RMIN4000 FINAL EXAM BROWN

Measure and analyze the loss exposures (step 2)

"Putting data to it"!! Estimate the frequency and severity of loss exposures. Frequency (probability) - How often does the loss occur? Severity (outcome) - How much does it cost when a loss occurs? Always prioritize severity over frequency Analyze!!! Rank loss exposures according to relative importance! Severity is more important!!! Maximum Possible Loss - The WORST loss that could happen to the firm during its lifetime Probable Maximum Loss (PML) - The worst loss that is LIKELY to happen

Res Ipsa Loquitur

"The thing speaks for itself" The very fact that the injury or damage occurs establishes a presumption of negligence Three requirements: The event is one that normally does not occur in the absence of negligence, the defendant has exclusive control over the instrumentality causing the accident, the injured party has not contributed to the accident in any way

policy forms

"This is what's covered, this is what isn't", "These are the perils", etc. Policy forms and endorsements must be filed with the state department of insurance Purpose is to protect consumers from misleading, deceptive, or unfair provisions Contract adhesion: One company drafts the policy & the consumer has to agree to it ... cant make modifications EXAMPLE: Brown was writing a policy for organic farms and a non-organic farm over sprayed herbicides and pesticides onto organic farm ... organic farm files suit & Brown has to rewrite policy forms & get them approved

Traditional Risk Management

- Risks are evaluated in a "silo" approach - Losses are usually insurable, pure risks Personal risks, Liability risks, Property risks (direct loss), Net Income risks (indirect loss) ALSO: Evolution - 1990s - Companies began expanding to include speculative financial risks

Pure vs. Speculative Risk

-A pure risk is a situation in which there are only the possibilities of loss or no loss (earthquake) -A speculative risk is a situation in which either profit or loss is possible (gambling)

Lannister Insurance Company insures 200,000 vehicles. In 2019, they paid a total of $136,000,000 in collision losses to the owners of 16,000 of those vehicles. What was Lannister's collision loss frequency in 2019?

0.08 (16k/200k)

types of mutual insurers

1. Assessment Mutual- Insurer has the right to assess policyholders an additional amount if the insurer's financial operations are unfavorable 2. Advance Premium Mutual- Insurer does not issue assessable policies 3. Fraternal Insurer- Provides life and health insurance to members of a social or religious organization. Must be a non-profit organization that does not issue common stock

Claim Settlement

1. First Party- claim submitted by the insured to the insurer. Fire, theft, hail, etc. 2. Third Party- claim submitted against a negligent insured for bodily injury, physical damage, personal injury. Insurer pays damages to the third party.

Steps in the Risk Management Process

1. Identify loss exposures 2. Measure and analyze the loss exposures 3. Select the appropriate combination of techniques for treating the loss exposures 4. Implement and monitor the risk management program

Lloyd's Structure

1. Lloyd's Brokers - Represent policyholders to arrange coverage with syndicates 2. Lloyd's Syndicates - Offer insurance contracts in the market

Goals of insurance regulation

1. Maintain insurer solvency 2. Educate consumers 3. Ensure Reasonable Rates 4. Make Insurance Available

P&C Ratemaking Methods

1. Pure Premium 2. Loss Ratio 3. Merit (scheduled, experience, retrospective) 4. Judgement

Requirements of Insurance Contract

1. offer and acceptance 2. consideration 3. competent parties 4. legal purpose

What is the actual cash value of a 5 year old refrigerator with a 10 year useful life? It cost $1,500 when originally purchased, but costs $2,000 brand new today?

1000 (5/10=50% depreciation) so ACV=RC-DEPR so 2000-1000=1000

Samir is using the Needs Approach to determine how much life insurance to buy. He has calculated the following: cash needs of $30,000, income needs of $170,000, and special needs of $200,000. His current assets total $50,000. Based on the Needs Approach, how much life insurance does Samir need?

350,000

Agent Michael Scarn sells insurance for the Federal Bureau of Insurance (FBI). He is quoting a property insurance policy for Samuel Chang, the owner of an office building. The office building is 15,000 square feet and FBI charges a gross rate of $25 per 100 square feet. What is the gross premium for the property policy covering the office building?

3750 (15K feet/ 100 feet = 150ft * 25$ = 3750$)

Felix Gallardo has a Personal Auto Policy with liability limits of $100,000 / $300,000 / $50,000. What is Felix's limit for property damage?

50,000

Average Joe Insurance has entered into a Surplus Share reinsurance agreement with Globo Re. The reinsurance treaty covers Average Joe's Commercial Property line of business and includes a $250,000 retention. Average Joe insures a gymnasium for $1,500,000. The owners of the gymnasium pay Average Joe $15,000 in premium for the policy covering the factory. If the factory sustained a $600,000 loss, how much is Globo Re responsible for?

500,000 (250,000/1,500,000} * 600,000)

Vincent recently broke his arm and had to go to the Emergency Room. The resulting medical bills were $2,000. Vincent's health insurance includes a $1,000 deductible and an 80-20 coinsurance clause. How much will his insurance company pay for the medical bills?

800 (2000-1000=1000 * .8= 800)

Lannister Insurance Company insures 200,000 vehicles. In 2019, they paid a total of $136,000,000 in collision losses to the owners of 16,000 of those vehicles. What was Lannister's collision loss severity in 2019?

8500 (136M/16K)

Charlie Harper has a Personal Auto Policy with liability limits of $50,000/$100,000/$25,000. While speeding down the Pacific Coast Highway, Charlie loses control of his car and hits an SUV with two people inside. From the SUV, one person's injuries are $40,000 and the other's are $75,000. How much will Charlie's policy pay in total for bodily injuries?

90,000

All of the following are examples of operational risks EXCEPT: a) changing conditions in financial markets b) employment practices c) customer service d) supply chain

A

avoidance

A certain loss exposure is never acquired or an existing loss exposure is abandoned. Advantage --> Frequency is reduced to 0! Disadvantage- May not be possible/ Opportunity Cost/ Avoiding one loss exposure may lead to another. EXAMPLE: Don't want to live in CA because of wildfires, so you move to FL ... now you have a risk of hurricanes!!!

Mutual Insurer

A corporation owned by policyholders Policy holders elect board of directors who appoint executives. Profits are distributed to policyholders by dividends or rate reductions. Examples: StateFarm, Nationwide, NW Mutual, Liberty Mutual. Not as profit driven ... more commonly give out rate reductions rather than dividends

Variable Life Insurance

A fixed-premium policy in which the death benefit and cash values vary according to investment experience Policyholder has input into how cash-value is invested No minimum guaranteed cash values

tort

A legal wrong for which the court allows a remedy in the form of monetary damages Plaintiff - the person who is injured Tortfeasor - the alleged wrongdoer Intentional Tort - Intentional act or omission resulting in harm or injury to another person or damage to their property. Examples: Libel, Slander, Invasion of privacy, Assault & Battery

excess insurance

A plan in which the insurer pays only if the actual loss exceeds the amount a firm has decided to retain Auto - $300k ... Home - $300k Paid by the umbrella policy, coverage above the amount you need

valued policy

A policy that pays the face amount of insurance if a total loss occurs (life insurance) ... Unique items ... famous paintings ... life insurance EXAMPLE: Brown's friend has RC of $250,000 because it is 100 years old & the way it was built is unique & materials aren't readily available Valued Policy Law (in some states) Requires payment of the face amount of insurance if a total loss to real property occurs from a peril specified in law..... EXAMPLE: House burns all the way to the ground ... insurance must pay out face value of loss!

Deductible

A provision by which a specified amount is subtracted from the total loss payment that would otherwise be payable Property insurance, health insurance Dollar amount that's deducted at the time of a claim Auto insurance w/ $500 deductible but $1000 in damage ... you have to pay $500 of that $1000 but insurance pays the other $500. Eliminate small claims Its relatively expensive for an insurance company to adjust small claims May cost $300 in expenses for a $200 claim Reduce premiums Pure premium = frequency x severity Both frequency & severity are reduced Reduce moral & morale hazard Dishonest ppl may not be able to afford deductible People are less careless if they know it will cost them money (skin in the game) Satisfies principle of Indemnity

diversifiable risk

A risk that affects only some individuals, businesses, or small groups. can be reduced through diversification, risks are NOT correlated. EX: risk of your car catching on fire has no correlation to risk of it getting stolen

warranty

A statement that becomes part of the insurance contract and is guaranteed by the maker to be true in all respects. A condition agreed to by an insured in order to receive coverage. Violation of a warranty may result in a claim being denied. EXAMPLE: If a set of stairs doesn't have a railing, insurer can make insured put in a railing ... if insured doesn't and someone falls down stairs, insurer will not cover it for insured

Who handles the ratemaking function within insurance companies?

