to members at discounted fees. There is not fixed payment to be made. The fee is generally lower than the regular fee. Patients can choose the hospital, physician, or provider when care is required. The actual charge and negotiated charge are different, for example, if the regular fee is $1,500 and negotiated amount is $950, the patient is not required to pay $550. There is no requirement to have permission from primary physician to see specialists. (a) PPO allows to low fee and coinsurance charges. In this case, M has used preferred providers and the expenses are approved by the insurer. The lost earnings are covered under workers compensation. Here, M is not covered for that. The total cost is $31,000 . M is required to pay $1,000 calendar year deductible. The out of pocket cost allowable is $3,000. Thus, M can collect $27,000 b) In PPO, M has the option to choose the hospital, physician, or provider when care is required. There is no requirement to have permission from primary physician to see specialists. Thus, M can receive medical care from outside specialist. The deduction and coinsurance payment will be higher.
A large casualty insurer writes a substantial amount of private passenger auto insurance. An actuary analyzed claims data for a specific class of drivers for a recent one-year policy period. The claims data showed that the insurer paid out $30 million for incurred losses and loss-adjustment expenses for each 100,000 cars insured for one year. Based on the pure premium method, calculate the pure premium.
Pure premium is that portion of the rate which is required to pay losses and loss adjustment expenses at the time of maturity of the policy. Pure premium is calculated by dividing the amount of incurred losses and loss adjustment expenses by the number of exposure unit. Calculate the Pure premium by using the details given below: Incurred losses and loss-adjustment expenses = $30million Number of exposure units of car = 100,000 Pure Premium = incurred losses/ number of exposure units Pure Premium = $300
Property Insurance Company is a new property insurer. The company is growing rapidly because of a new homeowners policy that combines traditional homeowner coverages with insurance that pays off the mortgage if the insured dies or becomes totally disabled. Premiums written have increased substantially; new agents have been hired; and the company is considering expanding into additional states. However, its growth has been hampered by statutory accounting rules that require an insurer to write off immediately its first-year acquisition expenses but do not allow full recognition of premium income until the policy period has expired. In this case, explain how reinsurance will enable Property Insurance to continue to grow in an orderly fashion.
Reinsurance will definitely help property insurance company to grow in an orderly fashion. Reinsurance increases the underwriting capacity for the company. In this the primary company has the authority to issue a single policy exceeding its retention limit for the full amount of insurance. Through reinsurance, a primary company can share the large part of its losses and its fluctuations with the reinsurer as part of losses will have to be borne by the reinsurer. Reinsurance helps in reducing the unearned premium reserve account (which is shown on the liability side of the insurer balance sheet) and increases the insurers surplus position. Thus, the insurer continues to grow. Finally, through reinsurance, a primary company can protect itself from any catastrophic loss as the reinsurer bears the loss exceeding the specified limit.
Property and casualty insurance can be marketed under different marketing systems. Compare the independent agency system with the exclusive agency system with respect to each of the following: a. Number of insurers represented by the agent b. Ownership of policy expirations c. Differences in the payment of commissions
Representation of various unrelated insurers: The independent agent represents several unrelated insurers. b. Ownership of policy expiration: For independent agent: Renewal rights: The independent agents have the renewal and expiration rights. At the time of renewal of the policy the independent agent can place another insurer before the insured party.
Based on the following information, determine Mutual Life Insurance Company's gain from operations before income taxes and dividends to policyholders: Total premium income $20,000,000 Licenses, taxes, and fees 580,000 Death benefits paid 6,000,000 Net investment income 3,000,000 Commissions paid 5,900,000 General insurance expense 2,500,000 Surrender benefits paid 800,000 Annuity benefits paid 1,600,000
Revenues Amount($) Amount($) Total Premium Income 20,000,000 Investment Income Net investment Income 3,000,000 Total Revenue 23,000,000 Expenses Licenses, taxes, fees 580,000 Death benefit paid 6,000,000 Commissions paid 5,900,000 General insurance exp. 2,500,000 Surrender benefits paid 800,000 Annuity benefits paid 1,600,000 Total expenses 16,800,000 Total gain from operations before tax 6,200,000
Sarah owns a valuable diamond ring that has been in her family for generations. She is told by an appraiser that the ring has a current market value of $50,000. She feels that the ring is adequately insured because she purchased a Homeowners 3 (special form) policy. Is Sarah correct in her thinking? If not, what would you advise her concerning proper protection of the ring?
