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81 Cards in this Set
- Front
- Back
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Adverse Selection
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the process by which consumers with the greatest probability of loss are those most likely to purchase insurance
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Revenue comes from two major sources
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1 PREMIUMS – payments by insureds to purchase insurance
Earned - The portion of written premiums that corresponds to coverage that has already been provided. Unearned – The portion of written premiums that corresponds to coverage that has not yet been provided. 2.INVESTMENTS – interest, dividends, capital gains, and other earnings on funds held by the insurer. The three most common areas of investment for insurers are bonds, stocks, and real estate. |
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Pooling
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risk sharing mechanism whereas insurance is a risk transfer mechanism. The insurer introduces additional financial resources that enable it to provide a stronger guarantee that sufficient funds will be available in the event of a loss, further reducing risk. These financial resources are from Initial capital from investors and retained earnings
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Policyholder’s surplus
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measure of how much capital the insurer has to pay claims that are greater than expected. The difference between an insurer’s assets and its liabilities. Premium-to-surplus ratio represents the insurer’s financial cushion for absorbing unexpected claims. Premium-to-surplus-ratio = Written premiums + Policyholder’s surplus
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The 2 main types of regulatory constraints on the supply of insurance
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BUSINESS PRACTICES: licensing, policy language, min financial requirements, and participation in residual markets.
PRICE REGULATION: State regulators have the power to limit prices by regulating insurance rate increases and the underwriting factors used in setting premiums for many lines of business. |
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Factors affecting demand for insurance
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1 INSURANCE MANDATES AND REGULATION – liability insurance requirement
2 RISK TOLERENCE – insurance buyer’s attitude toward risk 3 FINANCIAL STATUS – insurance purchases are often a luxury that cannot be afforded 4 REAL SERVICES RENDERD – Services offered with the insurance policy 5 TAX INCENTIVES – encourage people to purchase certain lines of insurance in which the premium is tax deductible |
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Written premiums
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The total premium on all policies written (put into effect) during a particular period.
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Earned Premiums
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The portion of written premiums that corresponds to coverage that has already been provided.
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Unearned Premiums
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The portion of written premiums that corresponds to coverage that has not yet been provided.
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Loss Ratio
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compares an insurer’s incurred losses with its earned premiums for a specific period. The figure for incurred losses includes loss adjustment expenses
Loss ratio = Incurred losses/Earned Premiums |
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expense ratio
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compares an insurer’s underwriting expenses with its written premiums for a specific period.
Expense ratio = Incurred underwriting expenses/Written Premiums |
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The trade basis combined ratio
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combines the loss ratio and the expense ratio to compare inflows and outflows from insurance underwriting. There are two widely accepted ways of calculating the combined ratio: The financial bases combined ratio and the trade basis combined ratio.
Trade basis combined ratio = (incurred losses (including LAE)/Earned premiums) + (Incurred underwriting expenses/written premiums) Or Trade basis combined ratio = loss ratio + expense ratio |
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Six Characteristics of an Ideally Insurable Loss exposure
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• Pure Risk – Involves pure risk, not speculative risk
• Fortuitous losses – subject to fortuitous loss from the insured’s standpoint • Definite and measurable – subject to losses that are definite in time, cause, and location and that are measurable • Large number of similar exposure units – one of a large number of similar exposure units • Independent and not catastrophic – not subject to a loss that would simultaneously affect many other similar loss exposures; not catastrophic. • Affordable – premiums are economically feasible |
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How 6 characteristics of ideally insurable loss exposure apply to commercial insurance
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Fire, Windstorm, Flood; Liability: Premises & Operations, Death & Retirement
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How 6 characteristics of ideally insurable loss exposure apply to personal insurance
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Property, Liability, Net Income, Life, Health, and Retirement
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The role of federal and State involvement in insurance markets
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1.To fill insurance needs unmet by private insurers
2.To compel people to buy a particular type of insurance 3.to obtain greater efficiency and/or provide convenience to insurance buyers 4.to achieve collateral social purposes |
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The Board of Ethical Inquiry is
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an eight-member board, chaired by the Ethics Counsel, responsible for implementing, establishing, and approving CPCU ethics policy.
Rule R4.1 – A CPCU shall competently and consistently discharge his or her occupational duties. |
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Common-Law System
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A legal system in which the body of law derived more from court decisions as opposed to statues and constitutions
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Civil law
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a classification of law that applies to legal matters not governed by criminal law and that protects rights and provides remedies for breaches of duties owed to others. Criminal law is a classification of law that applies to acts that society deems so harmful to the public welfare that government is responsible for prosecuting and punishing the perpetrators.
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The elements of an enforceable contract
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agreement, capacity to contract, consideration, and legal purpose.
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Void contracts
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an agreement that, despite the parties’ intentions, never reaches contract status and is therefore not legally enforceable or binding
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Voidable contracts
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a contract that one of the parties can reject (avoid) based on some circumstance surrounding its execution.