Actuaries

global high cost of HC

Advances in Technology MRI Organ Transplants Robotics Aging population Behavioral factors Third-party financing No incentive to control costs Overutilization

noninsurance transfers

Advantages - Can transfer some losses that are not insurable, Less expensive, Can transfer loss to someone who is in a better position to control loss. Disadvantages - Contract language may be ambiguous, so transfer may fail, If other party fails to pay, firm is still responsible for the loss, Insurers may not give credit for transfers

no-fault insurance

After an accident involving bodily injury, each party collects from their own insurer regardless of fault. Pure No-Fault - Accident victims cannot sue at all, no payments for pain and suffering Modified No-Fault - Accident victims can sue if bodily injury exceeds a certain dollar amount or verbal threshold (death, dismemberment, etc.) Personal Injury Protection (PIP) endorsement added to policy. Benefits restricted to economic loss: Medical expenses Loss of earnings Essential services expenses (housework) Funeral expenses Survivors' loss benefits

Captive Agent

Agent represents only one insurer or group of insurers under common ownership. Agents are generally paid a lower commission rate on renewal business than on new business. Agents usually do not own the expirations or renewal rights to the policies. Insurers provide strong support services to new agents

twisting

Agent/Broker gets higher commission at another insurance company so he tries to convince policyholder to switch insurance agencies

reinsurance pools

Agreement between a number of companies where participants collectively reinsure a large group of risks Ceding companies cede risks into the pool and the participants share in a predetermined percentage of the premium and losses EXAMPLE: GA Farm Bureau entered into pool with other states to cover potential terrorism losses

Loss should not be catastrophic to insurer

Allows pooling technique to work. EXAMPLE: Terrorism, flood, earthquake Why is a catastrophic loss problematic? Catastrophes are infrequent, so there isn't prior data to base decisions on. Clash loss= multiple insurance agencies have to pay out a bunch of money at the same time. EXAMPLE: 9/11 ... companies had insurance, people had life insurance, liability to airlines, workers comp, etc. --> Largest insured loss in history! Solutions for insurers: Reinsurance & Diversification

OTC

Also referred to as Comprehensive (Comp) Loss due to the following perils: Missiles or falling objects, Hail, water, flood, fire, windstorm, Theft or larceny, Explosion or earthquake, Malicious mischief or vandalism, Riot or civil commotion, Contact with a bird or animal, Glass breakage. side note, a non owned auto (Coverage also applies to temporary substitute vehicle) is a vehicle not owned by or made available for the regular use of the named insured or family member

Prospective Loss Costs (pure premium)

Amount needed to pay future claims and loss adjustment expenses. Loss adjustment expense: Expenses that go along with individual claims ... Paying fire damage expert to examine cause of fire. Go with specific claims!

Expense Provision (load)

Amount needed to pay future expenses (acquisition, overhead, premium taxes) 30% of overall rate

Profit and Contingencies (Risk Charge)

Amount needed to protect against the possibility the actual claims and expenses exceed projections

aggregate deductible

Amount the insured is responsible for in total (over all losses during the policy period) before the insurer pays anything Health insurance!!!!! EXAMPLE: $1000 deductible ... Dr. Appt on 1/31 costs $600, insured pays all $600, insurer pays $0 ... Dr. Appt on 2/17 costs $900, insured pays remaining $400 on deductible, insurer pays the remaining $500 for appt

straight deductible

Amount the insured is responsible for per loss before the insurer pays anything. Property, auto, houses EXAMPLE: $1000 deductible ... Accident 1 on 4/21 w/ $10000 in damages, Insured pays $1000 & insurer pays $9000 ... Accident 2 on 6/15 w/ $900 in damages, Insured pays $1000 deductible & insurer pays $0

Direct Writer

An insurer in which the salesperson is an employee of the insurer, not an independent contractor. Employees are usually compensated on a "salary plus" arrangement

captive insurer

An insurer owned by a parent firm for the purpose of insuring the parent firm's loss exposure. Single-parent captive is owned by only one parent Association or group captive is an insurer owned by several parents. EXAMPLE: Very Good Company gets insurance from insurer ... premium is too high, so VGC opens their OWN Very Good Captive Insurance Company, so the premiums are less, but the losses for VGCIC directly impact VGC ... VGCIC only insures specific loss exposures. EXAMPLE: If ABC company & XYZ company join VGC, it become a group captive!

Underwriting Sources of Information

Application, Agent, Physical Inspection (property insurance) Check possible hazards around a property ... leaky roof? Weak wood? Fire hydrant in front yard? Etc. Physical Examination (life insurance) Claim files (existing policies) Vendor reports Fire Protection (property) Score 1-10 ... 1 being really good = fire hydrant & fire station close buy ... minimizes severity of fire Motor Vehicle Record (MVR) Credit-Based Insurance Score Comprehensive Loss Underwriting Exchange (CLUE)

Jim Halpert and his wife, Pam, are selling the home they've lived in for the past seven years. They are aware of an electrical problem in the home that they do not want to fix because it would be expensive. Potential buyers of the home are unaware of the electrical problem. This is an example of:

Asymmetric Information

Underwriting Principles

Attain an underwriting profit Premium brought in > losses/expenses paid out Select prospective insureds according to the company's underwriting guidelines Provide equity among the policyholder Similar policyholders should pay similar amounts 20 year old & 80 year old shouldn't pay same amount for life insurance Minimize adverse selection & asymmetric information

characteristics of PULP

Broader coverage than underlying policies (includes libel, slander, invasion of privacy, etc). 85% of umbrella claims are due to auto accidents. Also covers defense costs/attorney fees. Relatively inexpensive, cost for $1million in coverage is usually $300/year. As income increases, you become a target. VERY IMPORTANT.

Term Insurance

Can be provided for 5, 10, 15, 20, 25, or 30 year periods (terms). Premiums paid during the term are level, but increase if renewed. Most policies are renewable, meaning the policy can be renewed without evidence of insurability. Most policies are convertible, meaning the term policy can be exchanged for a cash-value policy without evidence of insurability. Appropriate when the amount of income that can be spent on life insurance is LIMITED, need for protection is temporary, Insured wants to guarantee future insurability. Limitations: Premiums increase with age at an increasing rate & eventually reach prohibitive levels, Inappropriate if you wish to save money for a specific need.

advantages of captive insurer

Can help a firm when insurance is expensive or difficult to obtain lower costs, No agent or broker commissions, Interest earned on invested premium, Easier access to reinsurance market, Possible of lower tax rate, possibility of favorable regulatory environment.

whole life insurance benefits

Cash-Value policy that provides lifetime protection Stated amount is paid to a designated beneficiary when the insured dies, regardless of when the death occurs Can get cash-value back. Maintain coverage for your entire life (vs. a certain time period with term) Accumulate savings (cash-value). BAD PART IS HIGH PREMIUMS.

foreign insurer

Chartered (domiciled) in another state, but licensed to operate in the state State Farm is domiciled in Illinois, but they are licensed to operate & write insurance in GA

Alien Insurer

Chartered in a foreign country, but licensed to operate in the state

who needs life insurance

Child- Probably don't need it b/c of income, but might get it because of additional expenses that could be incurred Single person - NO children- Probably not Single person - w/ children - Definitely need life insurance Married - NO children - Depends ... can I maintain a standard of living if spouse passes? Married w/ children - both spouses work - Absolutely need life insurance on breadwinner & potentially on lower earner Married w/ children - one spouse works - Certainly need it on working spouse.

damages

Compensatory Damages - Compensate the victim for losses actually incurred. This includes special damages- Provide compensation for medical expenses, lost earnings, or property damages and General Damages- Cannot be specifically measured (pain & suffering). Punitive damages - Designed to punish people and organizations so that others are deterred from committing the same wrongful act.

hazard

Condition that creates or increases the frequency and/or severity of a loss, but does NOT cause a loss. FOUR TYPES: physical, moral, morale, legal.

Enterprise Risk Management

Considers all risks an organization (business) faces across the entire enterprise ... Holistic/interconnected view of risk. Typically headed by Chief Risk Officer (CRO) and used in large organizations. Creates a "risk culture" within the organization in which everyone is responsible for identifying and managing risk.

rating for HOI

Construction Type -Wood houses cost more to insure than brick because it burns quicker Geographic Location - Closer to coast? Cold place? Tornado alley? Fire Protection - Lower number, closer to fire dept. Lower premium Reconstruction Cost Form Type - Less coverage, cheaper HI Year of Construction Deductible - Higher deductible lower premium Insurance Score - Higher score, lower premium Roof Factors

personal contract

Contract is between the insured and insurer. Policy cannot be validly assigned to another party without the insurer's consent. Assignment of Benefits.

legal purpose

Contract that encourages something illegal or immoral is contrary to public interest and cannot be enforced Can Walter White buy property insurance to cover his meth lab? Technically yes, if they don't ask. However, he is breaking the legal doctrine of concealment

legal defenses

Contributory Negligence- The injured person cannot collect damages if his or her care falls below the standard of care required for his or her protection Under strict application of common law, the injured cannot collect damages if his or her conduct contributed in any way to the injury. Comparative Negligence- The financial burden of the injury is shared by both parties according to their respective degrees of fault. Pure Rule - You can collect damages even if you are negligent, but your reward is reduced in proportion to your fault 50 percent rule (STATE OF GA USES THIS) You cannot recover if you are 50 percent or more at fault also 51 percent rule-You cannot recover if you are 51 percent or more at fault. Last Clear Chance Rule - A plaintiff who is endangered by his or her own negligence can still recover damages from the defendant if the defendant has a last clear chance to avoid the accident but fails to do so. Assumption of Risk Doctrine - A person who understands and recognizes the danger inherent in a particular activity cannot recover damages in the event of an injury

Replacement Cost

Cost to replace property with an item of like kind and quality (similar workmanship and materials) EXAMPLE: If my laptop breaks, how much will a similar one cost?

