RMIN 5950 Final

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What is the minimum limit of E & O coverage an agent or broker should provide evidence of when you select them?

$1 million

Incident rate =

(Claim frequency) / (# of exposures)

Total losses =

(Claim frequency) X (Average severity)

Average severity =

(Total losses) / (Claim frequency)

Cost of Motor Vehicle Crashes in US (2013)

- 32,719 fatalities (3.1% decrease) - 2.31 million individuals injured - Economic cost of motor vehicle crashes, $277 billion - 5.615 million crashes - Insured liability costs of $79 billion - Insured property damage costs of $45 billion - 31% of fatalities involved alcohol

Other States Insurance

- 3A states with know operations (existing operations) - 3C states where operations could arise (list where could potentially go (no premium)) - Monopolistic States cannot be listed (cannot list Ohio) monopolistic states only sell WC, not EL

Valuation

- Actual cash value - RC - depreciation - Replacement Cost - Agreed Value - Functional Valuation

Civil Justice Reform Proposals:

- Attorney Fees - Frivolous suits (loser pays) - Limits on Expert Testimony - Limiting Punitive Damages - Caps on noneconomic damages - Collateral Source Rule - Joint and Several Liability - Alternative Dispute Resolution (ADR) - Limits on Class Action Lawsuits

Exposures to Loss (D&O Legal Liability)

- Basic Functional Duties - Fiduciary Duties - Types of Suits

Causes of Loss Form

- Basic: 11 named perils - Broad: basic +4 and collapse - Special: all risk with exceptions - Earthquake: % deductible

Covered Property

- Buildings (scheduled or blanket) - Business Personal Property (leased property considered owned) - Property of others

Business Continuation Plans

- Business Form - Buy-Sell Agreements - Funding Approaches

Mobile Equipment

- CGL - Inland Marine (equipment floaters)

Policy Conditions

- Cancellation - Transfer of rights (subrogation)

Most commonly considered civil justice reform proposals

- Caps on noneconomic damages - Collateral Source Rule - Joint and Several Liability - Alternative Dispute Resolution (ADR)

D&O Insurance (Common Policy Features)

- Claims-Made Basis - Exclusions: 1) Dishonest acts 2) Bodily injury of any person 3) Pollution 4) Defamation -Discovery Clause: 12 month tail

Auto Physical Damage Insurance

- Collision - Comprehensive (OTC= Other Than Collision)-written on an "open perils" basis - Exclusions: 1) Wear and tear 2) Sound reproducing/recording equipment 3) Radar detectors

Fundamental Guidelines

- Consider financial ability of transferee (solvency issues) - Require certificates of insurance to prove existence - Be named as an additional insured - Waiver of subrogation - Avoid being ambiguous or too severe

Function of DIC Insurance

- Converts named perils or all-risks policy to even broader all-risks policy - Not intended to be "excess" insurance (DIL) - Manuscripted coverage

Insurance Problems

- Cost: insurance may be available, but it comes with a very high cost - Availability: it may not be available

Advantage of DIC Insurance

- Covers identified and unidentified perils - Less costly than separate insurance - No coinsurance - Fewer policies: existing policy can be "filled in"

High Cost of U.S. System

- Currently, the system is extremely inefficient, and sometimes it is uncertain who actually benefits from the litigation process. + 22% of the tort dollar goes to compensate victims for economic losses + 54% of the tort dollar never reaches the victim - Increases uncertainty associated with the legal system leads to more risk, which leads to higher costs

OSHA Penalties

- De minimus - Serious - Recordkeeping and Compliance

Key Persons Exposures

- Death - Disability - Insurance: company buys insurance on key person to protect against loss - COLI: Cost of Living Index

Additional Coverages (BPP)

- Debris removal - Preservation of Property - Fire dept service charge - Pollutant clean-up and removal

Ratings (Controlling Costs)

- Deductibles - Coinsurance - Reporting Forms (for fluctuating values) - Duplicate Records (credits provided if maintain backups)

Types of Benefits (Workers Compensation)

- Disability (indemnity) *partial v. total *temporary v. permanent * benefit levels - Compensation for death - Medical benefits - Rehabilitation - Second Injury Funds

Describe the pay back method of evaluating a loss control program

- Does not consider TVM - It's not good enough

Describe the IRR method of evaluating a loss control program

- Don't need to know cost of capital - IRR based on hurdle rate

Retention

- Draws on funds origination within the firm or its economic activity - Two types: ---> Active (planned) ---> Passive (unplanned)

Post-Accident Control

- EMT and rehab

Emerging Liability Issues:

- EPL - D&O/Corporate Governance - Obesity - Pollution - Terrorism - E-Risks/info privacy - Asbestos - Others

Auto Liability Exposures (Liability for others vicarious)

- Employer/Employee: if employee advancing interest of employer, employer will be liable - Business name on vehicle: adds number in fleet, even though vehicle not insured - Negligent Entrustment: allowing a poor driver to drive an insured vehicle

Factors Affecting Use

- Enforceability:insurance policies are Contracts of adhesion, which means any ambiguity is construed against the writer of the contract - Ability to manage risk - Price/Consideration paid

Funding Approaches

- Entity Plan - Cross Purchase Plan

What factors determine the impact of deductibles?