The diamond ring will come under the Jewelry. Under Homeowners 3 policy, jewelry is covered but the maximum to the limit of $1,500, and the market value of ring is $50,000, so Ms. S does not have adequate insurance for ring. She should buy an insurance policy with full coverage to cover the loss of diamond ring.
Felix is a property claims adjustor for a large property insurer. Janet is a policyholder who recently notified the company that the roof of her home incurred substantial damage because of a recent hail storm. Janet owns her home and is insured under a standard homeowners policy with no special endorsements. What questions should Felix ask before the claim is approved for payment by his company?
The firm F could ask the following questions before approving the claim: • Did the loss occur during the policy period? • Does the policy cover the hail storm loss? • Does the policy cover the property destroyed in the loss? • Can the claim be recovered? • Does the loss occur at an insured location?
Kathy, age 29, is married and has a son, age 3. She owns a $100,000 ordinary life insurance policy that contains a waiver-of-premium provision, guaranteed purchase option, and accelerated benefits rider. Kathy has several financial goals and objectives for her family. For each of the following situations, identify an appropriate contractual provision or policy benefit that will enable Kathy to meet her financial goals. Treat each situation separately. a. If Kathy dies, she wants the policy proceeds to be paid in the form of monthly income to the family until her son attains age 18. b. Kathy is totally disabled in an auto accident when she failed to stop at a red light. After six months, she has not recovered and remains totally disabled. As a result, she cannot return to her former job or work in any occupation based on her previous training and experience. She finds that the premium payments for life insurance are financially burdensome. c. When she retires, Kathy would like to have the cash value in the policy paid to her in the form of lifetime income. She wants the payments to continue for at least 10 years. d. Kathy is terminally ill from a serious heart condition. Kathy's physician believes she will die within one year. Kathy has no savings and health insurance, and her medical bills are soaring. She needs $50,000 to pay all medical bills and other financial obligations. e. Three years after the policy was issued, Kathy was diagnosed with breast cancer. As a result, she is now uninsurable. She would like to purchase additional life insurance to protect her family.
The following are the appropriate policy contractual provisions or policy benefits which would enable Mrs. K to meet her financial goals: a) Fixed period option of settlement allows the payment of the policy proceeds in the form of monthly income for a fixed period. Thus, this option can be used by Mrs. K to provide monthly income till her son reaches age of 18 years. b) Waiver of Premium provision is a provision by which premium would be waived, although all the benefits of the policy would continue, if the insured is totally disabled. This provision would assist Mrs. K to avoid the premium, in case she is disabled. c) Life income with guaranteed period provides an option for the payment of policy proceeds to the insured in form of income after retirement. The provision also guarantees the payment for a specified number of years. This would meet the financial goals of Mrs. K. d) Accelerated benefit provision allows the withdrawal of life insurance death benefit in whole or part, before the death of the insured, and would help in the payment of the medical bills and other expenses. This provision can be used by Mrs. Kathy to generate $ 50,000 for medical bill payments. e) Guaranteed purchase option allows the insured to purchase additional amount of insurance at specified times without the evidence of insurability. This provision would allow Mrs. K to purchase additional amount of insurance for her family.
Ashley purchased a dining room set for $5000 and insured the furniture on an actual cash value basis. Three years later, the set was destroyed in a fire. At the time of loss, the property had depreciated in value by 50 percent. The replacement cost of a new dining room set at the time of loss was $6000. Ignoring any deductible, how much will Ashley collect from her insurer? Explain your answer.