Cov A and B

Coverages_____ Dwelling) and _____ (Other Structures) are open perils Exclusions to ______ & _____. Collapse (except as covered in Additional Coverages) Freezing of pipes if building is not heated Theft of materials from building under construction Vandalism if vacant more than 60 days Mold, fungus, or rot unless caused by covered loss Wear and tear, mechanical breakdown Birds, rodents, insects; nesting or infestation

uninsured motorist coverage

Covers bodily injury caused by an uninsured motorist, a hit-and-run driver, or a negligent driver whose insurance company is insolvent. Property damage may also be covered (depending on the state). The uninsured motorist must be legally liable. Who has uninsured motorists coverage in policy under the PAP? The named insured and family members, Another person while occupying a covered auto, Any person legally entitled to recover damages (ex. surviving spouse). What vehicles are considered to be uninsured? A motor vehicle or trailer for which no bodily injury liability insurance policy applies at the time of the accident

Cov B

Covers other structures on the residence premises set apart from the dwelling by clear space. Examples: Detached garage, Shed (if on a foundation), Fence, etc. Structures that are rented out or used for business are excluded.

Cov C

Covers personal property owned or used by an insured while it is anywhere in the world BUT coverage for personal property at another residence or in storage is limited to 10% of the Coverage C limit or $1,000, whichever is greater. jewelry up to 1500, money up to 200, firearms/gold up to 2500. Coverage for - Fire/lightning Wind/hail Explosion Aircraft and vehicles Vandalism Theft (subject to exclusions Falling objects Weight of ice/sleet/snow Accidental discharge of water/steam Freezing if building is heated

medical payments coverage

Covers reasonable medical expenses (medical, surgical, X-ray, dental, & funeral) incurred by an insured in an accident. Coverage is not based on fault. Covers medical services rendered within 3 years from the date of the accident. Limits typically range from $1,000 to $10,000 per person. Who has medical payments coverage under the PAP? The named insured and family members While occupying any motor vehicle As pedestrians when struck by a motor vehicle Other persons occupying a covered auto are covered, but only in an owned vehicle.

Cov A

Covers the dwelling (house) on the residence premises Structures attached to the dwelling Materials intended for construction. No coverage for land.

additional coverages

Debris Removal (of damaged property) Up to 5% of Cov. A limit in addition to limit if needed. Up to $1,000 for the removal of fallen trees (due to wind/hail/ice/snow) from covered property. Reasonable Repairs - To protect property from further damage. Examples: Tarp over hole in roof, board up broken window. Trees, Shrubs, and Other Plants If loss caused by specific perils Up to $500 per tree/shrub/plant Fire Department Service Charge (up to $500) Unauthorized Use of Credit Card (up to $500) Loss Assessment (up to $1,000) Collapse Landlord's Furnishings (up to $2,500) Ordinance or Law (up to 10% of Cov. A limit)

Parts of an Insurance Contract

Declarations Definitions Insuring Agreement Exclusions Conditions Endorsements

for federal regulation

Decrease compliance costs Increase competition The more companies in each state, the more competitions Increase innovation Have to revamp insurance in 50 different ways More effective negotiations of international insurance agreements More effective treatment of systemic risk Diversified risk

the loss must be determinable and measurable

Definite cause, time, place, and amount of loss. Is the loss covered under an insurance policy? EXAMPLE: Car gets hit & has a dent in it ... was that already there or did the accident cause it? EXAMPLE: Person gets hit ... claim "pain and suffering" --> do you actually have that?

Separation

Dividing the assets exposed to loss to minimize the harm from a single event EXAMPLE: Firewalls in building, Companies with multiple warehouses

domestic insurer

Domiciled in the state GA Farm Bureau writes insurance in GA

Financial Modernization Act (1999)

Eliminated barriers between insurers and banks. Insurers can have banking operations and banks can have insurance operations. Led to several mergers and acquisitions (Travelers & Citigroup). Created some confusion as to who would regulate each division Frequently sited as a contributor to the financial crisis (2008) leading to Systemic Risk

USA high cost of HC

Employer-sponsored health insurance Fee-for-service providers (FFS) High administration costs Lack of transparency in cost and quality Cost-shifting in Medicare and Medicaid Defensive Medicine

Property Coinsurance

Encourages the insured to insure the property to a stated percentage of its insurable value. EX: Small house's reconstruction cost is $100k, insurance company may require coinsurance to insure the house for up to 80%, so insurance company wants house to be insured for $80k, if not met, the insurer will not pay loss in full. If coinsurance requirement is not met at the time of loss, the insured must share the loss (as a coinsurer) (Amount of Insurance Carried / Amount of insurance Required) x Loss = Amount of Recovery EX: Commercial building with reconstruction cost of $500k. Owner has insured building for $300k. Policy includes 80% coinsurance clause. Fire causes $200k in damages. ($300000 / (80% * $500000)) * $200000 = $150,000.00. Insurance pays $150k, insured pays $50k of $200k loss Why? Premium is cheaper & common in commercial insurance

Ensure reasonable rates

Ensure economically reasonable premium for needed coverages (health, fire, auto liability) Prevent excessive/unsubstantiated rate increases Ensure premiums are sufficient to pay losses

Dodd Frank Wall Street Reform Act

Established general federal oversight of the insurance industry. Deal with destabilizing practices of banks & agencies & investment institutions Created the Financial Stability Oversight Council (FSOC) Has the authority to treat systemic risk Can classify non-bank financial companies (which includes insurance companies) as "systemically important financial institutions" (SIFIs) SIFIs receive tougher financial oversight and are regulated by the federal reserve AID, Prudential, MetLife - 3 US parties responsible as SIFI's ... font like & file suit SIFI is revoked from all 3 after suit

O'Houlihan Wrenches is a tool manufacturer. They have asked Average Joe Insurance to insure their new $40 million manufacturing facility. Because of the high amount of coverage needed, the Average Joe's underwriter has indicated that they'll need to check with their reinsurer, Globo Re, to determine if they can obtain a reinsurance policy to specifically cover the manufacturing facility. Which type of reinsurance does Average Joe Insurance need for the manufacturing facility?

Facultative

Negligence

Failure to exercise the standard of care required by law to protect others from an unreasonable risk of harm. Standard of care - Based on the care required by a reasonably prudent person. Not the same for each wrongful act. Elements of Negligence - Legal duty owed, Breach of legal duty, Damage or injury & Proximate cause.

make insurance available

Fair access to Insurance Requirements (FAIR Plans) Restrict the market exit of insurers. EXAMPLE: Insurance companies wanted to stop writing property insurance in Florida, but FL state government said if they do that, they'll have to stop writing auto insurance as well

Government Insurance Programs

Financed entirely or in large part by contributions from employers and/or employees. Benefits are heavily weighted in favor of low-income groups. Eligibility and benefits are prescribed by statute. Found in both state and federal level. EXAMPLES: Old-Age, Survivors and Disability Insurance (Social Security) / Unemployment / Medicare

universal life insurance

Flexible premium policy that provides lifetime protection After the first premium, the policyholder decides the amount and frequency of payments Most policies have a target premium, but the policyholder is not obligated to pay it Most policies have a no-lapse guarantee if the minimum premium is paid Cash-value accumulates (accumulation fund) on premiums net of mortality charges and expense charges Policyholder can borrow the cash-value

auto rating variables

Garaging Location Age, Gender, Marital Status Vehicle Use Driver Education Good Student Discount Number of Vehicles Limits Deductible Insurance Score Driving Record Multi-Policy Discount

rebating

Giving an individual a premium reduction or some other financial advantage not stated in the policy as an inducement to purchase the policy

Gross Premium

Gross Rate * # of Exposure Units. EXAMPLE: Gas prices: Gross Rate = Price/gallon ... # exposure units = gallons of gas EXAMPLE: Harvey wants $300,000 in liability coverage & Gotham charges a gross rate of $49.75 per $25000 in coverage. What is the gross premium? 49.75 * (300000/25000) = $597

Risk Retention Group

Group captive that can write any type of liability coverage except employers' liability, workers compensation, and personal lines. Exempt from many state insurance laws.

Affordable Care Act

Guaranteed Issue- Insurers cannot deny coverage due to preexisting conditions - leads to adverse selection! Community Rating- Insurers may only rate on a few variables- leads to adverse selection! Minimum Standards for Health Insurance Cannot drop policyholders Dependents can remain on policy until age 26 No annual or lifetime limits Coverage for essential health benefits Individual Mandate- Buy health insurance or pay a penalty (since repealed) Health Insurance Exchanges Subsidies for low income individuals/families Employer Mandate- Firms with 50+ employees must provide health insurance or pay a fine Require health insurers to pay 85% of premiums in claims

group insurance

HIGH ADVERSE SELECTION may be less expensive, tax benefits to employees (costs are usually pre tax), employer may pay all/part of premium, no evidence of insurability, may get insurance you wouldn't have bought otherwise. Disadvantages of ___________ __________: Inflexible for individuals, must be employed to get it, not always available, may get insurance you wouldn't otherwise.