- Flat - Split - Time - Percentage - Disappearing (sliding) - Franchise - Aggregate

Types of Risk Control Transfers:

- Incorporation - Leasing - Subcontracting - Waivers

OSHA Standards

- Industrial hygiene - Machine operations - Material handling - Medical facilities - Personal protection - Plant design and maintenance

Declarations

- Insurable interest - Coinsurance - Causes of loss form - Valuation

Types of Risk Financing Transfers:

- Insurance (primary method) - Hold-Harmless Agreements - Indemnity Agreements

Garage Coverage Forms

- Liability Coverage (general liability & auto liability) - Garagekeepers Coverage (property in care, custody and control) - Physical Damage Protection (collision & comprehensive coverage)

Auto Liability Exposures (Factors affecting auto exposures)

- Location/territory (garaging) - Vehicle size and type - Mileage - Characteristics of Operator - Claims record - Credit-based insurance scores - Driving record

Engineering Controls

- Machine guards - Health hazards

Prospective Insurance Rating Plans (Guaranteed Cost)

- Manual Rate - Experience Modification

Disadvantages of DIC Insurance

- Market is more volatile: may not always be available - Policy interpretation can be difficult

What factors determining financial conditions are important to consider in retention?

- Net worth - Cash flows - Available credit - Earnings - Investment expertise - Asset liquidity

Coverage Extensions (BPP)

- Newly acquired and constructed - Personal effects and property of others - Valuable papers and records - Property off-premises - Outdoor property (signs and landscaping)

Worker's Compensation Coverage (Coverage A or Part 1)

- No policy limits: must conform with state's statutes or laws - Pays a stated benefit and pre-defined costs - Subrogation: employers can recover from wrongdoers or other insurance if possible (huge benefit)

Perils Covered under DIC Insurance

- Often adds flood and earthquake, and may cover indirect losses or loss in transit

Auto Liability Exposures (Activity that leads to liability)

- Ownership - Operation: most common - Maintenance

Abnormal Reserves

- Paid losses by injury - Five years of data - Compute mean and standard deviation - Mean +(3 x Std. Deviation)= Norm

What is included in the "general information" part of an insurance program?

- Proposal requirements - Timetables - Organization's history - Type of operations - Organizational structure - Info about organization

Extent of Responsibility Transferred

- Restating law (limited): Clarifying contract terms - Shifting responsibility for joint fault (moderate): both parties responsible, but only one pays - Shifting all responsibility (broad): No responsibility for one party, but still pay

Job-Safety Analysis

- Selection of critical list - Materials handling and storage - Repetitive motion injuries

D&O Who Sues:

- Shareholders - Employees - Customers/Clients

What is included in the "coverage terms and conditions" part of an insurance program?

- Specific lines - Endorsements - Exclusions - Payroll for workers' compensation - Fleet size (auto) - Loss history (five years) - Discussion of unusual or large losses

D&O Insurance (Coverages)

- To individual Directors or Officers - Entity Coverage - Prior Acts Coverage

Why is it important for a company to be transparent and truthful when mentioning unusual or large losses?

- To show what they have LEARNED from it - It is an opportunity to show IMPROVEMENT

Employer's Liability Coverage (Coverage B or Part 2)

- Tort suits by employees and families: "Dual Capacity Doctrine" - Exclusions: retaliation/discharge: coverage is excluded if employer responsible for this behavior - Limits of Liability: can be limited based on bodily injury per accident per year (per accident, per employee, and aggregate limits can apply)

WC/EL Insurance (Other Coverages)

- Voluntary compensation endorsement - Stopgap cover - Endorsements for federal acts - Foreign voluntary compensation coverage

Common Exclusions under Umbrella Liability Policy:

- WC - Aircraft/Watercraft - Pollution - Product recall - Care, Custody, and Control - Insured's Product or Work

D&O Issues:

- Wrongful termination - Inadequate/Inaccurate disclosures - Merger/Acquisition activities

Business Auto Coverage (BAC) Liability Coverage (Other Coverages)

-Medical Payments to injured persons insured - Uninsured/Underinsured motorist coverage - Personal Injury Protection (PIP)

Liability Exposures (Auto Exposures)

1) Activity that leads to liability 2) Liability for others (Vicarious): Respondeat Superious

Controlling WC Costs

1) Analyzing loss records 2) Job Safety 3) Assessing reserving practices

Covered Autos: categories 3-7 exist so org. can target only the coverage that the state may mandate

1) Any Auto that is licensed for public roads 2) Owned Autos only 3) Owned private passenger vehicles only 4) Owned autos other than private passenger autos 5) Owned autos subject to no-fault laws 6) Owned autos subject to compulsive under/uninsured motorist law 7) Specifically described autos 8) Hired autos only 9) Non-owned autos only

What are the 5 feasibility conditions in retention?

