RMI 2

Many individuals buy "replacement cost" insurance. Technically, replacement cost insurance violates which of the following fundamental principles of insurance:

Principle of indemnity

Coinsurance in Health Insurance

functions much like a straight deductible, expressed as a percentage; often referred to as copayment

franchise deductible

typically expressed as percentage or dollar amount. once loss exceeds this amount insurer must pay entire claim

The insurer can be legally obligated to perform in the case of a covered loss, but the insured cannot be forced to pay premiums. This fact allows us to describe an insurance contract as a(n

unilateral contract (only one party obligations are legally responsible)

Why are exclusions used in insurance contracts and what are the major types?

used to define and limit the coverage provided. Limit certain perils that are "uninsurable" or can be covered elsewhere. Exclude property and location.

personal coverages

possibility that peril may affect a persons income (death sickness, unemplyment)

Private vs public insurance

private is written by privately organized groups and is considered voluntary whereas public is written or monitored by the government, considered involuntary

Global insurance

rates vary due to the change in circumstances in different countries, some may have more threats or less

named perils versus open perils

Named perils list perils covered and open perils are insurers intent to cover accidental perils except those excluded in the contract

Define the principle of utmost good faith

"Higher standard of honesty is imposed on parties to insurance agreement than is imposed through ordinary commercial contracts."

What are the four requirements of a valid contract

-Legality(must be legal) -Capacity(must be eligible((no insane/minors)) -Offer and acceptance(offer of certain terms and acceptance of those terms/made by applicant) -Consideration(the value given to each party(payments/conditions in contracts))

What different categories can insurance be classified into?

-Personal (life and health) vs property (buildings, homes, autos, ) -Government (public/social) vs private -Involuntary (Social Security) vs voluntary (fire insurance)

Which of the following statements are true with respect to the principle of insurable interest: 1. I can buy insurance on a piece of property that I do not currently own 2. I can buy life insurance on a random stranger, with whom I have no business or personal dealings with 3. I can collect insurance money on a piece of property that I own

1 and 3

What are requirements for a risk to be considered insurable?

1. Large number of similar units 2. The potential losses must be accidental 3. Loss must be observable and unintentional 4. Loss must be observable and calculatable

Which of the following are true regarding independent agents: 1. Any misrepresentation can void an insurance contract 2. Only material misrepresentations can void an insurance contract 3. Any breaches of warranties can void an insurance contract

2 and 3

How does erm assign value to a company

Adds notion and probability to the risks Improves capital iffeciency and shareholder wealth by pooling all risk together

What are distinguishing characteristics of insurance contracts

Aleatory: Values exchanged by contracting parties are not necessarily equal •Unilateral: Only one party's promises are legally enforceable (insurer) •Conditional: Insurer only has to perform if insured adheres to conditions •Personal: Requires privity of the contract

Which of the following statements is NOT true:

All government provided insurance requires participation (ie is involuntary)

What are the costs and benefits of insurance to society

Benefits: -Reduced reserve requirements-Capital freed for investment-Lower cost of capital-Reduced credit risk-Business and social stability-Facilitates offering of new products and services-Loss control activities Costs: Expense loading etc. to insured (payment > actuarially fair premium)-Inefficiencies (e.g., moral hazard, fraudulent claims, inflated claims)

principle of utmost good faith: warranties

Clause in insurance contract stating that before the insurer is liable, a certain fact, condition, or circumstance affecting the risk must exist. for a ship ( warranted free of capture or seizure)

Which of the following statements are true regarding insurance capital

Having more capital reduces the probability that an insurance company will go bankrupt All things constant (no increase in premiums!) policyholders of an insurance company prefer more capital to less

Define principle of utmost good faith

Higher standard of honesty is imposed on parties to insurance agreement than is imposed through ordinary commercial contracts

What is insurable interest?

Insured must demonstrate personal loss or else be unable to collect amounts due when loss caused by insured peril occurs. ( life insurance, legal contracts, leases, ownership) Personal contract following the person, not the property

What makes a risk insurable?

Large number of homogeneous units -Accidental and unintentional losses -Determinable and measurable losses -Non-catastrophic losses -Calculable chance of loss

Which of the following are true regarding independent agents

Offer products from multiple insurance companies

Define principle of subrogation

One who has indemnified another's loss is entitled to recovery from any liable third parties who are responsible.

Principle of subrogation

One who has indemnified another's loss is entitled to recovery from any liable third parties who are responsible. insurer is entitled to get money from whoever did the damage.

What is insurance and how does it differ from other methods of risk transfer

Pooling of losses by a transfer of risk to insurers who agree to pay insureds for such losses, to provide other pecuniary benefits on their occurrence, or to render services connected with the risk. Not only risk transfer but also pooling and risk reduction

What are the main purposes of clauses limiting amounts payable?

Reduce the costs of offering the insurance service\ -Limit the number of small, expensive-to-administer claims -Achieve a greater degree of fairness in the rate structure -Place upper limit on the insurer's obligation on any one policy

Purpose of Subrogation

Reinforces principle of indemnity: Insured can only collect once -Helps hold rates/premiums below what they would otherwise be. -Places burden of loss on those responsible (i.e. negligence)

exceptions to subrogation

Subrogation does not exist when the principle of indemnity does not apply (life in-surance) -Subrogation always waived for an insured -If insured violates or destroys insurer's subrogation rights, insured may forfeit collection rights under the contract. -Insurer entitled to subrogation dollars only after insured has collected fully for loss

What is the principle of indmenity and its main purpose?

The insured may not collect more than the actual loss in the event of damage caused by an insured peri. Replacement cost-depreciation

Define principle of indemnity

The insured may not collect more than the actual loss in the event of damage caused by an insured peril (insured can only collect once)

Savings are greater

The lower the correlation coeffieceint the higher the level of baseline risk The higher the safety level

The principle of subrogation states that the insurer is entitled to recover from a negligent third party any loss payments made to the insured. The reason for this principle is:

To reinforce the principle of indemnity To keep insurance premiums down To prevent fraud and double recovery

Principle of utmost good faith: mistakes

When a honest mistake is made in the contract(spelling error) Used when the insured feels the insurer is not acting in good faith -Used to force insurance companies to perform according to the contract

stock insurers

a corporation owned by stockholders. shares exist and can be traded

What is the difference between actual cash value and replacement cost?

actual cash value is the replacemnt cost at time of loss minus any depreciation. (maximum reimbursement so they do not pay more than what is needed to replace property)

calendar year deductible

aggregate deductible that is found in basic medical expense and major medical insurance contracts

aggregate deductible

applies for one contract year Insured absorbs all losses until deductible level is reached-Then, insurer pays for all losses over specified amount

Straight deductible

applies to each loss and is subtracted before any loss payment is made. One of the simplest and most effective deductibles.

Property Coverage

covers property that is already purchased

Coinsurance in Property Insurance

device used to make the insured bear a portion of every loss only when underinsured

Define ERM

encompasses all major risks faced by a firm (pure, observational, financial) acknowledge that these risks interact together

Define principle of insurable interest

insured must demonstrate personal loss or else be unable to collect amounts due when loss caused by insured peril occurs.

mutual insurers

non profit

dissapearing deductible

size decreases as loss amount increases

What is a deductible ?

specific dollar amount that will be borne by the insured before insurer becomes liable for payment. reduces price of coverage

principle of utmost good faith: representation

statement made by applicant before policy is issued ( saying no one under the age of 25 drives the car)

Principle of utmost good faith: concealments

you must divulge information voluntarily,