HOP forms

HO-2 Broad Form HO-3 Special Form HO-4 Contents Broad Form (Renters) HO-5 Comprehensive Form HO-6 Unit-Owners Form (Condo) HO-8 Modified Coverage Form

duplication

Having back-ups or copies of important documents or property available in case a loss occurs EXAMPLE: Mr. Brown has class slides on a flash drive & a laptop in case one doesn't work someday

Types of Risk with ERM

Hazard/Pure Risk, Operational Risk, Financial Risk, Strategic Risk

Which type of spending account can be coupled with a high-deductible healthcare plan?

Health Savings Account

Principle of Utmost Good Faith

Higher degree of honesty is imposed on both parties to insurance contracts than is imposed on parties to other contracts. Insured is responsible for providing accurate information to insurer. Sometimes, insurer isn't able to inspect insured & relies on good faith. Supported by three legal doctrines 1. Representations 2. Statements made by the applicant for insurance ... all responses ... "do you smoke?" "do you drink?" "have you ever received a ticket?" What if statements are false? Contract is voidable if the misrepresentation is: Material False, and Relied on by the insurer 3. Material: Had the insurance company had known the true facts, they would have not issued the policy or would have issued it under different circumstances EXAMPLE: A smoker lies on their life insurance application & later dies in an auto accident ... Contract is voidable because the applicant lied & the insurance company would have increased the premium and rate

Severity

How much does it cost when a loss does occur? The $ amount of loss for a specific peril (fire, theft, collision) Ex: Average fire loss = $32,547. Total Losses ($) / # Losses

Needs Appraoch

How much money is going to be needed if this person dies? amount needed depends on the financial needs that must be met if the family head should die. Calculation should consider: Estate clearing fund (burial, medical bills, debts, attorney's fees, taxes) One or two year readjustment period (same income as prior to death)- Gives time for family to adjust standard of living Dependency period for children (until youngest is at least 18)- How much money do you need for your children who are dependent on you? Income for surviving spouse (if needed) Special needs (college education, mortgage, emergencies) Retirement needs EXAMPLE: Cash needs + Income needs + Special needs - Total assets (savings, mutual funds, IRA, other life insurance) = Additional life insurance needed

frequency

How often does a loss occur? The number of losses (fire, theft, collision) that occur within a specified time period. Probability of a loss. Ex: Probability of a fire is .0071/loss exposure per year. # Losses / # Exposures

POS plan (point-of-service)

Hybrid of HMO and PPO Typically structured as an HMO, but members can go outside of network for care (primary care physician has to be in network though) If patients see providers who are in the network, they pay little or nothing out of pocket Deductibles and copayments are higher if patients see providers outside the network

Unfunded Retention

Identified some type of loss exposure & realize it's not that important to set aside money for it EXAMPLE: Glassware in bar ... don't set aside money for it because they expect it to get broken

loss of business income

If a business has to shut down for a period of time due to a physical damage loss, it is unable to generate an income - Direct or Indirect loss? INDIRECT!!! EXAMPLE: Grease fire in the kitchen causes a restaurant to close down for 4 weeks while repairs are made. The restaurant has no income while closed

Functions of Reinsurance

Increase underwriting capacity Stabilize profits Reduced the unearned premium reserve Jan 1 - Dec 31 ... premium $1200 ... April 1: Earned $300, Unearned $900 Surplus = Assets - Liabilities Premium / Surplus ... 1:1 (IDEAL), 2:1 Ok, 3:1 Bad $250 / $100 = $2.5 --> 2.5/1... Pass $100 premium to reinsurance ... $150 / $100 = $1.5 --> 1.5/1 Provide protections against a catastrophic loss Retire from a line of business EXAMPLE: Farm Bureau covered church insurance ... underwriters retired ... sent church insurances to reinsurance company, but acted as a middle man in the process Obtain underwriting advice on a line for which the insurer has little experience New to a line of insurance, so used reinsurer

Benefits of ERM Program

Increased risk awareness across organization Improved risk assessment Greater accountability for the management of risks the organization faces Increased certainty of meeting strategic and operational objectives Greater efficiency in the management of risks and potential cost savings

Independent Adjuster

Individual or organization that adjusts the claim for a contracted fee (common after catastrophe)

endorsements to HOI

Inflation Guard - Guards against inflation of money Personal Property Replacement Cost - Paying more for your coverage to be RC instead of ACV Scheduled Personal Property - List each and every one and how much you want insured for it Personal Injury Watercraft Backup of Sewer and Drain - An endorsement you absolutely want

Maintain insurer solvency

Insurance contracts are worthless if the insurer goes bankrupt. Potential financial hardship for consumers. Protects consumers. Monitor financial strength of an insurance company. EXAMPLE: Hurricane hits FL - State guarantee funds pays claims if insurance company becomes insolvent ... use taxpayer $

Educate consumers

Insurance policy is a complex legal document Difficult to compare insurance coverages and costs Insurance is a contract of adhesion Prevent unethical insurers or agents from taking advantage of consumers

investments

Insurance premiums are invested for the time period between the receipt of the premium and the payment of a claim. Extremely important in reducing the cost of insurance to policy owners and offsetting unfavorable underwriting experience

McCarran-Ferguson Act (1945)

Insurance should be regulated and taxed by the states. Federal antitrust laws do not apply to insurance (with some exceptions)

Offer and Acceptance

Insured completes an application (the offer) Insurance company issues a binder or policy (acceptance) The insurance company can also reject the offer Conditional Premium Receipt Receipt given to applicant for life insurance. If policy is approved, coverage becomes effective as of the date of the application

contract of adhesion

Insured must accept the entire contract, with all of its terms and conditions. Because this is imbalanced, courts have ruled that any ambiguities or uncertainties in the contract are construed against the insurer. Principle of Reasonable Expectations An insured is entitled to coverage under a policy that he or she reasonably expects it to provide, regardless of policy provisions Reasonably expected that you would be covered from perils like fire

Premium must be economically feasible

Insured must be able to afford it Would the premium be economically feasible for a 90 year old looking to buy life insurance?

conditional contract

Insured must comply with all policy conditions to collect for a covered loss. Provisions within the policy that qualify or place limitations on the insurer's promise to perform. EXAMPLE: Your duties after a loss ... give immediate notice to insurance & protect from further damage. EXAMPLE: Tree falls on your roof causing a hole ... required to put a tarp or something over the hole to prevent further damage

Hard Market

Insurer profitability is declining, underwriting standards are tightened, premiums increase and insurance is hard to obtain

concealment

Intentional failure of the applicant for insurance to reveal a material fact to the insurer. Contract can be voided if concealed fact was known by the insured to be material. Insured intended to defraud the insurer.

exclusions to liability coverage

Intentional injury or damage Property owned or transported Property rented, used, or in the insured's care Used as a public or livery conveyance Vehicles used in a business Vehicles with fewer than four wheels Vehicles made available for your regular use

Dante Hicks works at Quick Stop Groceries (a convenience store). Which of the following correctly describes customers of the store?

Invitees

Types of Private Insurance

LIFE HEALTH PROPERTY LIABILITY & CASUALTY Life: Pays death benefits to beneficiaries when the insured dies Health: Covers medical expenses because of sickness or injury Property: Indemnifies property owners against the loss or damage of real or personal property Liability: Covers the insured's legal liability arising out of property damage or bodily injury to others Casualty: Refers to insurance that covers whatever is not covered by fire, marine, and life insurance

Barriers to ERM program

Lack of commitment form company leadership Rigid organizational culture Disagreements between departments over responsibilities Tech difficulties Lack of communication

Characteristics of an Ideally Insurable Risk

Large number of exposure units Accidental and unintentional loss Determinable and measurable loss No catastrophic loss Calculable chance of loss Economically feasible premium

bad faith

Law that allows lawsuits against insurance companies for: Improper denial of claims Improper delay of claims Bad faith damages can exceed policy limits and include: Attorney's fees Emotional distress Punitive damages

Regulatory Compliance

Laws you have to comply with. If laws change, you have to spend $ to adhere to them. EX: Manufacturing company ... if laws change, you have to update machinery

Liability Risk

Legal liability (financial consequences) resulting from injuries or damages you caused to someone else. No upper limit. Liens can be placed on income, assets seized. Defense costs - lawyers are expensive!

ordinary whole life

Level-premium policy that accumulates cash values and provides lifetime protection to age 121. Premiums are payable throughout the lifetime of the insured Accumulates a cash-surrender value, which is the amount paid to a policyholder who surrenders the policy early Policyholder has the right to borrow the cash value PAY SAME AMOUNT EVERY YEAR

Strict Liability

Liability imposed regardless of negligence or fault Examples: Defective products, Damages caused by animals, Hazardous activities or Workers compensation

surplus lines broker

Licensed to place business with a non admitted insurer. refers to any type of insurance for which there is no available market in the state. non admitted Insurer - an insurer not licensed to do business in the state.

