Insurance
_______ is the chance of a loss or no loss occuring. Type of risk we can insure-can't make a profit.
Pure Risk
__________ is defined as the chance of loss, uncertainty associated with loss, or the possibility of a loss.
Risk
_______ is the chance of loss, no loss, or a profit. Ex. buying a stock.
Speculative Risk
________ is the risk that an individual perceives based on their prior experiences and the severithy of those experiences.
Subjective Risk
For an insurer, ___________ is the difference between expected and actual losses.
Objective Risk
________ is a risk that can impact a large number of individuals at one time-ex war or an earthquake. Difficult for insurance company to insure.
Fundamental Risk
_____________ is a risk that can impact a particular individual. Ex. Heart Attack
Particular risk
_____________ is a risk that would result in a loss, other than a monetary loss. Ex. Emotional distress from someon passing away.
Non-Financial Risk
Risk involving loss of finacial value. Ex. Income loss due to death
Financial Risk
The chance of a loss occuring. Measures the long-run frequency with which an event occurs. Useful measure for the insurer.
Probability of Loss
The more exposures, the more likely probable results will equal true results. Helps reduce objective risk.
The Law of Large Numbers
List steps in the risk management process.
1. Determining the objectives of the risk management program.
2. identifying the risks
3. Evaluating for the probability and severity of loss
4. Determining the alternatives
5. Select appropriate alternatives for each risk.
6. Implement the Plan
7. Periodically evaluating and reviewing.
How might identifying potential risks be understood?
Checklists, survey forms, financial statements
Explain the matrix for determining and selecting the best risk management alternatives.
High severity-low frequency=Transfer (Insurance)
Low severity-low frequency=Retain risk
High severity-high frequency=avoid risk
low severity-low frequency=retain/reduce risk
The actual cause of a loss, such as: fire, wind, tornado, earthquake, burglary & collision
Perils
A condition that increases the likelihood of a loss occurring.
Hazard (Icy Roads)
Type of Hazard: Filing a false claim (fraud, dishonesty)
Moral Hazard
Type of Hazard: Leaving the car unlocked because you have insurance-indifference.
Morale Hazard
Type of Hazard: Icy roads, poor lighting, defective equipment, poor eyesight.
Physical Hazard
What are the requisites for an insurable risk?
1. A large number of homogenious exposure units
2. Losses must be accidental
3. Losses must be measurable and determinable
4. Losses must not pose a catastrophic risk for the insurer
5. Premiums must be reasonable and affordable.
What are the elements of a valid insurance contract?
1. Mutual consent-both parties understand contract
2. Offer and acceptance-sign app and pay premium.
3. Performance or delivery-one party has a duty to make you whole
4. Lawful purpose-has to be within the law
5. Legal competency of all parties-no business w/ minors or incompetent people.
Insured is only entitled to compensation to the extent of the insureds financial loss and cannot make money from the contract.
Principal of Indemnity
If the insurer pays a claim, only the insurer can then sue the responsible party.
Subrogation Clause
Insured must have a financial loss. Property and Liability must have insurable interest at the time of policy inception AND at time of loss. Life insurance: only needs to be at the time of policy inception.
Principal of insurable interest
Representation-don't lie to insurance company. Must be material misrepresentation to void contract. Age is not material.
Principal of utmost good faith
Promise made by the insured to the insurer.
Warranty (Principal of utmost good faith)
Hiding important information. Being silent about a fact that is material to the risk being considered.
Concealment (principal of utmost good faith)
Take it or leave it-referring to terms and conditions.
Adhesion
Money exchanged may be unequal. Small premium, large benefit.
Aleatory
Only one promise made by the insurer; which is to pay in the event of a loss.
Unilateral
Insured must pay the premium to receive the benefit/promise to pay.
Conditional
Property insurance policies are a contract between the insurer and the insured.
Personal
Legal representative of the insurer-enter into contracts on their behalf.
Agent
Written document to appoint by and insurance company. The insurer is responsible for the acts of an agent.
Expressed Authority
Authority the public perceives. (Visual: signs on the door, business cards on dest)
Implied Authority
Authority that the public perceives due to visuals but no authority actually exists.
Apparent Authority
Relinquishing a known legal right.
Waiver
________ is where, through a legal process, you are denied a right you might otherwise be entitled to under the law. Agent makes claim about something that is not what the contract says-ex suicide clause.
Estoppel
Insurance company that issues stock and is owned by shareholders with the intent to earn a profit.
Stock Insurer
Insurance company that is owned by the policyholders, not shareholders.
Mutual Insurer
What is the difference between an agent and a broker?
Agents are legal reps of an insurer and act on their behalf whereas a broker is a legal rep of the insured and act in their best interests.
Insurance company transfers some or all of the risk to other insurance companies.
Reinsurance (Ceding company to reinsurer)
List of key words, phrases or terms used throughout the insurance contract.
