Cfp Module 1 Part 5

Front 1

Who should be responsible for formulating the objectives and risk
management policy of the client?

Back 1

The client is ultimately responsible for preservation of his or her own
assets. The planner’s function is to assist the client in this process.

Front 2

In the second step of the risk management process, “gather pertinent
data to determine risk exposures,” what tools are used to attempt to
make the information gathering process systematic and thereby help
the planner avoid missing important information?

Back 2

 insurance policy checklists
 risk analysis questionnaires
 financial statements
 review of the client’s activities, both personal and professional

Front 3

In the first step of the risk management process, “identify risk
management goals,” what should be accomplished? How do you
know when it is done properly?

Back 3

This step involves deciding precisely what the client wants from his or
her risk management program. It is accomplished when clearly
defined objectives have been outlined, often in a formal risk
management policy, which can serve as a source of guidance for the
planner and can be used by the client in evaluating the planner’s
recommendations.

Front 4

Why is it important to obtain thorough information on the client and
his or her family?

Back 4

Virtually all of the client’s assets and activities may result in liability. All
assets represent the potential for loss of the asset itself—from contracts relating to its acquisition, from liability for losses attending its
use, and from consequential losses. Client activities can result in
liability based on tort or contract law. To anticipate unique risk
exposures the client may face, it is essential to know the sources from
which these exposures could spring. Obtaining thorough client data is
the only way to anticipate these risk exposures.

Front 5

How do you identify risk exposures facing the client?

Back 5

The planner carefully reviews the client data, looking for risk
exposures that could arise based on the assets and activities of the
client and his or her family members.

Front 6

Why is monitoring, evaluating, and updating the risk management
plan important?

Back 6

First, things change. Both risks and techniques for treating those risks
change over time. Second, mistakes sometimes occur. Monitoring and
evaluating allow for a review of decisions and the discovery of mistakes.

Front 7

What are the basic rules of risk management? Explain what is meant
by each rule.

Back 7

1. Don’t risk more than you can afford to lose.
- Always transfer those risks that could bring
severe financial losses and whose potential severity cannot be reduced.
2. Consider the odds.

- Don’t transfer risk where the probability of loss is very high.
3. Don’t risk a lot for a little.
- There should be a reasonable relationship
between the cost of transferring risk and the
value to the transferor.

Front 8

What is the “large-loss principle”?

Back 8

 Essential coverages (those covering exposures with potentially
catastrophic financial impact) should be purchased first.
 The probability that a loss may or may not occur is less important
than the possible size of the loss.

Front 9

What is the “law of large numbers”? Why is it considered the basis of
insurance?

Back 9

The law of large numbers states that the observed frequency of an event
more nearly approaches the underlying probability of the event occurring
in the population as the number of trials approaches infinity. The insurer
uses probability theory and the law of large numbers by combining a
sufficiently large number of homogeneous exposure units to allow the
insurer to be able to predict losses for the group as a whole.

Front 10

What are the four elements of an insurable risk?

Back 10

 There must be a sufficiently large number of homogeneous
exposure units to make the losses reasonably predictable.
 The loss produced by the risk must be definite and measurable.
 The loss must be fortuitous or accidental.
 The loss must not be catastrophic.

Front 11

How do the four elements of an insurable risk help prevent adverse
selection?

Back 11

Large numbers provide the quantity of risk exposures necessary to
allow the law of large numbers to operate effectively. Measurability
reduces the ability to counterfeit the loss. If the loss is accidental, the
insured cannot control the loss. When a loss is not catastrophic, it is
suffered by only a small percentage of the group, thereby keeping the
law of large numbers in play.

Front 12

What is underwriting and what is its purpose?

Back 12

Underwriting is the process of selecting and classifying risks. This
means that the underwriter must:
 select risks to guard against a concentration of exposures that
could result in a catastrophic loss to the company (e.g., if 80% of
an insurer’s homeowners policies insure people living on the same
fault line, one earthquake could bankrupt the insurer)
 select risks to obtain a sufficient number of similar exposures so
that the law of large numbers can operate
 select risks to guard against adverse selection
 evaluate the risk that a prospective contract presents to the
company and compare that with the risks the company has priced
to determine if the rate should be modified
 determine if the proposed insurance is acceptable at any rate

Front 13

What are the practical implications of the underwriting process?

Back 13

The most important practical implication is that there are definite limits on the amount and type of insurance that can be obtained for the
client, regardless of what the client is willing to pay. There are limits

Front 14

What is the agent’s role in the underwriting process?

Back 14

The agent’s role is to submit business that will produce profit for the
company—through marketing and an initial screening to determine
whether the applicant fits within the general underwriting guidelines.

Front 15

What are the various underwriting policy regulations that the underwriter applies to incoming applications?