1) Attitude of management 2) Financial conditions 3) Ability to administer the program 4) Ability to return to insurance 5) Ability to adapt to change

Name 3 types of costs that require loss control measures

1) Capital expenditures and depreciation 2) Expenses for safety personnel 3) Program expenses

Analyzing Loss Records:

1) Clerical errors 2) Subrogation 3) Non-compensable claims 4) Fraudulent Claims 5) Repeat Claimants 6) Analyze by location 7) Analyze by cause, injury type and body part

Common Primary Policies under Umbrella:

1) Commercial General Liability 2) Business Auto Coverage 3) Employer's Liability 4) Liquor Liability

Defenses to Negligence Include the Following:

1) Contributory Negligence 2) Comparative Negligence 3) Assumption of the Risk

According to Haddon's energy release approach to loss control, accidents can be viewed in light of the following 2 steps:

1) Control energy buildup 2) Separate released energy from persons or objects

Automobile Exposures

1) Costs of these exposures 2) Liability Exposures 3) Factors Affecting Auto Exposures

Coverage Forms (BPP)

1) Covered Property 2) Property not covered 3) Additional Coverages 4) Coverage Extensions

Policy Organization

1) Declarations 2) Policy Conditions 3) Coverage Forms (BPP)

What are 6 specific techniques of retention?

1) Deductibles 2) Current spending of losses 3) Unfunded reserve 4) Funded reserve 5) Borrowing 6) Captive

What are the 4 valid reasons for marketing your insurance program?

1) Dissatisfied with current service 2) Lower price (price may signal quality) 3) Consider the market cycle 4) Don't bid to often

Negligence has Four Key Elements:

1) Existence of a legal duty of care 2) Breach of the legal duty 3) The breach being the proximate cause of an injury 4) Actual injury or loss sustained

What are considerations to keep in mind when retaining?

1) Expense 2) Expected losses and risk 3) Opportunity costs 4) Quality of services 5) Tax considerations 6) Market considerations

Directors and Officers Legal Liability

1) Exposures to loss 2) D&O Insurance

Management of Contractual Transfers

1) Factors Affecting Use 2) Fundamental Guidelines

What are the 3 main RM/probability distributions?

1) Frequency 2) Severity 3) Total Losses

DIC Insurance

1) Function 2) Perils Covered 3) Advantages and disadvantages of DIC

Workers' Compensation Loss Financing

1) General Financing Issues 2) Prospective Insurance Rating Plans 3) Retrospective Plans 4) Employee Leasing

What are 2 types of analyses in systems safety?

1) Hazard mode and effect analysis 2) Fault-free analysis

Assessing Reserving Practices

1) Inactivity 2) Abnormal Reserves 3) Reserving Accuracy (open v. closed)

Types of Tort Liability's:

1) Intentional Torts 2) Negligence 3) Strict Liability 4) Vicarious Liability 5) Assumption by Contract 6) Statutory Liability

Job Safety

1) Job-safety analysis 2) Engineering controls 3) Personal Protective Equipment 4) Post-accident control

Business Continuity

1) Key Person Exposures 2) Business Continuation Plans

Business Auto Coverage (BAC)

1) Liability Coverage 2) Other Coverages 3) Auto PD Insurance 4) Covered Autos 5) Car Rental Issues

Other Compensation Laws

1) Longshore and Harbor Workers Act 2) Federal Employers Liability Act 3) Jones Act (Maritime Employment)

Losses Covered under Umbrella Liability Policy:

1) Losses that are above the single (occurrence) or aggregate limits in primary policy - Loss is covered but the limit is exhausted 2) Losses outside of the primary policy, in which case umbrella pays after retention (Self-Insured Retention/SIR) - There is no gap between primary policies and umbrella policies. Once primary limit is penetrated, umbrella policy is triggered.

Funding of Obligation (WC)

1) Monopolistic State Fund 2) Competitive State Fund 3) Private Insurance 4) Retention (Qualified Self Insurance) 5) Assigned Risk Plans

What are the 3 probability rules?

1) Mutually Exclusive 2) Independence 3) Conditional probability

Modeling procedure (steps)

1) PLOT each proposed predictor against the dependent variable. 2) Draw the PICTURE. 3) Look for PATTERNS of relationship. 4) Analyze the correlation matrix.

Types of Dividend Plans:

1) Participating 2) Sliding Scale

Important Concepts in Liability Insurance:

1) Policy Trigger - Accident - Occurrence - Claims-Made 2) Policy Limits 3) Defense Costs

Specific Liability Exposures:

1) Premises and Operations 2) Products or Services 3) Bailee Liability 4) Fiduciary Liability 5) Professional Liability 6) Employment Practices Liability

What 2 types of allocation exist in profit centers?

1) Premium allocation 2) Cost allocation

Types of Contractual Liability Transfers:

1) Risk Control Transfers - Incorporation - Leasing - Subcontracting - Waivers 2) Risk Financing Transfers - Insurance - Hold-Harmless Agreements - Indemnity Agreements

What are the 4 key mechanisms of the Alternative Risk Transfer (ART) Market?

1) Self insurance 2) Captives 3) Risk retention groups 4) Capital market securitizations

Classifications

1) Service 2) Retail 3) Commercial 4) Mobile Equipment

Types of Deductible Plans:

1) Small 2) Large

OSHA

1) Standards 2) Penalties

Employers' Liability Exposures

1) Suits by employees 2) Suits by third parties

General Financing Issues (WC Loss Financing)

1) Timing and Amounts - Lag - Predictability 2) IRR (discount rate) 3) Taxes (for premiums) and RML (residual market loads) - Firms want to decrease friction costs

Contractual Liability Transfers:

1) Types of Contractual Liability Transfers 2) Extent of Responsibility Transferred 3) Management of Contractual Transfers 4) Contractual Transfers in Case

Controlling Costs

1) Valuation 2) Rating

WC/EL Insurance

1) Workers Compensation Coverage (Coverage A Part 1) 2) Employers Liability Coverage (Coverage B Part 2) 3) Other States Insurance 4) Other Coverages

Probability

1) proportion of losses among a large number of exposures; 2) proportion of losses over a long period 0-1 probabilities

True

22% of the tort dollar goes to compensate victims for economic losses.