Definitions
Lists insured, covered property and the amount of coverage premiums, terms and administrative items.
Delclarations
Life or health policies list the name of insured. Property and casualty list the address of the property.
Description of what is insured
Outlines specifically what will NOT be covered. May exclude perils such as war and flood.
Exclusions
Named Peril basis where specific perils are listed as covered or open peril basis covers all risks of loss not specifically excluded.
Perils Covered
Details the duties and rights of the insured and insurer.
Conditions
What is the typical grace period in an insurance contract?
31-60 Days
What are written additions to an insurance contract, typically require additional premium and make it possible to customize contract-also take precidence over conflicting terms in policy.
Riders and Endorsements
Classifies applicants into risk pools, selecting insureds and assigning a premium.
Underwriting
The tendency of higher than average risks to purchase or renew insurance policies.
Adverse Selection
Amount insured pays before benefits start.
Deductibles
In addition to deductible flat dollar or percent of loss.
Copayments
Cost sharing between insured and insurer. Ex. 80/20
Coinsurance
What is the coinsurance formula for property insurance?
Amount of Insurance carried (Purchased)
____________________________________
Amount of Insurance Required (min)
*Covered loss-deductible=Amount insurer pays
Current costs of replacing property with new materials of like kind.
Replacement Cost (RC)
Replacment cost, less depreciation.
Actual Cash Value (ACV)
Determined jointly by insured and insurer for valuing property.
Agreed Upon Value (AUV)
Administers, interprets and enforces insurance laws.
Executive or State Insurance Commissioner
Provides a watchlist of insurance companies and issues model legislation but no direct regulatory authority.
National Association of Insurance Commissioners
What is the difference between embedded deductible and non-embedded deductible?
Embedded is a family plan with BOTH an indivudual and family deductible. non embedded is where the entire family must meet deductible before moving to the coinsurance phase.
The Afordable Care Act limits the maximum out of pocket expenses to what for 2024?
9450 for an indivudual and 18,900 for a family.
What are key provisions of the affordable care act?
Qualified health plans cannot deny coverage due to pre-existing conditions, elimination of lifetime benefit limits, and children may remain on parents health care plan to age 26.
What is an indemnity health insurance plan?
One that is written on an indemnity basis (reimbursement) or on a managed care basis.
What is an HMO network?
Must stay in network and primary care physician acts as a gatekeeper to specialist services.
What is a preferred provider network (PPO)?
Not required to receive services from preferred providers, but higher deductibles and coinsurance payments may apply when services are from outside the network.
What is a consumer-directed health plan?
A combination of a high deductible health plan and a Health Savings account (HSA). A portion of the premium savings from the high deductible may be contributed to HSA.
What are the contibution limits for HSA account?
Single 4150, and family 8300. Catchup at 55 plus is extra 1k.
List the characteristics of an HSA account.
-Allows for pre-tax contibutions by employee or employer (or both)
-Assets are 100% vested at the time of contribution and owned by employee.
-Earnings on account is not taxed and distributions used to pay for qualified medical expenses are tax-free
-Can't contribute beyond 65.
-LTC and Cobra premiums are eligible
-After 65 non qualified expenses are taxable but no 20% penalty
-HSA can continue to grow year to year-not a use it or lose it life FSA
What is the grace period for an FSA?
Allows funds from the prior year to be used for expenses incurred during the first 2.5 months of the current year.
FSA's can be used for ____________. Where an HSA cannot.
Child care or dependent care.
What is the incontestability clause?
Protects the insured by preventing the insurer from challenging the validity of the health insurance contract after it has been in force for a specified period of time unless the insurred fraudulently obtained coverage to begin with.
What is the election period for Cobra benefits?
60 days from the time the beneficiary receives notification from the adminstrator.
Who does Cobra apply to?
Empolyers who offer a group health plan and have at least 20 full-time employees. (2 part time equal one full time)
List the benefit periods for Cobra based on qualifying events.
1. 18 months for reduction in hours or notmal termination
2. 36 months for death
3. 36 months for divorce
4. 36 months for medicare eligibility
5. Up to 29 months if employee meets Social security definition of disabled.
What does medigap insurance do?
Fills in the holes of traditional Medicare.
What is the unholy trinity or Goldman triangle?
When the insured, owner, and benficiary are all three different people.
What method of calculating life insurance looks at annual earnings minus personal expenses and taxes equal annual family need, determine the clients work life expectancy, and adjust family need using an inflation-adjusted rate of return.
Human Life Value
What approach calculates the estimated cash needs that the family will require at and after the death of the insured?
Needs Approach (Think a list)
What approach says that there is no need to determine the work life expectancy because if the investment returns are realized, the lump sum death benefit will yield enough earnings each year to provide the desired income for a perpetual period of time?
Capitalized-Earnings approach