Back 15

 lines of insurance that will be written
 prohibited exposures
 amounts of coverage permitted on various types of exposures
 geographic locations in which each line will be written

Front 16

Post-selection underwriting involves not only reviewing applications
but also deciding whether to cancel an existing policy before it
expires. What regulations have many states enacted to restrict the
insurer’s rights in this underwriting process?

Back 16

The insurer must give advance notice of an intent to refuse renewal.
This is designed to prevent the insurer from canceling or from refusing
to renew a policy without providing adequate time for the insured to
obtain replacement coverage. A recent example is the 1993
legislation in Florida prohibiting insurers from canceling homeowners
policies until after the 1993 hurricane season.

Front 17

What five sources of information are used in the underwriting of
insurance?

Back 17

 the application
 information from the agent or broker
 investigations
 information bureaus
 physical examinations or inspections

Front 18

Why is risk avoidance sometimes considered a negative technique?

Back 18

Nothing is actively done to deal with risk. Furthermore, the activity
giving rise to the risk is not engaged in. If used extensively, individuals
and society would suffer.

Front 19

How does voluntary risk retention differ from involuntary risk
retention?

Back 19

-Voluntary risk retention: characterized by recognition that risk exists; a
tacit agreement to assume losses involved

-Involuntary risk retention: the individual exposed to risk does not
recognize its existence, or there is no other option available

Front 20

What is probability theory?

Back 20

Probability theory is a body of knowledge concerned with measuring
the likelihood that something will happen and with making predictions
on the basis of that likelihood.

Front 21

What is adverse selection, and why is it a problem?

Back 21

Adverse selection is the tendency of poorer-than-average risks to
purchase or continue insurance. It is a problem because, unchecked,
it could render past experience useless in predicting future losses.

Front 22

Why is “self-insurance” a misleading term?

Back 22

The insurance mechanism essentially consists of a transfer of risk or
the pooling of exposure units; one cannot pool with or transfer to
oneself.

Front 23

criminal acts

Back 23

 public wrongs
 violations of laws governing the relationship of the individual
with the rest of society
 prosecuted by the state as plaintiff against any citizen for
violation of a duty prescribed by statute or common law

Front 24

intentional torts

Back 24

Such torts are infringements of the rights of others resulting from
an intentional act on the part of the defendant; these include such
torts as assault, battery, libel, slander, false arrest, false
imprisonment, trespass, and invasion of privacy.

Front 25

trespasser

Back 25

A trespasser is a person who comes onto property without right
and without consent of the owner or occupier.

Front 26

licensee

Back 26

A licensee is a person who comes onto property with the
knowledge or tolerance of the owner but for no purpose of, or
benefit to, the latter (e.g., door-to-door salespeople).

Front 27

invitee

Back 27

An invitee is a person who has been invited into or onto the
property for some purpose of the owner (e.g., delivery people) or
any person on premises open for admission to the general public,
such as a church, a theater, etc.

Front 28

survival of tort actions

Back 28

A cause of action for most torts survives the death of either the
plaintiff or the defendant.

Front 29

attractive nuisance

Back 29

A high degree of care is imposed on a land occupier for certain
conditions on the land (attractive nuisances) that attract and
possibly injure children; the land occupier is obligated to use due
care to discover children on property, then warn them to protect
them from conditions threatening death or serious bodily harm.

Front 30

What is the collateral source rule and what prevents a plaintiff from
using it to defeat the concept of indemnity under an insurance contract?

Back 30

The collateral source rule states that a tortfeasor (one who
commits a tort) will be liable for full damages even though the
plaintiff has available to him or her other sources of recovery that
can compensate for his or her loss. This prevents the tortfeasor
from benefiting because of fortuitous circumstances such as the
foresightedness of a plaintiff who has purchased insurance.

Front 31

negligence

Back 31

(unintentional tort)

This term refers to wrongs resulting from negligence or
carelessness.

Front 32

negligence per se

Back 32

Negligence per se describes a situation where the standard of
care (duty) of the defendant is set by statute. For this to occur, the
statute generally must be found to be intended to protect the class
of people to which the plaintiff belongs; it must also be intended to
protect against the type of harm which has in fact occurred in the
case. In such a situation, an unexcused violation of the statute is
held to be negligence.

Front 33

absolute liability

Back 33

If a person maintains an extra-hazardous condition (such as
keeping wild animals) or engages in extra-hazardous activities
(such as dynamite blasting), he or she will have to bear such
losses as result to others even though he or she may not be
negligent in the typical meaning of the word.

Front 34

vicarious liability

Back 34

This is imputed liability: one person is held liable for the negligent
behavior of another. For example, principals can be held liable for
the negligent acts of their agents.

Front 35

res ipsa loquitur

Back 35

 Literally, “the thing speaks for itself.”
 It is a name given to circumstantial evidence in certain
situations; the requirements for using res ipsa loquitur
generally are formulated as follows:
 the accident was caused by something under the exclusive
control of the defendant,
 the accident involved an event that does not ordinarily
happen in the absence of negligence, and
 the plaintiff did not contribute to the accident.