About what percentage of the total commercial risk market is ART?

30%

Foreign Voluntary Compensation Coverage

30+ day overseas employees not covered under standard policy, but can use this endorsement to provide coverage - Normally must also meet local requirements

How much more do indirect costs compare to direct costs?

4 to 8 times as much

True

54% of the tort dollar never reaches the victim.

How long do underwriters typically need to review a policy?

90 days

What is the formula for the coefficient of variation?

= (standard deviation) / (mean)

Confidence bonds based on Normal distribution assumption

=1-NORMDIST(900,460,309.84,TRUE) P( X>900 ) = .078

Liability Exposure

A condition that presents the possibility of a legal claim or lawsuit being made against an organization

What 3 RM insurance specifications in the marketing of an insurance program?

A) Introduction B) General Information C) Coverage terms and conditions

AEL:

Actual Excess Loss (>$10,000)

APL:

Actual Primary Loss (<=$10,000)

Special Damages

Actual monetary losses sustained, has a $ amount.

What suspends coinsurance?

Agreed Value

Transfer of Rights of Recovery

Also called subrogation

Manual Rate

Applies only to current policy year

Longshore and Harbor Workers Act

Applies to longshoremen, harbor workers, and other maritime workers who are injured during course of employment, or suffer diseases caused/worsened by conditions of employment - Provides medical benefits, comp for lost wages, and rehab services - Has been extended by Defense Base Act, Other Continental Shelf Lands Act, and Nonappropriated Fund Act

Products or Services

Arise out of injuries/damage that results from a defective product or faulty workmanship.

Professional Liability

Arises out of the practice of a profession, which has traditionally been associated with medicine, law, education, and clergy.

Types of Suits

Ask question of "on whose behalf is plaintiff seeking damages?" - Derivative Suits - Non-derivative Suits

What are 3 other names for the mean?

Averaged, weighted average, and expected value

Bailee Liability

Bailee only becomes liable to bailor when the bailee is negligent, and what constitutes negligence depends on the circumstances of the bailment

B:

Ballast

Reserves

Based on incurred, we expect to have to pay reserves

Derivative Suits

Brought by shareholders on behalf of the company for harm to the company

Non-Derivative Suits

Can come from a multitude of different parties (class-actions common form)

Cancellation

Can sometimes extend cancellation period

Voluntary Compensation Endorsement

Cannot force employee to collect, but takes place of WC in states without statute - Employees can still sue if they choose to. Often builds goodwill for employer

Experience Modification

Carries on with employer (avg= 1; higher numbers are bad) =(Actual/Expected) - Frequency is more within control of employer, sometimes losses get out of control

Disability (WC)

Cash payments to injured workers to replace income lost because of worker's inability to return to work or inability to return to the position he/she had before injury - Basically, they are indemnity payments - Benefits not payable immediately after injury, must wait a specified number of days

Reserving Accuracy (open v. closed)

Compare accuracy of reserves while claims are still open

What are the two types of direct costs?

Compensation and medicals

Damages under Negligence Include the Following:

Compensatory - Special - General Punitive

What is simulation?

Computer is simulating drawing outcomes from distributions.

Entity Plan

Controlled through the business, better when firm has many owners - Org. purchases life insurance on each key person

Prospective Insurance Rating Plans

Cost this year is what insurer believes to expected cost of losses based on prior experience, normally an average of past 3 years. 1) Guaranteed Cost 2) Dividend Plans 3) Deductible Plan

How are intentional torts usually insured?

Coverage B in CGL

Excess Liability

Coverage on top of a single, specific underlying coverage

Umbrella Liability

Coverage on top of multiple underlying categories of coverage

Types of Benefits (Medical Benefits)

Covered by almost all states - Scope of covered medical care is broad, and coverage begins immediately after injury

Ordinance or Law Coverage (ICC) Coverage B

Covers cost to demolish undamaged portion of structure and remove debris

Ordinance or Law Coverage (ICC) Coverage C

Covers increased cost to repair/replace in accordance with codes

Ordinance or Law Coverage (Increased Cost of Construction) Coverage A

Covers reduction in value of undamaged portion that must be demolished

W:

Credibility factor (0<=W<=1)

Business Continuity

Crucial for closely held businesses - Ideal solution for most businesses is to make prior arrangements for the sale of an individual's interest prior to the death/disability through a buy and sell agreement.

What is included in the "introduction" part of an insurance program?

Description about the company and organization

What are the two costs involved in accidents?