loss prevention

Measures that reduce the frequency of a particular loss ... does NOT completely eliminate risk EXAMPLE: TSA at airport

cov f

Medical Payments to Others (you don't have to have done anything unlike liability, no negligence required) NOT BASED ON LEGAL LIABILITY Pays the reasonable expenses of another person who is accidentally injured: while on the insured location, or by the activities of an insured or residence employee, or animal owned by or in the care of an insured. Medical Payments to Others (Examples) A guest falls in your home and breaks her wrist - Policy would pay up to limit, no negligence on your part but you're still liable A neighbor's child falls off a swing set in your backyard and is injured - ^^^^ Your dog bites a houseguest- No hazardous condition required for the injury to occur

managed care plan

Medical expense plan that provides covered services to the members in a cost-effective manner Choice of physicians and hospitals may be limited Includes HMO, PPO, and POS plans

Lloyd's Syndicates

Members join together & provide capital to form syndicates, receiving profits, or bearing losses. Most are corporations or limited partnerships. "Names" are high net worth individuals. Must meet the stringent capital requirements. Managing Agents - manage the syndicates, who typically specialize in certain lines. Underwriters - work for the syndicates to assess risks and determine premiums - 240 brokers, 85 syndicates, 56 managing agents, 450 members, 1650 corporate members!

noninsurance transfers

Methods other than insurance by which a pure risk and its potential financial consequences are transferred to another party EXAMPLES: Contracts, Leases (Renting or leasing a house in college), Hold-harmless agreements.

group insurance marketing

Methods to sell individual insurance policies to: Employer groups Labor unions Trade associations Products are sold through group representatives, employees who receive a salary and incentive payments based on sales Employees typically pay for insurance by payroll deduction EXAMPLE: UGA takes Brown's premium out of his paycheck

Loss Ratio Method

Modifies existing rates by comparing the actual loss ratio to the expected loss ratio Loss Ratio = (Incurred Losses + LAE) / Earned Premium If expected loss ratio is 70% but actual ratio is 75%, raise rates by 5%

liability coverage

Most important part of the policy!!!! Protects a covered person against suit or claim arising out of ownership or operation of a covered vehicle. Covers damages and defense costs. Split Limits ($100,000/$300,000/$100,000) vs. Single Limit ($500,000) Who has_____________ coverage? The named insured and any resident family member Any person using the named insured's covered auto. Any person or organization legally responsible for any insured's use of a covered auto on behalf of that person or organization.

exclusions to e & f

Motor Vehicle Liability Exceptions Vehicle in dead storage on insured location. Vehicle used to service residence. Using them for like farmwork Vehicle designed to assist the handicapped. Coverage in some situations for golf-carts and recreational motor vehicles (RMVs). Watercraft, Aircraft, Hovercraft Liability (Like jet skis or boats) Expected or intended injury Business activities Professional services Transmission of communicable disease Sexual molestation, corporal punishment, physical/mental abuse Controlled substance Section 2 - Exclusions to Coverage E Contractual liability - Any liability that's assumed within a contract Property owned by or in the care of an insured Workers compensation Bodily injury to an insured - Done by you Section 2 - Exclusions to Coverage F (meant to cover people that are not regular stayers at your home) Injury to residence employee off insured location Workers compensation Persons regularly residing on the insured location

Chance of Loss Must be Calculable

Must be able to calculate average frequency and average severity. Pure Premium = Frequency * Severity

for state regulation

Needs of each state are different (Hurricanes on east coast vs. wildfire in California). Allows insurance to prioritize and regulate quickly ... Federal gov't doesn't care about Clarke County. Federal regulation is historically inefficient! (Federal gov't was in charge of banks during crashes in 2007 & 2009) Transition to federal would be costly and require dual regulation for a short time The National Association of Insurance Commissioners (NAIC) already advocates for uniformity Insurers can innovate by experimenting in different states Can experiment in just one state rather than all 50 Unknown consequences of federal regulation "The way we've always done things"

capitation fee

Not paid under FFS (Fee-for-service) Instead, physicians and medical groups are paid a fixed annual amount for each plan member regardless of the frequency or type of service provided Doctors won't order unnecessary tests Shifts risk of overutilization to the medical provider

Claims Process

Notice of loss, Claim investigation, Proof of loss, Payment of loss or denial of claim

Aysmmetric Information

Occurs when one party has information that is relevant to a transaction that the other party does not have "Show me the Car Facts". EXAMPLE: Life insurance asks you questions about your health & then sends a medical professional to run tests & examine to avoid asymmetric information

unilateral contract

Only one party (insurer) makes a legally enforceable promise Insurer makes legally enforceable promise to pay claims Insured cannot be legally required to pay premiums

not covered if

Ordinance or law (other than provided by Additional Coverages) Earth movement Flood, surface water, storm surge, water back-up Power failure Neglect War Nuclear hazard Intentional loss Governmental action

Several years ago, I was driving my car when a deer ran in front of me. As I was unable to avoid the deer, I collided with it and it caused a significant amount of damage to my car. The damage was covered under the "Coverage for Damage to Your Auto" part of my insurance policy. Which type of loss was this?

Other Than Collision / Comprehensive

stock insurers

Owned by stockholders Public: Anyone can buy stock Board of Directors appoint those who run the company Objective is to earn profit for stockholders by increasing the value of the stock and paying dividends EXAMPLES: Allstate, Progressive, Aetna, MetLife

PAP

Part A: Liability Coverage Part B: Medical Payments Coverage Part C: Uninsured Motorists Coverage Part D: Coverage for Damage to Your Auto Part E: Duties after an Accident or Loss Part F: General Provisions

competent parties

Parties must have legal capacity to enter into a binding agreement Insured must: Be old enough to enter into a contract Not intoxicated Not insane Insurer must be legally competent and licensed to sell within state

FSA (Flexible Spending Account)

Permits employees to pay for certain unreimbursed medical expenses with before-tax dollars Cannot be used with high deductible plan (because those plans allow for an HAS) Forfeit contributions if not used by March 15 of the following year Employer may contribute

CDHP (consumer directed health plan)

Plan that combines a high-deductible health plan with a health savings account (HSA). A high-deductible health plan (HDHP) has an annual deductible that is substantially higher than traditional plans. EXAMPLE: Brown's policy has a $2200 individual deductible and $4400 family deductible. Consumers with high deductibles will be more cost sensitive and avoid unnecessary tests. If not used, money in the HAS can be saved for retirement. Health insurance is more affordable (lower premiums)!!! High cost if you use a lot of healthcare

PPO (Preferred Provider Organization)

Plan that contracts with healthcare providers to provide certain medical services at discounted fees. Plan forms a "network" of providers. Patients are not required to use a provider within the network, but the deductible and copay are lower if they do. PPO Healthcare Providers provide services at a discount from full charges (pay based on FFS). If the provider's actual charge exceeds the negotiated fee, the provider absorbs the cost. No referral needed for specialist! Can go out-of-network physicians (but pay higher deductible, coinsurance)! But more cost sharing than HMO. Out-of-network physicians may bill insured for insured amounts in excess of FFS. Less efficient communication between providers. Billing is more complicated than HMO since each medical provider has their own system

requirements for PULP

Policy is excess of homeowners and personal auto policy. Home and Auto policies are REQUIRED to have liability limits of a certain level. (EX: 250,000). Limits range from 1 million to 10 million. Home or personal auto policy responds FIRST, then umbrella responds when coverage limits have been exhausted.

Human Life Value Approach

Present value of the family's share of the deceased breadwinner's future earnings Process: Estimate the individual's average annual earnings over his/her productive lifetime Deduct taxes and self-maintenance costs Using a discount rate, determine the present value of the family's share of the earnings for the number of years until retirement EXAMPLE: Phil, age 27, is married and has three children. He plans to retire in 40 years Earns $50k/year Spends $20k on taxes & personal needs Using a 5% discount rate, the remaining $30k/year for 40 years has a present value of $514,800

When an insurable interest exists

Property Insurance - At time of loss Can't collect on an insurance policy after you sell your home Life Insurance - At inception of policy Ex-spouse can still collect on life insurance if listed as policy beneficiary Company can take out life insurance on a key executive because they are in a position to lose financially if he/she dies

personal property not covered

Property insured elsewhere Animals, birds, fish Motor vehicles, aircraft, hovercraft Property of roomers, boarders, tenants Property in a regularly rented apartment Business data Water or steam

components of gross rate

Prospective Loss Costs (Pure Premium), Expense Provision (Load), Profit and Contingencies (Risk Charge)

cov e

Protects an insured when a claim or suit for damages is brought because of bodily injury or property damage allegedly caused by an insured's negligence. Pays amount for which the insured is found legally liable, up to policy limits. Insurer also pays defense costs, in addition to the limit. Your dog bites a neighbor- You have coverage!!!!!! While burning leaves in your backyard, the fire gets away from you and damages your neighbor's home- Your liability is covered by your insurance policy because you caused it A friend visiting your house trips over one of your children's toys and sues you for their resulting injuries- You have coverage!!!!! You are shopping and your child breaks an expensive vase- You have coverage for this under liability!!!!