The following information is known: Replacement cost of new dining room = $6,000 Depreciation = 50% Calculate the total amount that Ms. A will collect from her insurer by using the formula mentioned below: Actual Cash Value= Replacement cost - Depreciation =$6000 - ($5,000*50%) =$3,500
Doug, age 40, is the owner of a small firm that sells window blinds and cleans carpets. The company provides health insurance for seven employees. The wife of one employee has breast cancer and has incurred substantial medical bills, which resulted in a 40 percent increase in health insurance premiums for the company. Doug is not certain that the company can continue to provide health insurance for the employees because of the substantial increase in premiums. Explain the provision in the Affordable Care Act that will enable Doug to provide affordable health insurance to his employees.
The following provision will enable D to provide affordable health plan for his employees. Affordable insurance exchange: Under this provision individual as well as small employers can buy affordable and qualified health policy and can apply for premium subsides via state based insurance exchanges. It allows comparison shop of health insurance packages, and also provides the option to enroll in various available plans, and to administer premium credit, so that people of all income groups can get coverage.
Richard, age 45, is married with two children in high school. He estimates that his average annual earnings over the next 20 years will be $60,000. He estimates that one-third of his average annual earnings will be used to pay taxes, insurance premiums, and the costs of self-maintenance. The remainder will be used to support his family. Richard wants to calculate his human life value and believes a 6 percent discount rate is appropriate. The present value of $1 payable for 20 years at a discount rate of 6 percent is $11.47. Calculate Richard's human life value.
The human life value can be defined as the present value of the family's share of the deceased bread earning member of the family. The following information is known: Annual Income= $ 60,000 Family's share of annual income = 2/3rd of $ 60,000 Hence, the family's share of annual income is = $40,000 Calculate the human life of Mr. R by using the formula mentioned below: Human Life Value=Family's Share of Annual Income x Present Value Factor =$40,000*11.47 =$458,808
a. The human life value is one method for estimating the amount of life insurance to own. Keeping all other factors unchanged, explain the effect, if any, of each of the following: 1. The discount rate used to calculate the human life value is increased. 2. The amount of average annual income going to the family is increased. 3. The period over which income is paid to the family is reduced. b. Explain the limitations of the human life value approach as a method for determining the amount of life insurance to own.
The human life value generally depends on various factors such as annual income, interest rate and period of income. The changes in the above factors will impact the human life value. The effect on the elements such as discount rate or annual income is as follows: 1. An increase in discount rate will decrease the human life value. The discount rate is a representation of the interest rate. Hence, a higher discount rate would reduce the present value. 2. An increase in average annual income leads to an increase the human life value. The increase in the human life value generally depends upon the disposable income of the person. 3. The decrease in the period of the income would automatically reduce the human life value. b) The human life value approach has the following limitations: 1. The method does not consider other sources of income such as social security benefits. 2. Income and expenses are considered to be constant and employee benefits are ignored. 3. The money allocated to the family can change due to the birth of child, death of the member or divorce, but these factors are ignored. 4. The effects of inflation on expenses and earnings are ignored.
Jim, age 32, purchased a $300,000 five-year renewable and convertible term insurance policy. In answering the health questions, Jim told the agent that he had not visited a doctor within the last five years. However, he had visited the doctor two months earlier. The doctor told Jim that he had a severe heart problem. Jim did not reveal this information to the agent when he applied for life insurance. Jim died three years after the policy was purchased. At that time, the life insurer discovered the heart ailment. Explain the extent of the insurer's obligation, if any, with respect to payment of the death claim.
The incontestable clause states that the insurer cannot contest the policy, if the policy has been in force for two years or more. The insurer therefore cannot contest or refuse after two years of death claim, stating that the policy was taken based on material misrepresentation, fraud and concealment. For example, if the insured has not disclosed that he had high blood pressure and he dies within two years of the policy, the insurer can contest the death claim. The same cannot be contested, if the death takes place after two years of the policy. Based on the above clause it can be concluded that in the given case the insurer cannot deny insurance obligations as three years had already passed during which the insurer could not identify the disease of Mr. J. Hence the policy would be effective in whole and claims of Mr. J cannot be determined by the insurer.
Craig owns a home with a replacement cost of $200,000 that is subject to a $100,000 mortgage held by First Federal as the mortgagee. Craig has the home insured for $160,000 under the HO-3 policy, and First Federal is named as mortgagee under the Mortgage Clause. Assume there is a covered fire loss to the dwelling in the amount of $50,000. To whom would the loss be paid? Explain your answer.