Direct and indirect costs

What is strongly influenced recently by Sarbannes-Oxley: builds more oversight into corporate governance? - No fiscal limit on liability - Must convince regulators of a backup plan

Directors & Officers Legal Liability

Fiduciary Duties

Disclosure, pension management, etc. Must act in best interest of others

Unfunded reserve

Do NOT match assets to reserves

Stopgap Coverage

EL exposure still exists in monopolistic states, so stopgap covers EL exposures in those states

Experience Modification Formula

EM= [APL + B + B(AEL) + (1-W)(EEL)] / (TEL + B)

Suits by Employees

Employees can sue the employer based on the Dual Capacity Doctrine, which asserts employer is serving a capacity other than a employer when the injury occurs

Excluded Employees/Employers (WC)

Employers with less than three employees are not required to purchase WC insurance - Counting Rules

Federal Employers Liability Act (Interstate Railroad Workers)

Enables injured railroad employees to sue employer for occupational injuries resulting from negligence, and prevents employer from asserting common-law defenses - Tort based Act, involves comparative negligence on part of employer

Policy Trigger

Event/activity that activates coverage for a particular policy.

Why is EXPECTED LOSSES AND RISK an important retention consideration?

Every insurance company will state that they are "better than the average" in terms of premium.

Business Auto Coverage (BAC) Liability Coverage (Exclusions and Limits)

Exclusions: - Pollution - Mobile Equipment: inland marine used to cover property damage, CGL for liability (premises/operations) Limits: - DOT requirements: may stipulate limits - State laws - Requirements for umbrella

Fiduciary Liability

Exists when a director/officer fails to act in the best interest of the shareholders.

EEL:

Expected Excess Losses

Negligence

Failure to exercise degree of care a reasonably prudent person would've exercised under similar circumstances.

Non-compensable claims are those that are consistent with workplace activities.

False

Professional Liability tend to have more "short-tailed" claims than most other liability exposures.

False

Which type of Specific Liability Exposure is frequently involved with D&O claims, and employee benefit claims?

Fiduciary Liability

Serious

Firm has immediate threats to health - Fines: financial - Prison is possible

Truckers Coverage Form

For insureds in the business of transporting property of others

Jones Act (Maritime Employment)

For sailors on US vessels, allows negligence suits against the employer

Property Not Covered

Generally anything underground

Employment Practices Liability

Generally involves discrimination in hiring/firing practices, sexual harassment, and wrongful termination claims.

Policy Limits

Generally separated by occurrence limits, and annual aggregate limits

Basic Functional Duties

Hiring, appointing, managing firm, etc.

Inactivity

If claim open for certain period of time, can probably be closed

Contributory Negligence

If plaintiff 1% at fault, recovery is completely barred

Why is QUALITY OF SERVICES an important retention consideration?

If we transfer, a third party (claims department) would become involved in rating the quality of a claim. We want to avoid this.

Elective (WC)

In Texas and NJ, WC must be elected by the employer

Compulsory (WC)

In most states, any employer with over 3 employees must purchase WC insurance

Valuation (Controlling Costs)

Include only values of insured property - Excluded Property should not be included - Correct Valuations: keep up to date

As we (increase/decrease) the number of probabilities in simulation, we get closer to actual "tabulated distribution."

Increase

Recent Developments

Increased likelihood for tort reform

Partial Disability

Injured worker can work in some capacity despite injury

What is the normal distribution assumption?

It assumes that distribution is normal.

Additional Factor of Negligence

Joint and Several Liability

Employee Leasing

Leasing firms responsible for HR and WC of leased employees

Is an unfunded reserve an asset or a liability for a company?

Liability

Joint and Several Liability

Liability of multiple defendants collectively or individually for entire amount of damages

Assumption by Contract

Liability that arises bc of an enforceable agreement between two or more parties that creates an obligation to do, or not to do, something.

Strict Liability

Liability that is not based on negligence or the intent to cause harm. - Can be imposed by tort law, or by statutes - Tort Law applies to: 1) Abnormally dangerous activities 2) Sale of dangerously defective products

How can we control loss frequency?

Loss prevention

How can loss severity?

Loss reduction

A low coefficient of variation corresponds with a (high/low) level of risk/variation.

Low

Retention (Qualified Self-Insurance)

Lowest cost option

Funded reserve

MATCH assets to reserves

3 examples of measures of location

Mean, median, mode

Types of Benefits (Rehabilitation)

Means to reduce seriousness, and cost of disabling injuries - Provide vocational/physical assistance to injured workers - Often reduce ultimate losses; available even if state does not include specific provision for them

Deductible Plan

More retention is built into the program

Business Form

Most appropriate plan depends on the business form

Job Safety

Most recommendations for workplace injuries involve changes to work style (back most common body part at UGA)

Risk Control Transfers

Moving activity around

Insurable Interest

Must exist at time of loss

Monopolistic State Fund (WC)

Must purchase WC insurance from a state-approved fund

Fleet Safety Program:

Needs to be broad, many claims/losses stem from improper loading 1) Driver selection 2) Driver training 3) Driver control 4) Vehicle maintenance and design 5) Breakdown and accident response 6) Drug and alcohol testing

Do companies typically buy pure insurance or purely retain?

Neither! They usually do some combination of both.

Is a RManager necessary for a successful RM program?

No

General Damages

No dollar amount, injuries are presumed to follow from the type of wrong.

De Minimus

No immediate threat, but acts as a warning

Mutually exclusive

No probability that A and B will occur together. P(A n B) = 0

Can the direction of the relationship between the x and y variables be established statistically?

No, it must be established analytically.

Defense Costs

Normally responsibility of insurer, who has a comparative advantage - Can be in addition to the limit, or included in the limit

Why is OPPORTUNITY COSTS an important retention consideration?

OC has to do with TVM. Insurers want premiums upfront but companies want to pay it later.