Personal Umbrella Policy

Provides protection against a catastrophic lawsuit or judgement. This is LIABILITY coverage not property coverage. EX: you kill someone in a car, dog severely attacks child disfiguring face

health coinsurance

Provision that requires the insured to pay a specified percentage of covered medical expenses after the deductible is met. Reduces premiums and prevents overutilization of policy benefits. If you have to pay for a portion of it, are you going to get a medical test you don't think you need? Reduces moral hazard. AGGREGATE DEDUCTIBLE EXAMPLE: $1000 deductible 80/20 coinsurance (insurer pay 80%) $5000 medical procedure $5000 - $1000 = $4000.00 $4000 * 80% = $3200.00 --> Insurer pays $3200 Insured pays remaining $800

conditions

Provisions in the policy that qualify or place limitations on the insurer's promise to perform If insured doesn't abide, their claim may not be paid Examples: Prompt notification of loss Protect property from further loss Valuation/Loss Settlement - ACV vs. RC No concealment or fraud Subrogation Has to provide inventory of damaged items

Merit Rating

Rates are adjusted upward or downward based on experience. 3 Types - Scheduled, Experience, and Retrospective Scheduled: Each item has its own insurance EXAMPLE: Farm ... insurance on cotton picker, tractor, etc. all separate of each other Experience: Rates are going to be adjusted upwards or downwards based on prior experiences EXAMPLE: If a business has few losses, their rates are adjusted downwards Retrospective: Rate/Premium is adjusted up or down after everything is finished EXAMPLE: Manufacture a product & buy liability insurance ... insurance bases premium on what a company expects to sell ... 10,000 expected, but company sells only 7,000 so insurance company refunds company for the 3000 units that we insured but not sold ... AKA deposit premium

Judgement Method

Rates are determined by the judgement of the underwriter (data is limited). Could be used by Lloyd's of London

Pure Premium Method

Rates developed based on past experience. (Incurred losses + LAE) / # of exposure units. ... EXAMPLE: Incurred Losses = $43,750,000 ... Loss Adjustment Expenses = $1,750,000 ... Exposure Units = 125,000 ... (43750000 + 1750000) / 125000 = $364

loss reduction

Reduces severity. EXAMPLE: fire sprinklers Can occur pre-loss or post-loss. Duplication, Separation & Diversification

diversification

Reducing the chance of loss by spreading the loss exposure across different parties (customers, suppliers), securities (stocks, bonds), or transactions EXAMPLE: Phil Knight opening multiple manufacturing factories for Nike to diversify their suppliers

market conduct

Refers to the marketing practices of insurers and agents that involve interactions with insureds, claimants, or consumers Practices include: Sales of insurance policies Advertising of insurance products Underwriting and rating Collection of premiums Policy renewals, termination, and changes Claims settlement Examinations- State departments of insurance conduct market conduct examinations of insurers

Facultative Reinsurance

Reinsurance that is transacted on an individual risk (ex. Large factory) where the primary insurer cedes the individual risk to the reinsurer. Optional, used on a case-by-case basis.

Actual Cash Value

Replacement Cost minus Depreciation. Depreciation (%) = Age/Useful Life ACV = RC - Depreciation Highest depreciation is usually 80% In property insurance, indemnification is usually based on the actual cash value of the property at the time of the loss. EXAMPLE: Roof installed in 2012 for $5000 & has a useful life of 20 years. It will cost $6000 to replace based on current costs. After depreciation, the ACV is $3600. Depreciation is 40% (8 years old / 20 year useful life) EXAMPLE: What is the ACV? --> Cost $750 when purchased in 2016. Useful life is 10 years. Current Model is $450 Depreciation % = 40% ... $ = 450 * .4 = 180 ACV = $450 - $180 = $270.00 EXAMPLE: What is the ACV? --> Cost $250,000 when built in 2014. Useful life of 20 years. Fire completely destroys building in 2020. Current reconstruction cost is $300,000 Depreciation % = 6/20 = 0.3 ... $ = 300000 * .3 = 90000.0 ACV = $300000 - $90000 = $210000.00

Consider and Select the most appropriate risk management techniques (step 3)

Risk Control (Avoidance, Loss Prevention, Loss Reduction, Duplication, Separation, Diversification) OR Risk Financing (funded reserve, deductible, captive insurer, self insurance, risk retention group)

implement and monitor the chosen techniques

Risk Management Policy Statement Outlines: The risk management objectives of the firm Company policy with respect to treatment of loss exposures & Provides standards for judging the risk manager's performance. Benefits of Risk Management Enables a firm to attain its pre-loss and post-loss objectives more easily Society benefits because both direct and indirect loss are reduced Can reduce a firm's cost of risk

erm tools

Risk Score, Risk Register, Risk Map. All the different risks an organization faces is plotted based on frequency & severity

Operational Risk

Risk arising from day-to-day business operations. Supply Chain, Manufacturing Defects, Insurance, Proper equipment, Caution signs, Customer Service, Training, Ensuring that employees understand and adhere to company culture, Cybersecurity, Maintenance, Virus protection, Employment Practices, Qualifications, Diversification, Separation.

financial risk

Risks arising from changing conditions within financial markets. Commodity Prices, Interest Rates & Foreign Exchange Rates

HOP coverage

Section I Coverage A: Dwelling Coverage B: Other Structures Coverage C: Personal Property Coverage D: Loss of Use Section II ◦ Coverage E: Personal Liability Coverage F: Medical Payments to Others

limited-payment life insurance

Similar to Ordinary "Paid-Up" policy Insured has lifetime protection, and premiums are level, but they are only paid for a certain period of time Small amount of insurance Commonly paid for 10, 20, or 30 years EXAMPLE: Buy 20-year limited-payment policy at 25 After 20 years (at age 45), the policy is paid in full No additional premium is required and coverage remains in place

insurance broker

Someone who legally represents the insured and solicits applications, places coverage with the appropriate insurer, is paid a commission from the insurer, does NOT have the authority to bind. Very important in Commercial P&C coverage because knowledge of highly specialized insurance markets. Provide risk management and loss-control services. Large Firms such as Aon, Marsh, Willis Towers Watson.

Insurance Agent

Someone who legally represents the principal aka the insurance company and has the authority to act on the principal's behalf and is legally responsible for all acts of an agent when the agent is acting within the scope of authority EXAMPLE: Daniel buys a new car & agent forgets to input new vehicle into insurance plan ... gets in a wreck, insurance agent and agency get in trouble EXAMPLE: Daniel is diagnosed with terminal illness ... insurance agent gives him a rate but doesn't tell agency, agency is still legally responsible for that policy

Jack recently ran a red light and struck a pedestrian. As a result of the accident, the pedestrian was admitted to the hospital. Which type of damages are the pedestrian's medical bills?

Special Damages

funded reserve

Special account for a "rainy day"

declarations

Statements that provide information about the particular property or activity to be insured Name of insurer and insured Property location Policy period (Dates) Amounts of insurance (limits) Premium Deductible Other relevant information

Underwriting Guide

States the company's underwriting policy which includes Lines of business written Policy forms and rating plan used Acceptable, borderline, and prohibited business Amounts of insurance that can be written Geographic territories High wind area - charge more wind damage premium Business that requires approval from a senior underwriter

What is the most important step in the risk management process?

Step 1: identify loss exposures

SWOT

Strength, Weakness, Opportunities, Threats

While walking your dog, if he/she were to bite and severely injure someone, what type of tort would this be?

Strict Liability

principle of subrogation

Substitution of the insurer in place of the insured for the purpose of claiming indemnity from a third party loss covered by insurance. "Insurance company can go after a responsible third party" Examples: Someone else hits your car. Your insurance company pays you for the damages to your vehicle. Your insurance company sues the other driver for reimbursement Reasons: Prevents insured from collecting twice (once from insurer, once from responsible party) Holds the negligent party responsible for the loss Reduces insurance claims costs & rates Receiving $ back from others, so they don't have to charge higher rates EXAMPLE: State Farm collects $1 billion in subrogation, so that's $1 billion less they have to collect via rates

insuring agreement

Summary of the major promises of the insurer (what the policy covers) Named Perils - Only those perils specifically named in the policy are covered Open Perils (All Perils, Special Coverage) - All perils are covered except for those that are specifically excluded Which is better? Open perils is more expensive, but covers a wider range, so it depends on $$$ EXAMPLE: Life insurance ... not covered in event of suicide, drugs, etc.