Front 36

assumption of risk

Back 36

This refers to risk assumed by the injured party. If one party
recognizes and understands danger in an activity and voluntarily
chooses to encounter it, another party cannot be held responsible
for the injury.

Front 37

contributory negligence

Back 37

Any negligence on the part of the injured party, even though slight,
defeats the claim.

Front 38

comparative negligence

Back 38

This is an alternative to contributory negligence. Comparative
negligence means that contributory negligence on the part of the
injured party does not defeat the claim but is used in some
manner to mitigate damages payable by the other party.

Front 39

last clear chance

Back 39

This is a modification of the contributory negligence rule.
According to the last clear chance doctrine, contributory
negligence of the injured party will not bar recovery if the other
party, immediately prior to the accident, had a last clear chance to
prevent the accident but failed to seize the chance.

Front 40

Does liability insurance cover liability for all types of conduct?

Back 40

No. It is generally against public policy to protect an individual from
the consequences of his or her intentional acts.

Front 41

What type of insurance is available to an individual accused of a
crime to indemnify the person against whom the crime was
committed?

Back 41

There is no insurance that will protect an individual from financial
obligations arising out of criminal activity.

Front 42

five legal requirements for an enforceable insurance contract.

Back 42

1. offer and acceptance

There must be an offer by one party, and the
offer must be accepted by the other party.

2. consideration

Each party must give the other something of
value.

3. legal object

The purpose of the contract must be legal

4. competent parties

The parties to the agreement must be capable of
entering into a contract in the eyes of the law.

5. legal form

If there are legal requirements concerning the
form of the particular type of contract entered
into, the contract must meet those requirements.

Front 43

What legal concepts or activities is a planner likely to encounter in his
or her daily activities?

Back 43

 contract law
 law of agency
 professional liability

Front 44

contract law

Back 44

The planner could be sued for failing to deliver services or plans
agreed to in a contract with his or her client.

Front 45

law of agency

Back 45

A planner who is part of a financial planning firm may be
considered an agent. As a representative (agent) of the planning
firm, he or she might make some promises to a client that the firm
doesn’t permit. The client could reasonably expect the promises to
be kept.

Front 46

professional liability

Back 46

A planner makes recommendations to a client based on a “gut
feeling” rather than careful consideration of the client’s needs and
circumstances. If the recommendation turns out to be bad for the
client, the planner may be deemed to have failed to use the care
required in providing professional services.

Front 47

waiver

Back 47

Waiver occurs when a party, with full knowledge of the material
facts and by his or her own actions (or the actions of his or her
agent), has voluntarily relinquished or surrendered a known right.
No action is required by the other party.

Front 48

estoppel

Back 48

Estoppel is a doctrine that prevents a party from asserting a right
to which he or she otherwise would be entitled where, because of
his or her own actions or behavior, he or she misled someone
(even though unintentionally) who relied on the understanding
created thereby to his or her own detriment. Note that action is
required on the part of the other party (he or she must rely on the misunderstanding to his or her detriment). The doctrine of
estoppel is based on the idea that where one of two innocent
persons must suffer, the one whose act occasioned the loss must
bear it.

Front 49

parol evidence rule

Back 49

Under this rule, when the parties put their agreement into a final,
complete, binding, written contract (in the absence of fraud,
mutual mistake, duress, or the like), evidence, whether oral or
written, of prior understandings will not be admitted to contradict
the writing. Note, however, that the parol evidence rule does not
apply to subsequent modifications: evidence of oral modifications
made after the agreement is in written form are admissible to
clarify the parties’ intent.

Front 50

waiver provision

Back 50

To avoid liability from an agent offering the client terms not
contemplated by the contract, insurers generally place a waiver
clause in insurance contracts providing that “only the president, a
vice president, or the secretary of the company has authority to
alter this contract or to waive any of its provisions.” Such
provisions are not always successful.

Front 51

rescission

Back 51

Rescission is an equitable remedy by which the contract is
deemed null from its beginning due to fraud, impossibility,
misrepresentation of a material fact, concealment in the
application, or mutual mistake as to a material fact.

Front 52

reformation

Back 52

Reformation is an equitable remedy by which the written
instrument between the parties is changed to express the original
intentions of the parties. It must be shown that there was a mutual
mistake, or a unilateral mistake coupled with actual or equitable
fraud by the other party, duress, or related misconduct. The
purpose of reformation is not to change the contract but to make
the written contract conform to what was originally intended.

Front 53

Briefly explain the difference between a void contract and a voidable
contract.

Back 53

A void contract is not a contract at all. It is not enforceable
because it lacks one of the requirements for being an
enforceable contract.

A voidable contract is one where one party has the option of
voiding the contract if desired, while the other party is bound
by the contract.