The mortgage clause within the homeowner's policy is designed to protect the loan provider (mortgagee), usually a commercial bank. The mortgage is used as collateral for the housing loans approved, therefore if the house is lost or damaged, the bank is facing a loss on its loan. Therefore, the mortgage clause protects the bank in a way that guarantees that in the case of damage, the bank will receive payment in the amount of its interest. Since the mortgage amounts to $100,000 and the fire loss is $50,000, the loss is lower than the bank's interest, meaning that the total of $50,000 would be paid to the mortgagee.
Megan owns an antique table that has a current market value of $12,000. The table is specifically insured for $12,000 under a valued policy. The table is totally destroyed when a tornado touches down and damages Megan's home. At the time of loss, the table had an estimated market value of $10,000. How much will Megan collect for the loss? Explain your answer.
The principle of indemnity states that the insurer does not get more than the actual amount of loss. The amount of loss can be determined by replacement cost less depreciation or fair market value or by broad evidence rule (valued by expert). However, there is an exception to the principle of indemnity. One of the exception is valued policy. A valued policy will pay the face amount in case of total loss. In this case, an antique table current market value is $12,000. The valued policy is for $12,000. After a tornado, there is damage to the table and the current market value is $10,000. Since this is a valued policy. The amount of insurance of the face value will be received by the insurer. Thus, M will collect from the valued policy. This is regardless of the actual loss.
Liability Insurance Company writes a substantial amount of commercial liability insurance. A large construction company requests $100 million of liability insurance to cover its business operations. Liability Insurance has a reinsurance contract with Bermuda Re that enables the coverage to be written immediately. Under the terms of the contract, Liability Insurance pays 25 percent of the losses and retains 25 percent of the premium. Bermuda Re pays 75 percent of the losses and receives 75 percent of the premium, less a ceding commission that is paid to Liability Insurance. Based on the preceding, answer the following questions: a. What type of reinsurance contract best describes the reinsurance arrangement that Liability Insurance has with Bermuda Re? b. If a $50 million covered loss occurs, how much will Bermuda Re have to pay? Explain your answer. c. Why does Bermuda Re pay a ceding commission to Liability Insurance?
This is a case of quota share treaty where the primary insurer and the reinsurer agree to share the profits and losses on the basis of quota or certain percentage. b. BR pays 75 percent of the losses less a ceding commission that is paid on liability insurance. There is a loss of $50 million. BR share will be $37.5 million less a ceding commission that is paid to liability insurance.c. BR pays a ceding commission to liability insurance to compensate for the expenses incurred in writing the business.
A group of investors are discussing the formation of a new property and liability insurer. The proposed company would market a new homeowners policy that combines traditional homeowner coverages with unemployment benefits if the policyholder becomes involuntarily unemployed. Each investor would contribute at least $100,000 and would receive a proportionate interest in the company. In addition, the company would raise additional capital by selling ownership rights to other investors. Management wants to avoid the expense of hiring and training agents to sell the new policy and wants to sell the insurance directly to the public by selective advertising in personal finance magazines. a. Identify the type of insurance company that best fits the above description. b. Identify the marketing system that management is considering adopting.
Two types of insurance companies exist, one is Mutual Insurance Company and another is Stock Insurance Company. In a mutual insurance company the owners of the company are policyholders', whereas in a stock insurance company the owners are the investors. In the given case, the insurance company is a Stock Insurance Company, because raising of additional capital is only possible in stock insurance company. b. Since, management wants to avoid the hiring of agents and personalized selling, which can be easily done by adopting direct response system marketing strategy. In this life and health insurance policies are sold directly to customers through telemarketing, television or websites.