HMO (Health Maintenance Organization)

System that provides healthcare to its members on a prepaid basis in a particular area. Negotiates rates/agreements with hospitals and physicians to provide medical services. May own hospitals and employ physicians, so choice of providers (doctors/hospitals) is limited. Ex: Kaiser Permanente. Structure- Employee enrolls in HMO plan then the employee selects Primary Care Physician (PCP) from the HMO's network of doctors. PCP acts as a "gatekeeper" You must receive a referral from the PCP to see a specialist

HSA (Health Savings Account)

Tax exempt account established exclusively for the purpose of paying qualified medical expenses Must be covered under a high-deductible health plan Account is an investment account from which the account holder can withdraw money tax-free for medical costs. Employees and employers can contribute to the account up to a certain annual maximum amount

avoidance

Technique in which a certain loss exposure is never acquired (proactive). EXAMPLE: Heard roommates can be bad & avoided it altogether.... OR an existing loss exposure is abandoned (reactive). EXAMPLE: Had a bad roommate and left to avoid the situation

risk financing

Techniques for funding losses. Retention: retaining part or all of losses that can occur from a given risk Active - Deliberately retaining risk (choosing a high deductible). Passive - Unknowingly retaining risk (not purchasing disability insurance). Good strategy for low frequency/low severity losses. Bad for high severity ALSO noninsurance transfer- By Contract EXAMPLE: Liability waiver Hedging - derivatives as options, futures, etc Incorporation - Reduces personal liability

risk control

Techniques to reduce the frequency or severity of losses. Loss Prevention, Reduces frequency. EXAMPLES: Airport security, safety training programs

insurance binder

Temporary evidence of insurance. Provide temporary insurance until the policy is actually written. Can typically be provided by property & casualty (P&C) agents. Life insurance agents usually have no authority to issue binders. EXAMPLE: Buying a new car, but before you can drive it off the lot, you have to prove insurance ... agency provides dealership temporary _______ as proof

If you have a limited budget to spend on life insurance, but you want to maximize the amount of life insurance you have, which type would be most appropriate?

Term Life Insurance

Split Limits

The amount of insurance for bodily injury (BI) and property damage (PD) are stated separately. Example ◦ $100,000/$300,000/$100,000 ◦ $100,000 BI per person / $300,000 BI per accident / $100,000 PD per accident

Quota Share (Pro Rata)

The ceding company and the reinsurer share premiums and losses based on a fixed percentage EXAMPLE: Average Joe retains 75% of premium & losses. Average Joe has $10,000,000 in premium and $8,000,000 in losses ... How much of the premium and losses does Globo Re owe? $2.5 million in premium (10,000,000 x .25) $2 million in losses (8,000,000 x .25)

Excess of Loss

The ceding company retains a predetermined dollar amount of a loss (retention). The reinsurer then pays losses that exceed the retention, up to the limit of the agreement. Designed for protection from a catastrophic loss. Catastrophe XOL. Reinsurer sets treaty limit & pays up to that! EXAMPLE: $100,000 retention with $2,000,000 treaty limit ... Loss amount = $2,250,000 ... ceding company pays $250,000 and reinsurer only covers $2,000,000

premature death

The death of a family head with outstanding unfulfilled financial obligations. Breadwinner makes $$$$. Costs: Possible reduction in standard of living and future earnings are lost forever Additional expenses incurred: Funeral expenses Uninsured medical bills Higher childcare costs Estate settlement expenses Outstanding debts

Indemnification

The insured is restored to his or her approximate financial position prior to the occurrence of the loss

insurable interest

The insured/beneficiary must be in a position to lose financially if a covered loss occurs Why? Prevents gambling on losses AND Reduces moral hazard EXAMPLE: I can't buy insurance on Brown's house b/c I am not in a position to lose $ on it Can't insure something for an amount greater than it's insurable interest other examples: Ownership of property (house, car), Potential legal liability (business owner (workplace injury), causing a car accident) Secured creditors (mortgage company, auto lender) Contractual right (goods in transit)

Principle of Indemnity

The insurer agrees to pay no more than the actual amount of the loss. Purpose is to prevent the insured from profiting from the loss- Eliminate Moral Hazard!!

estoppel

The loss of a legal defense because of previous actions that are now inconsistent with that defense EXAMPLE: Brown had to be very accurate when issuing claims because if he said something was insured, but it was not actually, he couldn't go back and say it wasn't

out of pocket max limit

The most the insured will have to pay out-of-pocket in a calendar year After the out-of-pocket limit is met, the insurer pays 100% of all eligible expenses Also called a stop-loss limit EXAMPLE: Jon Snow was recently stabbed with resulting medical bills of $4000. His health insurance includes the following: $1000 calendar-year deductible 80/20 coinsurance clause $5000 out-of-pocket max After insurance is applied, how much will Jon owe for the medical bill? Jon needs surgery during the same calendar year that costs $30,000. After insurance is applied, how much will Jon owe for the surgery?

property risk

The possibility of losses associated with the destruction or theft of property. Direct Loss - Cost to repair or replace property damaged by a peril. Indirect Loss - Financial loss resulting as a consequence of a direct loss EXAMPLE: Fire damages your home, you have to pay to live elsewhere while it's repaired. EXAMPLE: Grease fire in restaurant damages restaurant = Direct loss ... Financial loss as a result = Indirect loss For businesses, this includes Business Interruption, Loss of Income, etc.

treaty reinsurance

The primary insurer cedes all risks within one or more specific lines of business to the reinsurer The primary insurer must cede and the reinsurer must accept all risks included within the terms of the reinsurance agreement

Surplus Share (Pro Rata)

The reinsurer agrees to accept insurance in excess of the ceding insurer's retention limit. Losses and premium are shared in the same proportion that each party shares in the individual risk Proportion is determined by dividing the retention by the individual risk size. EXAMPLE: Average Joe's includes a $500,000 retention. Average Joe insurers a dodge ball manufacturing factory for $2,000,000. Owners pay AJ $20,000 in premium ... How much of the premium is ceded to Globo Re? If the factory sustained a $400,000 loss, how much is Globo Re responsible for? 500000/2000000 = 0.25 * 20000 = 5000 ... 20000 - 5000 = $15000 400000 * .75 = $300000

pooling of losses

The spreading of losses incurred by a few over the entire group. Purpose is to reduce variation (as measured by standard deviation) which reduces uncertainty (risk) SD = Average distance from the mean The LOWER the SD, the lower the risk

Adverse Selection

The tendency of persons with a higher-than-average chance of loss to seek insurance at average rates, which, if not controlled by underwriting, results in higher than expected loss levels. Those with the greatest probability of loss are most likely to buy insurance. EXAMPLE: Insurance agencies charging higher for drivers with more speeding tickets because they're riskier drivers ... that driver searching for an agency that will ignore those tickets and give a lower rate!

collision

The upset of your covered auto or non-owned auto or its impact with another vehicle or object. This is paid regardless of fault!!! Examples Car overturns on icy roads Car hits another car, telephone pole, tree, or building You bang your car door against another car damaging your door.

exchange of consideration

The value that each party gives one another Insured pays a premium. The insurer promises to pay future claims covered by the contract (premium).

Law of Agency

There is no presumption of an agency relationship. EXAMPLE: If Brown opens insurance agency, he can't just say he represents a specific company ... must be acknowledgement & evidence of relationship between agent & agency An agent must be authorized to represent the principal A principal (insurance company) is responsible for the acts of agents acting within the scope of their authority Limitations can be placed on the powers of agents

Hazard (Pure) Risk

Traditional RM types of risk - property, liability, etc. Techniques used to treat Insurance Non-insurance risk transfer Retention Loss prevention / Loss reduction

Private Insurance Industry

US insurance employed 2.6 million people. Insurers paid 20.5 billion dollars in premium taxes!) 54% property and casualties, 46% life and health.

Strategic Risk

Uncertainty regarding an organization's goals and objectives, and the organization's Strengths, Weaknesses, Opportunities, and Threats (SWOT) EXAMPLE: Braves moving stadiums season ticket holders from Cobb County - Taxpayers paid for new stadium - Improvements on traffic & Safer area at The Battery

Imputed Negligence

Under certain conditions, the negligence of one person can be attributed to another. Vicarious liability law Family purpose doctrine Joint business venture Dram shop law

Payment of fortuitous losses

Unforeseen and unexpected by the insured and occurs as a result of chance EXAMPLE: Mr. Brown punches a student & student falls and gets impaled by something in his backpack

independent agency

Usually represents several unrelated insurers. Agents are paid a commission which varies by the line of insurance. Agency owns the expirations or renewal rights to the business. Agents may be authorized to adjust small claims and may provide loss control services to their insurers

Aletory Contract

Values exchanged may not be equal but depend on an uncertain event EXAMPLE: Mia Wallace pays $1000 for homeowners insurance. Her house burns down and the insurance company pays her $200,000a EXAMPLE: Jules pays $1000 per year for 20 years for homeowners insurance. He's never filed a claim so his insurer has never paid him any money

Identify Loss Exposures (step 1)

What assets need to be protected? What perils are those assets exposed to? Most important step!!!! Sources: Loss history, Financial statements, Surveys Inspections, Contractual analysis, Risk management consultants. EXAMPLE: Loss Exposures for Apple: Losing customers to competitors, Software crash Data breach, Injuries to factory workers, Natural disaster at any of their properties, Loss of intellectual property Loss of key employees (Steve Jobs).

loss

When a house catches on fire, insurance agencies work to quantify the monetary loss of the house, property & personal property. Must be quantifiable ($)

moral hazard

When the act of insuring an event increases the likelihood that the event will happen. ex: Daughter had a sore throat & went to the doctor without insurance, so he said no to a strep & flu test because he had to pay out of pocket. Ex2: Using a hammer to create "hail" damage to a roof. Exaggerates the value of insured property

