FIN 361

Special damages

(economic damages) compensate for those harms that generally are easily quantifiable into dollar measures (tangible)

Defenses against liability:

1) Assumption of risk: doctrine that holds that if the plaintiff knew of the dangers involved in the act that resulted in harm, but chose to act in that fashion nonetheless, the defendant will not be held liable 2) Contributory Negligence: situation that disallows any recovery by the plaintiff if the plaintiff is shown to be negligent to any degree in not avoiding the relevant harm 3) Comparative Negligence: situation in which the court compares the relative negligence of the parties and apportions recovery on that basis 4) Last clear chance: doctrine under which a plaintiff who assumed the risk or contributed to an accident through negligence is not barred from recover if the defendant had the opportunity to avoid the accident but failed to do so.

The Principle of Indemnity is implemented and supported by several legal principles and policy provisions including:

1) Insurable Interest: financial interest in life/property that is subject to loss 2) subrogation: pool collects from responsible party 3) actual cash value provision: the replacement cost at the time of the loss 4) other insurance provisions: purpose is to prevent insureds from making a profit by collecting from more than one insurance policy

Provisions that violate the Principle of Indemnity

1) Replacement cost coverage- because better off after a loss 2) Valued policy provision (appraisal) 3) valued policy laws 4) cash payment policy provision

Negligence is determined by proving the existence of four elements:

1) a duty to act/ not act in some way 2) breach of that duty 3) damage or injury 4) causal connection; proximate cause

Exclusions exist to:

1) avoid financial catastrophe for the insurer 2) limit coverage of non fortuitous events (not random) 3) avoid duplication of coverage by policies specifically intended to insure the exposure

Insurance contracts are:

1) based on utmost good faith "full disclosure"- implemented by doctrines of representations and concealment 2) personal- meaning they insure against loss to a person, not tho the persons property 3) contracts of adhesion- situation in which insureds have no input in the design of a policy's term ** if it's unclear/ambiguous then it will always favor the PH 4) contracts of indemnity- meaning the insurer agrees to pay no more (and no less) than the actual loss suffered by the insured

Two factors that influence the grant of binding authority to an agent:

1) companies preference for specialists in the underwriting department 2) cancelable policies (no consideration)

Main categories of global risk exposures:

1) destabilized international political environment 2) heightened terrorism risk 3) lack of data risk: currency inconvertibility risk

Benefits of reinsurance

1) increases the financial stability of insurers by spreading risk (tail exposure) 2) facilitates placing large or unusual exposures with one company 3) helps small insurance companies stay in business, thus increasing competition in the industry

Legally liable if:

1) negligent: failure to act as a reasonable person (prudent person) 2) there is damage or loss 3) there is proximate cause: unbroken chain of events leading to the damage or loss

Requirements of a contract:

1) offer and acceptance: the process of two parties entering into a contract 2) consideration: the price each party demands for agreeing to carry out his/her part of the contract (premium) 3) competent parties: individuals of undiminished mental capacity (minors 4) legal purpose: must not be for the performance for an activity prohibited by law 5) legal form: appropriate language

Three Parties of Agency:

1) principal- individual who creates an agency relationship with a second party by authorizing him/her to make contacts with third parties (PH) not he principal's behalf 2) agent- individual who is authorized to make contacts with a third party 3) apparent authority- the implied authority of the agent to fulfill the principal's responsibilities

alien insurers

Lloyd's of london doing business in the US

PROP&LIABILITY vs. LIFE INSURANCE

P/L: can call agent over phone and have binding agreement (binding authority) Life: cannot call over phone and request coverage, need to know more information (conditional binder)

Coinsurance clause: "Insurance to Value"

PARTICIPATION: 1) requires one to carry an amount of insurance equal to a specified % of the value of property in order to be paid the full amount of loss incurred 2) stipulates a proportional payment of loss for failure to carry sufficient insurance

Deductibles

RETENTION 1) Straight deductible- requires payment for all losses less than a specified dollar amount **per occurrence basis 2) Disappearing deductible- one whose amount decreases as the amount of the loss increases