Cross Purchase Plan

One owner must purchase life insurance for each of partners, other than himself - Becomes complicated as number of owners increase

RML (residual market loads)

Option for orgs. that cannot obtain coverage through voluntary market - Charge on voluntary premiums to subsidize residuals

Buy-Sell Agreements

Other owners can purchase interests of deceased partner at time of death

Commercial (Vehicles)

Other than service or retail

Long-Term Leases

Over 1 year at inception date, treated as owned auto for insurance purposes

Participating (Dividend Plans)

Overall experience of insured

Is TVM in determining loss control expenses measured in future value or present value?

PV

Compensatory Damages

Payment for actual losses sustained and there are two types (Special and General)

Car Rental Issues:

Personal (Hertz): waiver of collision rights common if auto policy covers rented autos - Short-Term Leases - Long-Term Leases

Retail (Vehicles)

Pick-up property from, or deliver to, individual households

Assumption of the Risk

Plaintiff knowingly/voluntarily accepted the possibility of harm

Comparative Negligence

Plaintiff's recovery reduced by extent to which at fault

Policy Trigger (Accident)

Policy activated when accident occurs; common for auto

Claims-Made Basis

Policy in force when claim is made, regardless of when act committed, is the policy that will pay for losses

Policy Trigger (Claims-Made)

Policy in force when claim was made is the one that pays; very common for long-tailed claim line of business

Policy Trigger (Occurrence)

Policy in force when wrongdoing occurred is activated; no limits on length of time

The other theoretical probability distributions (lognormal, pareto, gamma) are ______ skewed.

Positively

Premises and Operations:

Possibility that an organization will be held liable because of bodily injury/property damage caused by either: 1) An accident occurring on premises owned/rented by the org., or 2) An accident occurring away from such premises, but only if it arises out of the org. ongoing operations

Borrowing

Pre-commitment with lines of credit, etc.

Independence

Probability that A and B will occur together. P(A n B) = P(A) X P(B)

What is often referred to as malpractice or E&O?

Professional Liability

Dividend Plans

Provide a refund of premiums for good (low) loss experience

Accidents Covered (WC)

Provides benefits only for occupational injuries- those that arise from worker's employment. - Accident= undersigned, sudden, and unexpected event. - Must arise out of and in the course of employment - Injuries that occur while commuting to and from work not covered, but delivery injuries are covered - Pre-existing condition diseases often challenged

Endorsements for Federal Acts

Provides coverage for other, additional employees

Punitive Damages

Punishment for especially wrongful act, or deterrent for future purposes - Both frequency and severity of punitive damages have been increasing in recent years

Private Insurance (WC)

Purchase insurance from private insurers

Classifications

Range from least expensive (service) to most expensive (mobile equip.)

Retrospective Rating Plans

Rates based on actual losses in current year, which impact current premiums

What is most attractive bc of tax laws?

Replacement Cost

Assigned Risk (WC)

Residual markets

Statutory Liability

Responsibilities are prescribed by statutes and regulations (law) rather than by tort law principles, and a breach need not be intentional.

When financial condition factors are HIGH, should you retain or not?

Retain.

Contractual Transfers In Case

Review leases carefully - Assumption of liability - Insurance obligations - Other duties Consider other agreements where transfers could be used or may be present

Who most commonly files D&O suits?

Shareholders; may file on behalf of themselves as individuals or on behalf of the corporation (Derivative and non derivative)

Sliding Scale (Dividend Plans)

Somewhat loss-sensitive

Competitive State Fund (WC)

State fund competes with private insurers

Which tort is prevalent with WC, pollution, and auto in some states?

Statutory Liability

What is very common with products liability and WC?

Strict Liability

Suits by Third Parties

Suits can be brought by any of the following against an employer: - Spouses - Consequential Injuries (mother pregnant w/ child) - Third-Party-Over Injuries (employee sues employer and manufacturer, manufacturer then files EL suit on employer to recover damages)

Is a normal distribution symmetrical or asymmetrical?

Symmetrical

Why is EXPENSE an important retention consideration?

The most costly part of RM transfer is underwriting.

Why is MARKET CONSIDERATIONS an important retention consideration?

There is pressure (at least now) to buy insurance when the market is in a SOFT state.

Short-Term Leases

Those that are less than 1 year at inception date, treated as hired autos

Types of Benefits (Compensation for Death)

To surviving spouses and dependents; also vary by state - Normally limited in time, and some states provide burial allowance

Global Competitiveness

Tort costs represent 1.82% of U.S. GDP, which puts the U.S. at a significant disadvantage when compared to other countries - Emerging markets have very low litigation costs

Intentional Tort

Torts committed with general/specific intent to commit the tortuous act. - Can be against a person, or can involve property or business - Includes assault & battery, malicious prosecution, defamation (libel & slander), and others - The intent to cause harm is not necessary

TEL:

Total Expected Losses

Service (Vehicles)

Transporting the insured's personnel, tools, equipment, and individual supplies to or from a job location

70% of fraudulent claims are from providers, not employees.

True

94% of the US M&A deals in 2013 over $100 million were challenged in shareholder lawsuits

True

Both Umbrella and Excess Liability policies exist to provide coverage on top of primary coverage.

True

Insurers may have incentive to overstate reserves.

True

It is the insurer's responsibility to assess reserve practices.