Additional riders and benefits often can be added to a life insurance policy to provide greater protection to the insured. Describe each of the following riders and options: a. Waiver-of-premium provision b. Guaranteed purchase option c. Double indemnity rider d. Cost-of-living rider e. Accelerated benefits rider
Waiver of Premium provision is a provision by which premium would be waived if the insured is totally disabled from the bodily injury or disease before some stated age. The insured must fulfill the following criteria to claim the requirement: • Must become disable before a specified age which can be 60 or 65 years. • Continuous disability for 6 months. • Satisfy the total disability definition. • Provide necessary proof to the insurer. b) Guaranteed purchase options allow the insured to purchase additional amount of insurance at specified time without the evidence of the insurability. The option ensures assurance of the future insurability. This option is suitable, where the insured is of sub-standard health and needs additional insurance. c) The double indemnity rider doubles the insurance amount, if the death occurs due to an accident. The following requirements must be satisfied: • Death must be caused by bodily injury in an accident. • Death must occur within one year of the accident • Death must take place before a specified age. d) The cost of living rider allows the policyholders to purchase insurance amounts which equals to the percentage change in the consumer price index with no evidence of insurability. For example , an insurance of $ 100,000 with the cost of living rider would allow the policy holder to buy $ 5,000 additional insurance, in case of an increase of consumer price index of 5%. e) Accelerated death benefit allows the policyholder to withdraw a part or whole of the death benefit, if the policy holder is suffering from chronic disease. In such cases, the policy holder can withdraw the amount before death to pay the medical bills and other expenses.
Jake borrowed $800,000 from the Gateway Bank to purchase a fishing boat. He keeps the boat at a dock owned by the Harbor Company. He uses the boat to earn income by fishing. Jake also has a contract with the White Shark Fishing Company to transport tuna from one port to another. a. Do any of the following parties have an insurable interest in Jake or his property? If an insurable interest exists, explain the extent of the interest. 1. Gateway Bank 2. Harbor Company 3. White Shark Fishing Company b. If Jake did not own the boat but operated it on behalf of the White Shark Fishing Company, would he have an insurable interest in the boat? Explain.
a) 1. G bank has the insurable interest on Mr. J's property because J has borrowed money from that bank and he has paid his loan amount by earning from that property. 2. H Company does not have any insurable interest on the J's property because J has only used the dock of that company and for that purpose he has already paid to that company. 3. W company has the insurable interest on the J's property because that company used his boat to transport its material to one place to another. b) J has the insurable interest on the boat even if he does not own the boat because both J and W Company earns from that boat and earning of both the companies generally depends on the boat.
Private insurance provides numerous coverages that can be used to meet specific loss situations. For each of the following situations, identify a private insurance coverage that would provide the desired protection. a. Emily, age 28, is a single parent with two dependent children. She wants to make certain that funds are available for her children's education if she dies before her youngest child finishes college. b. Danielle, age 16, recently obtained her driver's license. Her parents want to make certain they are protected if Danielle negligently injures another motorist while driving a family car. c. Jacob, age 30, is married with two dependents. He wants his income to continue if he becomes totally disabled and unable to work. d. Tyler, age 35, recently purchased a house for $200,000 that is located in an area where tornadoes frequently occur. He wants to make certain that funds are available if the house is damaged or destroyed by a tornado. e. Nathan, age 40, owns an upscale furniture store. Nathan wants to be protected if a customer is injured while shopping in the store and sues him for the bodily injury.
a. Life Insurance b. Auto Insurance c. Disability Insurance D. Home Owners Insurance E. Liability Insurance
One requirement for the formation of a valid insurance contract is that the contract must be for a legal purpose. a. Identify three factors, other than the legal purpose requirement, that are essential to the formation of a binding insurance contract. b. Explain how each of the three requirements in part (a) is fulfilled when the applicant applies for an auto insurance policy.
• Offer and acceptance: The first important requirement is that there has to be an offer by one party and acceptance of the terms and conditions of the insurance contract by the other party to the contract. In insurance contracts, the offer is usually put up by the applicant of the insurance, and it is accepted or rejected by the insurance provider based on its due diligence. • Consideration: The second requirement is that there has to be some consideration paid by each party to the other. The insured pays to the insurer a periodic premium, and the insurer agrees to cover up for financial losses in case of insured events. • Competent parties: This requirement specifies that each party entering the contract must be legally competent and able to do so. For example, no party should be mentally unstable, intoxicated, etc. In case of the insurance provider, it must have the necessary license to sell insurance, etc.