Paul vs. Virginia

US Supreme court decision that defined insurance as intra-state commerce

Cash flow underwriting

When the combined ratio is low, the industry lowers its underwriting standards in order to obtain more cash that can be invested

ceding commission

a fee paid by the reinsurer to the original insurer - cash flow directly to the IS - do not have to be reserved

Public adjuster

adjuster for the insured (you and me)

Binder

agreement that exists before a contact is issued - temporary contract to provide coverage until the policy is issued by the agent or the company - common p/l practice

Insuring clause

agreement, a general statement of the promises the insurer makes to the insured

Reinsurance

an arrangement by which an insurance company transfers all or a portion of its risk under a contract of insurance to another company

independent adjuster

an employee of an adjusting firm that works for several different insurers and receives a fee for each claim handled (independent contractor)

company adjuster

an employee of the insurer who handles claims

Punitive damages

are considered awards intended to punish an offender for exceptionally undesirable behavior (reckless behavior)

Rider

attachment to a life/health insurance policy that changes the terms of the policy

Endorsement

attachment to a property/casualty insurance policy that changes the terms of the policy - they require the payment of a risk premium

facultative arrangement

both the primary insurer and the reinsurer retain full decision-making powers (greater change for adverse selection)

standard fire policy (SFP):

came into effect during the late 1800s and came to be described as the generally accepted manner of underwriting for property loss due to fire

Excess and surplus lines insurers

companies that provide coverages that are not available from license insurers

General damages

compensation for harms that are not specifically quantifiable but that require compensation all the same (intangible)

Hard market

conditions occur when insurance losses are above expectations and reserves are no longer able to cover all losses - hurricane katrina - PHS is low, Reserves are high - insurance premiums are increasing

Soft market

conditions occur when the insurance losses are low and prices are very competitive - beneficial to policy holder - PHS is high

non admitted coverage

contracts issued by a company not authorized to write insurance in the country where a risk exposure is located * Lloyd's of London

incomplete contracts

contracts that contain terms that are implicit rather than explicit

relational contracts

contracts whose provisions are dynamic with respect to the environment in which they are executed

Admitted insurance

contracts written by companies authorized to write insurance in the country where a risk exposure is located

named-perils policy

covers only losses caused by the perils listed in the policy

Law of Agency

deals basically with the legal consequences of people acting on behalf of other people or organizations

NAIC

deals with the creation of model laws for adoption by the states to encourage uniformity - no regulatory authority - works for the benefit of state regulators

contract (policy)

document received when one transfer risks to the insurance company; is the only physical product received at the time of the transaction

Conditions

enumerate the duties of the parties to the contract, and in some cases define the terms used.

commissioner (superintendent) of insurance

executive in charge of monitoring insurance commerce

EXPLICIT vs. IMPLIED

explicit: agency agreement in a contact implied: public perception of what an agent should do

Negligence

failure to act reasonably, and that failure to act causes harm to others

Public Law 15

fed gov will defer it's right to regulate if states do an adequate job of regulation - answers the question "why do states regulate in the area of insurance" - was an act of congress

open-perils policy

formally called "all risk", covers losses caused by all perils except those excluded; most popular in property policies - usually requires a high premium than a named-perils, but is often preferable because it is less likely to leave gaps in coverage

Conditional binder

implies that coverage exists only if the underwriter ultimately accepts application for insurance - subject to all underwriting requirements

Twisting

inducing a policyholder to cancel one contract and buy another by misrepresenting the facts or providing incomplete policy comparisons EX: replacing a life policy without a complete policy comparison (don't know if it's financially in the best interest of the holder) - universal = fixed - variable = portfolio of equities

Principle of indemnity

insureds should not be able to profit from a loss

Application

is an offer to buy insurance - offer is made by YOU by providing info

prior approval

method of regulation in which an insurer or its rating bureau must file its new rates and have them approved by the commissioner before using them rate= unit of insurance cost IOWA: P/L- prior approval basis Life- competitive