True

Mobile equipment is usually covered under the CGL for liability. However, if an insured is transporting an item of mobile equipment on a trailer connected to one of its motor vehicles, liability arising from that transport is covered by the auto policy

True

Monday and Friday are most common days for WC claims.

True

Professional Liability tend to have more "long-tailed" claims than most other liability exposures.

True

Record keeping and compliance is the most significant part of Penalties section under OSHA.

True

Subrogation can help losses, and see if third party is responsible.

True

Vicarious liability is included in negligence

True

Workers Compensation laws are generally left to the states.

True

board members of smaller, closely - held companies and of non-profit organizations also face the risk of D&O suits

True

What are 2 characteristics underwriters appreciate about the information we compile and sent to them?

Truthful and organized

Coinsurance %

Underinsurance penalty, encourages insurance to value

Total Disability

Until recovery (if possible) injured worker is not able to work

What should a company remember to identify when presenting general information to the underwriter?

Unusual risks

Benefit Levels (WC)

Usually expressed as % of pre-injury wages, normally 2/3; but mandated by states

What applies to acts of employees, or joint tortfeasors, and depends on the laws in the state?

Vicarious Liability

What began with the concept of Respondeat Superious?

Vicarious Liability

Why is TAX CONSIDERATIONS an important retention consideration?

We can deduct taxes with transfer. If we pay for workers' compensation, those claims are tax deductible.

Functional Valuation

When MV exceeds RC, good for old buildings, replaces with functional equivalent

Vicarious Liability

When one party is held responsible for action of a subordinate/associate bc of the relationship between the two parties

When is it desirable to use the Poisson distribution?

When there are > 50 exposure units and the chance of loss < 0.1.

Risk Financing Transfers

Without the presence of all three, any risk financing measures are doomed. Insurance provides financial assets in the event of losses, but insured's cannot control 3rd party's exposures

Risk retention groups

Work like captives but are regulated by the government more

Temporary Disability

Worker is expected to recover

Permanent Disability

Worker will never be the same as before the injury occurred

Which line of insurance makes up the largest sections of the Alternative Risk Transfer Marker

Workers' compensation

When deductibles in the overall market are higher, should a company retain or not?

Yes, they should retain.

Is borrowing common with lots of retention within a company?

Yes.

Frivolous suits (loser pays)

another reform that has been advanced and is place in the British Legal System

PIP

is personal injury protection and is usually required in states that have a no-fault statute (Georgia is NOT a no-fault state, but Florida and Michigan are a few notable ones that are)

Where is D&O exposure the greatest?

large, publicly held corporations

What is the MOST effective reforms at reducing insurance costs?

limits or caps on noneconomic damages

Who are non derivative suits brought by?

stakeholders other than shareholders OR by shareholders individually

A good strategy is to purchase adequate limits on the auto policy so that the umbrella policy van be used to increase the overall liability coverage for the firm

true

Negligence is a common basis for liability for companies

true

The fact that workers' compensation benefits may be available for auto-related injuries of employees may cause firms to limit their purchase of medical payments (a no-fault coverage) or uninsured motorist coverage

true

Transporting pollutants is not covered in the base policy, but as an exception to the pollution exclusion, the liability arising from the reals of fuels or fluids that operate the vehicle are covered

true

With regard to property coverages, it should be noted that wear and tear is not covered (that is a maintenance issue) and electronic equipment that is not permanently installed in a location intended for it is also excluded. Radar detectors are usually explicitly excluded (primary use is not one that insurers favor).

true

directors and officers can be held personally liable and without limit to any investment in the company. Therefore, they expect the company to purchase D&O coverage to protect them personally

true

the term auto is broadly defined in the commercial auto policy to include all vehicles that are licensed for use on public roads. As a result, even a large tractor-trailer truck can be covered under the business auto coverage form (BAC), unless it is generally used for transporting property of others.

true

What percentage of accidents are a result of unsafe acts?

88%

What is an example of a natural hedge?

Busch Gardens mitigates the risk of inclement weather by opening a ski resort in the Northwest.

AKA Human approach to loss control

Heinrich's domino theory

Predictor

Independent variable

What is binomial distribution?

Indicates the probability of r events in n possible times

Regression analysis

An attempt to measure the degree of relationship between two or more variables and a variable of interest

Law of Large Numbers

As we INCREASE the number of exposure units, actual results will approach the expected results; As 'n' increases, relative risk decreases n=1, E( losses ) = µ, Var( losses ) = σ2 , CV = σ/µ

Why is it unwise to market your program more often than once every 5 years?

Carriers assume a lack of consistency and commitment

Probability of 0

Certain NOT to occur

Probability of 1

Certain TO occur

What is R^2 and what is the best R^2 you can get?

Coefficient of determination; 1 (=100%)

What does the correlation of risks (AKA the portfolio effect) imply?

Diversifying DECREASES the correlation of risks.

What is fault-free analysis?

Drawing tree that reveals the process of how safety is implemented

Of what should agents and brokers provide evidence when you select them?

E & O coverage

What is the difference between empirical distribution and theoretical distribution?

Empirical is based on events that have actually occurred while theoretical is based on a mathematical formula.

What is E & O coverage?

Errors and Omissions coverage

What are 3 parts to developing a RM program

1) RM policy statement 2) Safety program 3) Institute a coordinated effort

What are 2 examples of the reward-penalty system in a loss control program?