Lloyd's of London

World's leading market that provides services and physical facilities for its members to write specialized lines of insurance. NOT AN INSURER

physical hazard

a physical condition that increases the frequency or severity of loss. ex: Corrosion on a water pipe ends up busting the pipe & causes water damage

Risk Management

a process that identifies loss exposures faced by an organization and selects the most appropriate techniques for treating such exposures

nondiversifiable risk

a risk that affects the entire economy or large numbers of persons or groups within the economy. EX: Hurricane wipes out the coast of GA. Can NOT be reduced/eliminated through diversification. Government may be needed to insure. Insurance companies do not insure these risks because the expenses can be too much. Risks are correlated (inflation, unemployment) If a loss occurs, it affects all people at the same time.

self insurance

a special form of planned retention by which part or all of a given loss exposure is retained by the firm

Reinsurance

an arrangement by which the primary insurer that initially writes the insurance transfers to another insurer part or all of the potential losses associated with such insurance. Ceding Company- the primary insurer that initially wrote the insurance. Reinsurer- the company that accepts the insurance from the ceding company Retention Limit- the amount of insurance retained by the ceding company Cession- amount of insurance ceded to the reinsurer Retrocession- when a reinsurer insures part or all of its risk with another reinsurer

Loss Exposure

any situation or circumstance in which a loss is possible, regardless of whether a loss occurs

insurance agent

authority to settle small claims

Johnny and Moira Rose borrowed $150,000 from Rosebud National Bank to help fund the purchase of a new home. The home serves as collateral for the loan. Rosebud National has an insurable interest in the home based on

being a secured creditor

Ernesto arrived home from work to find his home filled water and sewage. Unfortunately, tree roots had grown into his drain pipe causing a blockage. As a result, the drain water from his home had backed up and was now coming up and through the drains in his sinks and toilets. How would coverage apply under the HO-3 to this type of loss?

both the dwelling damages and personal property are excluded

Review The Very Good Building & Development Company is a general contractor (builder). Due to difficulty finding affordable workers compensation insurance (covering employee injuries), Very Good established its own insurance company based in Vermont for the purpose of insuring Very Good's workers compensation loss exposures. The company that Very Good formed is called a

captive insurer

Morale Hazard (attitudinal)

carelessness or indifference to a loss, which increases the frequency or severity of a loss. ex: Leaving car keys in an unlocked car. EX2: Neglecting to cut a tree limb growing over your house

perils

cause of a loss; things that could happen to these assets (ex: fire, tornado, collision, license revoked, car accident, theft, vandalism, etc.)

legal hazard

characteristics of the legal system or regulatory environment that increase the frequency or severity of losses. EXAMPLE: You hit someone & get sued ... Jury decides what the damages/repayments are ... severity can vary based on where lawsuit takes place. EXAMPLE: Juries in some areas are more sympathetic than other areas (meaning larger damage awards in liability lawsuits). EXAMPLE: GA now requires Diminution in Value to be paid on property losses (meaning increased severity in GA).

The insurance company drafts and prints the policy contract. The insured must accept the entire contract; they cannot insist that some of the policy language be changed. Which legal characteristic of an insurance contract is this describing?

contract of adhesion

Each time I visit my primary care physician, my healthcare plan requires me to pay $25. The $25 I pay is

copayment

Michael Scott owns a condominium in Scranton, PA. A fire breaks out when his girlfriend, Jan, is dancing and knocks over a candle. The fire damages the condo and Michael's most prized possession - his plasma TV. The damage to Michael's plasma TV is considered a(n):

direct loss

Enterprise Risk

encompasses all major risks faced by a business firm, which include: pure risk, speculative risk, strategic risk, operational risk, and financial risk (PSSOF)

Insurance is the most appropriate risk management technique for which of the following types of loss exposures?

high severity, low frequency

Reubens work in insurance sales. He sells insurance through several different unrelated insurance carriers that he legally represents. What is Reuben's job?

independent agent

Who is responsible for regulating the insurance industry?

individual states

Soft Market

loose standards, low premiums, favorable insurance terms, less retention, insurance easy to obtain

Loss must be accidental & unintentional

loss is outside of the insured's control. law of large numbers is based on randomness.

Cov D

loss of use - Provides protection when the residence premises cannot be used because of a covered loss Includes: Additional Living Expenses, Fair Rental Value and Prohibited Use

high deductible

low premium

HO3

most common. special forms. personal property is named but dwelling is open. RC

HO5

most coverage. open perils. replacement cost

Heisenberg Insurance has a home office in Albuquerque, New Mexico and they specialize in insuring chemical manufacturers. Heisenberg is owned by its policyholders and any annual profits are distributed through rate reductions. Which type of insurer is Heisenberg?

mutual insurer

HO8

named perils covered and ACV replacement.

Bruce Wayne is the owner of a large house insured under an HO-3 policy. Unfortunately, bats have gotten into his attic and caused substantial damages to the dwelling. Is the resulting damage covered by his homeowners policy?

nope - nesting not covered

Underinsured Motorist Coverage

pays from your coverage if you are in an accident with another motorist that has lower liability coverage than your coverage. Your underinsured coverage will pay the difference. May be abbreviated as UN or UIM Optional coverage that can be added to PAP In general, the maximum amount paid is the underinsured motorist's coverage limit stated in the policy less the amount paid by the negligent driver's insurer. Coverage differs depending on the state.

acv

personal property covered at ____

calculated possibility

probabilistic outcome that is known/estimated, ranges from 0-100, greatest risk lies at 50% because you have no idea if it is going to happen or not. It is fairly easy to make accurate estimates when there is a lot of data available.

Claim adjusting

process of determining coverage, legal liability, and damages and settling the claim. Objectives: verify if covered loss, fair and prompt payment of claims, provide personal assistance to the insured.

Public Adjuster

represent the insured and are paid small amount based on amount of claim settlement

I have a high deductible ($2,200) in my health insurance plan. The high deductible is an example of which type of risk management technique?

retention

staff claims rep

salaried employee who investigates a claim, determines the amount of loss, and issues payment.

production

sales and marketing activities of insurers. Agents who sell insurance are called producers. Should be professional, highly knowledgeable, and place client's needs first.

Risk Control

techniques that reduce the frequency or severity of losses. (Avoidance, Loss Prevention, Loss Reduction, Duplication, Separation, Diversification)

Law of Large Numbers

the greater the number of exposures, the more closely will the actual results approach the probable results that are expected from an infinite number of exposures

insurance

the pooling of accidental losses by transfer of such risks to insurers, who agree to compensate insureds for such losses, to provide other monetary benefits on their occurrence, or to render services connected with the risk. Shifts financial responsibility from self to insurance company.

Ratemaking

the pricing of insurance and the calculation of insurance premiums. Rates must be adequate, must not be excessive and should not be unfairly discriminatory. Similar exposures should be charged similar rates!! Business Goal: Be stable, Be responsive, Provide for contingencies, Possibility of encountering greater losses than what was expected, Promote loss control Be simple!

underwriting

the process of selecting, classifying, and pricing applicants for insurance. Purpose: Develop and maintain a profitable book of business. Makes the decision to accept or reject an application for insurance. Field _______________: Travel & make decisions on if they want to insure a certain property

systemic risk

the risk of collapse of an entire system or entire market due to the failure of a single entity or group of entities that can result in the breakdown of the entire financial system. LONDON BRIDGE VIDEO IN CLASS. perfect example is housing market crash of 2007.

What peril(s) does the special limit of liability for firearms apply to?

theft

With no-fault insurance, injured motorists collect payment for their injuries from:

their own insurance companies

exposures

things of value that could be lost (ex: car, health, license, money, etc)

Walter White is the owner of A1A Car Wash. Jesse Pinkman is a regular A1A customer. One day, while waiting for his car to be washed, Jesse slipped on a wet spot on the floor and injured his back. As a result of his injury, he threatens to file suit against Walt and A1A Car Wash. Walt quickly notifies his insurer to start the claim process. This is an example of a:

third party claim

Large number of exposure units

to predict average loss based on the law of large numbers- large number of similar exposure units needed.

personal risk

type of pure risk. Directly affects an individual or family; involves the possibility of loss of income, extra expenses, depletion of financial assets. Perils: Death - lose all future income, Unemployment - lose income, Disability, Injury, Poor health - unable to work, medical expenses, Disability - Council of Disability Awareness Personal Disability Quotient (PDQ) Calculator, Inadequate Retirement - 2017 Employment Benefit Research Institute Survey 47% of retirees had saved less than $25,000 24% had saved less than $1000 Only 38% had saved $250,000 or more

risk

uncertainty concerning the occurrence of a loss OR a calculated possibility of a negative outcome

Antonio is employed by an insurance company. He reviews applications to determine whether his company should insure the applicant. Antonio assigns the applicant to a rating category based on the applicant's degree of risk. Antonio is a(n):

underwriter

Jason is the owner of a liquor store. With the insurance policy covering the liquor store, there is a provision stating that the liquor store must have a working burglar alarm at all times in order for insurance coverage to apply. What is this an example of?

warranty

risk management

what you do to protect these assets and prevent or reduce losses (ex: insurance, alarm, drive safely, seatbelt)