File- and- use

method of regulation that allows an insurer to begin using a new rate as soon as it is filed with the commissioner - utility model

Open competition

method of regulation that requires no rate filings by an insurer, as the underlying assumption is that market competition is a sufficient regulator of rates - life insurance in iowa

Remedy

monetary compensation for a person who has been harmed in some way

Valued policies

most life insurance contracts - contracts that agree to pay a stated sum upon the occurrence of the event insured against, rather than to indemnify for loss sustained ** insurable interest in life insurance is 100%

GAAP vs. SAP

net worth of an insurer using GAP accounting would be GREATER relative to the net worth determine under the SAP system - SAP allows companies to account differently for accrued losses

non proportional reinsurance

obligates the reinsurer to pay losses when they exceed a designated threshold (75/25)

Estoppel

occurs when the insurer or its agent has let the insured to believing that coverage exists and, as a consequence, the insurer cannot later claim that no coverage existed

exclusions

perils, risks, losses, and properties that are not covered in an all-risk policy

surplus lines agents or brokers

persons who hold special licenses to provide access to non admitted insurers

Conditional receipt

policy that does not bind the coverage of life insurance at the time it is issued, but it does put the coverage into effect retroactive to the time of application if one meets all the requirements for insurability as of the date of application

Domestic insurers

principal financial group

Binding receipt

proceeds payable if death occurs while one's application for life insurance is being processed, regardless of insurability. - once the process has been completed, then it becomes binding

Rebating

providing substantial value as an inducement to purchase insurance - advantages agents that have been in the business a long time - can't rebate in IA, can in FL - prevents an agent from sharing commissions with a policyholder

Real property vs. personal property

real: permanent structures personal: physical property that is mobile

excess-loss reinsurance

requires the reinsurer to accept amounts of insurance that exceed the ceding insurer's retention limit (most common)

risk-based capital

risk goes up then capital must go up

Binding authority

secures (binds) coverage for an insured without any additional input from the insurer - coverage starts immediately

State guaranty fund associations

security deposit pools made up of involuntary contributions from solvent, state-regulated insurance companies doing business in their respective states to ensure that insureds do not bear the entire burden of losses when an insurer becomes insolvent - similar to FDIC but not backed by federal gov

misappropriation of funds

situations in which the agent keeps funds belonging to the company, policy holder, or a beneficiary

Foreign insurers

state farm doing business in IA

Declarations

statements that identify the person(s) or organization(s) covered by the contract, give information about the loss exposure, and provide the basis upon which the contract is issued and the premium determined

assuming reinsurer

the company taking over the risk in a reinsurance arrangement

ceding insurer

the company transferring risk in a reinsurance arrangement

Waiver

the intentional relinquishment of a known right - to waive a right, a person must know he/she has the right and must give it up intentionally

Break-even combined ratio level

the level of combined ratio that is required for each line of business to avoid losing money

Combined ratio

the loss ratio plus the expense ratio below 1 = profitable above 1 = not profitable equal to 1 = breakeven (equation in notes)

Underwriting cycle

the movement of prices in time - chart (soft to hard to soft)

treaty arrangment

the original insurer is obligated to automatically reinsure any new underlying insurance contract that meets the terms of a prearranged treaty, and the reinsurer is obligated to accept certain responsibilities for the specified insurance (reinsurance coverage is provided automatically for many policies)

claims adjuster

the person who represents the insurer when the policyholder presents a claim for payment

Claims Adjusting

the process of paying insureds after they sustain losses

proportional (pro rata) reinsurance

the reinsurer assumes a respecified percentage of both premiums and losses (50/50)

Legal Liability

the responsibility, based in law, to right some wrong done to another person or organization

Global Risk

the unique problems that arise when companies cross national borders

Replacement cost new

the value of the lost or destroyed property if it were bought new or rebuilt not eh day of the loss

Political risk

unanticipated political events that disrupt the earning or profit-making ability of an enterprise