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Canceled Contract
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A legally enforceable contract that is no longer in effect.
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Elements of a loss exposures
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An asset (aka item subject) exposed to loss --is the subject or item exposed to loss, such as a home, money, personal property, a worker’s income, an investment portfolio, or a worker’s good health;
A Peril (cause of loss) --is the agent that causes reduction in the asset’s value; Financial consequence of that loss--is the reduction the asset’s value, which varies depending on the type of asset exposed to loss, the cause of loss, and the severity of loss. |
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Pure Risk
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chance of loss or no loss, but no chance of gain
Example: Owner faces risk or possible fire loss. House will either burn or not burn. If house burns owner suffers financial loss, if house does not burn financial condition is unchanged. Neither of these possible outcomes would produce a gain because there is no opportunity for financial gain. |
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Speculative Risk
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a chance of loss, no loss, or gain
Example: Gambling would be an example because it involves a chance of gain. It can be a desirable risk. And investor who purchases an apartment building to rent to tenants expects to profit from this investment, so it would be a desirable speculative risk. The venture could be unprofitable if the investor cannot attract sufficient tenants or if the government-imposed rental price controls limit the amount of rent that can be charged. Shares of stock involve a distinct set of speculative risks. |
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Subjective Risk
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the perceived amount of risk based on an individual’s or
Organizations opinion |
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Objective Risk
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The measurable variation in uncertain outcomes based on facts and data
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Diversifiable Risk
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A risk that affects only some individual, businesses, or small groups. Also called nonsystematic risk or specific risk
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Nondiversifiable Risk
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A risk that affects a large segment of society at the same time. Also called systematic risk or fundamental risk.
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Three financial consequences of risk
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Expected cost of losses or gains
Expenditures on risk management Cost of residual uncertainty |
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Explain the purpose of the code of Professional Ethics of the American Institute for the CPCU (the Code).
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The purpose of the code is to clearly communicate the minimum standard of the conduct expected for the CPCUs and the CPCU candidates. Basically for CPCUs and CPCU candidates to always perform their professional activities ethically.
The code also outlines the disciplinary process that will be followed to investigate the alleged Rule violations. |
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The 3 requirements for earning the CPCU designation are:
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1. The education requirement, which is met by passing a prescribed series of exams.
2. The experience requirement, which is two years of insurance experience that may include work in related fields such as law, teaching, and providing services to the insurance industry. Candidates need not have met this requirement to begin CPCU studies, but they must meet it before earning the CPCU designation. 3. The ethics requirement, which is adherence to the Code of Professional Ethics of the American Institute for CPCU |
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Components of the Code (the Code)
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Canons, rules and guidelines
-Also includes Disciplinary Rules, Procedures, and Penalties that explain the process by which it is administered and enforced |
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Categories of hazards (Ch 1)
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Moral hazard - potential for a person to increase the frequency or severity of loss by dishonest conduct
Morale hazard – attitudinal hazard is carelessness or indifference to loss that increases loss frequency or severity. Physical hazards – are tangible characteristics of a loss exposure that increase the likelihood or size of a loss. Legal hazard – is a condition of the legal environment that increases the frequency or severity of a loss |
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Benefits of risk management (Ch 2)
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Individuals - preservers financial resources by reducing an individual’s expected losses and reduces anxiety
Organizations – preserves financial resources, provides a sense of confidence that capital is protected against future costs, and reduces the deterrence effect of risk Society – lowers expected losses and improves allocation of productive resources |
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Pre-loss and post-loss risk management program goals (Ch 2)
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Post loss goals:
Survival Continuity of operations Profitability Earnings stability Social responsibility Growth |
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Six steps in the risk management process (Ch 2)
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Identifying loss exposures
Analyzing loss exposures Examining feasibility of risk management techniques Selecting the appropriate risk management techniques Implanting selected risk management techniques Monitoring results and revising the risk management program |
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Understand Guideline G1.2 CPCUs should avoid the appearance of impropriety (the Code
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G1.2 - be able to avoid ethical impropriety in the face of conflicting priorities. You must first act in a manner that best serves your long-term professional interests and avoid even the appearance of impropriety. Refrain from potentially unethical activities until you can receive clarification of the activity’s permissibility if necessary.
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Methods of identifying loss exposures (Ch 3)
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Document analysis (including any or all of the following)
Risk assessment questionnaires and checklists Financial statements and underlying accounting records Contracts Insurance policies Organizational policies and procedures Flowcharts and organizational charts Loss histories -Compliance reviews -Inspections -Expertise within and beyond the organization |
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Understand Central Tendency (Ch 3)
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Central tendency refers to the outcome on a probability distribution where most outcomes cluster. It is the outcome that is the most representative of the data set. There are many different descriptive statistics that measure central tendency. The most common method, and the one generally referred to simply as the average, is the arithmetic mean.