1) Salary evaluation 2) Profit centers

What are 5 examples of loss control techniques?

1) Separation of assets 2) Salvage 3) Rehabilitation 4) Redundancy 5) Noninsurance transfers

According to Heinrich's domino theory, employee accidents can be viewed in light of the following 5 steps:

1) Social environment 2) Fault of the person 3) Unsafe act 4) Accident 5) Injury

What are 6 examples of indirect costs?

1) Time lost by injured employees 2) Time lost by other employees 3) Time lost to prepare accident reports & do retraining 4) Cost due to damage to machinery, tools, cleanup, etc. 5) Reduced productivity of injured worker upon return 6) Reduced morale

What are 3 general considerations in evaluating loss control projects?

1) Timing 2) Opportunity cost of capital (discount rate) 3) Cash flows v. accounting values

What is the value of a predictor in a multiple regression?

> 1

Describe the NPV method of evaluating a loss control program

- Considers the size of project - Need to select discount rate - Discount all flows back to current value - If there is a positive NPV, it is a VALUABLE investment - This is the PREFERRED method of evaluating a loss control program

What are some examples of mechanical loss control?

- Machine guards - Good lighting - Cleanliness - Lock out switches - Workplace design (ergonomics)

What are some examples of the implementation of loss control programs?

- Policy - Manual - Hiring - Training - Promotion of program - Reports - Committees (executive/safety)

What are some examples of human loss control?

- Safety rule enforcement - Training for safety - Careful hiring practices - Education

What happens in the review part of the approval part of underwriting an insurance program?

- Select participants - Collect prioritized lists of markets - Allocate markets - Allow time for questions after specifications have been sent out - Set a firm deadline for written proposals - Select winning proposal - Implementation (2 weeks minimum)

What characteristics should you consider is selecting qualified agents/brokers?

- Services - Experience (with similar businesses) - Account team - Personalities - Abilities - Professionalism (ethics)

What are some examples of crisis management?

- Three Mile Island ---> Nuclear activity in the 70s - Tylenol ---> Tampering with poison in packaging ---> Did a great job recovering and actually INCREASED sales - Exxon Valdez ---> Drunk capitan driving - Katrina / Rita / Ike - Target ---> Data breach ---> By not admitting the possible scope of the problem, the CEO lost his job - VW ---> Another example of a CEO losing his job

What are 3 methods of evaluating loss control projects?

1) Pay back method 2) NPV method 3) IRR method

Regression modeling (steps)

1) Plot the data ---> Are they linear? If not, transform by taking the natural log 2) Fit a regression line. 3) Test the fit, R^2, and p-values 4) Plug into the right-hand side to obtain forecast 5) Note variation. Remember that forecast is just a point estimate.

What are the 3 most common theoretical distributions used in RM? (Measure Frequency)

1) Poisson 2) Binomial 3) Negative Binomial

Name 3 factors in comparing costs and benefits

1) Probability 2) TVM 3) PV of expected costs with PV of expected benefits

What does the variation/standard deviation tell?

Absolute variation/rise

Who will assist us in managing and marketing the insurance program?

Agent or broker

AKA Physical engineering approach to loss control

Haddon's energy release approach

If the market is currently in a (soft / hard) cycle, you should not market your program.

Hard

Correlation

It is a statistical relationship (-1, +1)

Is it correct to assume normal distribution in RM?

No. In RM, distribution is usually positively skewed.

What are the theoretical distributions that are associated with severity?

Normal Lognormal Gamma Pareto

Frequency Distribution Relates to what

Number of occurrences

How often should you market your program?

Once every five years

Confidence bonds based on empirical distribution

P( X>900 ) = .1

Example of Conditional Probability: P(E) = .01, P(F) = .10, P(E F) = .009 .... P(F|E) = ?

P(F|E) = P(E F)/ P(E) = .009/ .01 = .90

Variable of interest

Predicted of dependent variable

Probability Dist must equal what? And can contain what?

Probability Distribution must equal 1 and contain mutually exclusive & collectively exclusive

Conditional probability

Probability of an event ( A ), given that another ( B ) has already occurred.

In regards to losses and retention, what probability does the total claims distribution (Convolution) assume?

Probability that Losses < retention, probability of ruin, maximum probable yearly loss, Value at Risk (VaR)

What is the key part of implementation in loss control programs?

Provide incentive

What are 2 ways to measure the explanatory power of a model?

R^2 and p-values

3 examples of dispersion

Range, variance/standard deviation, coefficient of variation

How do we forecast frequency and severity?

Regression modeling

What does the coefficient of variation tell?

Relative variation/relative risk

Mean will be to the _____ side of the median in a positively skewed set of data

Right

Is a smaller or larger p-value better to determine if an individual variable is more important?

Smaller!

What are zero-beta assets and what is an example?

They are not correlated to market risk; CAT bonds

total claims distribution relates to

Total $ losses in a given period

What is VaR?

Value at Risk; it is another distribution that is more financial based

Standard deviation

Variation from what is expected

Since distribution is usually positively skewed in RM, does that mean that probability is overestimated or underestimated when we assume it is normally distributed?

We UNDERESTIMATE the probability when we assume normal distribution.

Conditional and Severity Distribution relates to what

severity of losses


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