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Four dimensions used to analyze a loss exposure (Ch 3)
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. Loss frequency – or number of losses in a time period
2. Loss Severity - the total dollar losses or the sum of the dollar amounts paid for all accidents an individual has had 3. Total dollar losses – or the sum of the dollar amounts paid for all accidents an individual has had 4. Timing – it measures the time from when accidents occurred to the loss payments were made |
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Prouty Approach - Four categories of loss frequency and three categories of loss severity (Ch 3)
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Loss frequency:
1. Almost nil 2. Slight 3. Moderate 4. Define Loss severity: 1. Slight 2. Significant 3. Severe |
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Define normal distribution in words and percentage (Ch 3)
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A normal distribution is a probability distribution that, when graphed, generates a bell-shaped curve. A normal distribution helps project future losses more accurately because specific percentages of all outcomes fall within specific numbers of standard deviations from the mean. (e.g., approximately 68% of all outcomes are within one standard deviation above or below the mean.
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Six risk control techniques (Ch 4)
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1. Avoidance
2. Loss Prevention 3. Loss Reduction 4. Separation 5. Duplication 6. Diversification |
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Six common policy provisions (Chapt 11)
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Declarations- This provides unique information about the insured and outlines who or what is covered and where and when coverage applies.
Definitions -This includes words with special meanings in the policy and may limit or expand coverage based on the definitions of terms. Insuring Agreements- These are the insurer’s promises to pay, and they outline the circumstances under which the insurer agrees to pay Conditions-These are qualifications on the insurer’s promise to pay, and the outline the steps the insured needs to take to enforce the policy Exclusions- These are limitations on the insurer’s promise to pay, and they limit payments based on excluded persons, places, things, or actions Miscellaneous Provisions -These include a wide variety of provisions that may limit or expand coverage based on the content of each provision. |
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Purposes of exclusions (Ch 11)
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Elimate coverage for uninsurable loss exposures; Assist in managing moral hazards; Assist in managing attitudinal (morale) hazards; Reduce likelihood of coverage duplications; Eliminate coverages not needed by the typical insured; Eliminate coverages requiring special treatment; Assist in keeping premiums reasonable.
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How CPCUs can improve the public understanding of insurance and risk management (the Code)
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Canon 7: 7.1 A CPCU shall support efforts to provide members of the public with objective information concerning their risk management and insurance needs and the products, services, and techniques available to meet their needs
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Activities to avoid per Rule R 7.2 (the Code)
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. 7.2 A CPCU shall not misrepresent the benefits, costs, or limitations of any risk management technique or any product or service of any insurer
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Insurable interest requirement – three reasons for;
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1. It supports the principle of indemnity.
2. It prevents the use of insurance as a wagering mechanism. 3. It reduces the moral hazard incentive that insurance may create for the insured.) understand variations for joint tenancy (The ownership of property by two or more persons, called joint tenants.); tenancy by the entirety (A type of joint tenancy available only to a husband and wife.); tenancy in common (The ownership of property, in equal or unequal shares, by two or more joint tenants who lack survivorship rights.); tenancy in partnership (The joint ownership of property by a partnership.)(Ch 12) ****Tenancy terms are actually found in Chap 10.**** |
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Understand Insured parties (types), including first named insured distinction (Ch 12)
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Insured parties identified by name
insured parties identified by relationship Additional insureds Multiple insured parties or covered locations, Parties not insured First named insured is typically responsible for premium payment and is the only insured who can cancel the policy, receive notice of cancellation, make policy changes with the insurer’s consent, receive claims and occurrence data from the insurer, and receive returned premiums. |
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Mortgagee clause vs. loss payee clause (Ch 12)
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Mortgagee clause vs. loss payee clause (Ch 12) Mortgagee Clause: A policy clause that protect’s the creditor’s (mortgagee’s) interest in real property pledged as collateral for a mortgage loan
Loss Payable Clause: A policy clause that protects the creditor’s interes in personal property pledged as collateral for a loan. |
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Insured events for property & liability insurance (Ch 12) ****Chap 13****
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1. Covered property (or activity)
2. Covered cause of loss (Alleged legal responsibility to pay covered damages) 3. No exclusion applies 4. Covered consequences 5. Covered location 6. Covered time period. |
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Occurrence- base vs. claims-made coverage (Ch 12) ****Chap 13****
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Occurrence-basis: Coverage triggered by the actual happening of injury or damage during the policy period.
Claims-made: Coverage triggered by a claim alleging injury or damage that is made during the policy period, even if the claim arises from an event that happened before policy inception. |
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Cancellation provision (Ch 13) ****Chap 12****
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A provision that typically indicates under what circumstances the policy may be canceled, who has the right to initiate the cancellation, how much advance notice is required, what procedures must be followed, and how any necessary premium charges or refunds will be determined.
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Insured’s and Insurer’s duties in the event of a loss – property, liability (Ch 13) ****Chap 12****
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Expeditiously report the loss to the insurance company, prevent further loss or damage, cooperate with the insurance company in evaluating and settling the claim, provide proof of loss, submit to examination under oath, comply with “abandonment” provisions. Liability situations are similar but always involve a third party who might or might not present a claim.
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Property Insurance Exclusions and Liability Insurance Exclusions (Ch 13) ****Chap 11****
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Policy provisions that state what the insurer does not intend to cover.
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Understand insurance to value, how to calculate, etc (Ch 14)
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A limit in property insurance that approximates the maximum potential loss. (Replacement cost, Actual cash value, Actual loss sustained, other valuation provisions)
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Reasons for and types of policy limits (Ch 14)
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Limit the insurer’s obligations, accommodate consumer preferences, reflect insurer capacity, substitute for exclusions (Scheduled property limits, Unscheduled property limits, specific limits, blanket limits, sublimits, per item limits, per occurrence limits, limits in additions and extensions of coverage, variable limits, non-dollar limits)
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Explain subrogation, salvage (Ch 14) ****Chap 12****
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Subrogation: the process by which an insurer recovers payment from a negligent third party who caused a property or liability loss that the insurer has paid to, or on behalf of, an insured.
Salvage: The process through which an insurer takes possession of damaged property, for which it has paid a total loss, and recovers a portion of the loss payment by selling the damaged property. Damaged property itself can also be called salvage. |
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Explain deductibles in liability policies (Ch 15)
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1. Reduce attitudinal (morale) hazards and encourage loss control.
2. Eliminate the insurer’s need to process small losses, thereby reducing insurer’s costs and loss adjustment expenses. 3. Reduce the premium cost to the insured. |
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Understand other-insurance provisions (Ch 15) ****Chap 16****
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All policy provisions, regardless of their caption, that attempt to specify in advance of a loss how an insurer’s obligations (amounts payable) will be affected by other insurance applying to the same loss.
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Explain how defense costs are related to policy limits in liability insurance (Ch 15)****Chap 17****
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Insurer has an obligation to defend the insured, but not obligated to provide a further defense once the entire policy limit has been paid for damages.
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Elements of negligence
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the failure to exercise the degree of care that a reasonable person in a similar situation would exercise to avoid harming others. Act of commission – doing something that a prudent person would not have done. Act of omission- failure to do something that a reasonable person would have done.
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Doctrine of Stare Decisis
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a method of case resolution in which the courts follow earlier court decisions, or precedents when the same issues arise in lawsuits.
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Compensatory Damages
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amount awarded by a court to reimburse a victim for actual harm. Actual monetary losses sustained by the victim plus any amounts that can be inferred from the case
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Special Damages
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Compensatory damages for actual out out-of-pocket losses resulting from the wrongful act. – Medical expenses, property damages, loss of earnings. Present value of anticipated future earnings.
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General Damages
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Compensatory damages that do not have a readily determined economic value and that are presumed to follow from the type of wrong claimed by the plaintiff. Ex. Pain and suffering, mental anguish, inconvenience, disability Economic and noneconomic damages- noneconomic damages are capped under state law.
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Punitive Damages or Exemplary Damages
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payment awarded by a court to punish a defendant for reckless, malicious, or deceitful act or to deter similar conduct
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Six elements courts consider when evaluating allegations of fraud
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A false representation, Of a material fact, Knowingly made, with intent to deceive, on which the other party has justifiable reliance, to his or her detriment (the first five must be present to cancel a contract, the last is necessary to collect damages)
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How concealment and misrepresentation affect genuine assent in insurance contract
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If an applicant fails to disclose answers to questions on the Insurance application the concealment my result in a claim being denied or an application being rejected
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Actual vs. apparent authority of agents
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actual authority can be established through a formal written contract or it can be implied from the dealings of the parties.
Apparent authority arises from actions of an insurer that causes a customer reasonably t believes that an agency relationship exists. |
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Describe 6 distinguishing characteristics of an insurance policy
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1. Principal of indemnity—restore a person to the same financial position after a loss he enjoyed before a loss.
2 Insurance contracts are characterized by utmost good faith. 3. Insurance is intended for fortuitous losses (losses occurring by chance rather than design) 4. Must be a contract of adhesion (presented as a “take it or leave it” no input from the insured on how it will be drafted) 5. Exchange of unequal values (premium paid rarely equal the loss payments made by an insured during a given policy period) 6. Is a conditional contract (one party is required to fulfill its obligation before the other party makes any performance…if premium is not paid policy is not enforceable) |
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Waiver and situations where it may apply
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voluntary surrendering of a known right or advantage (insured notifies homeowner insurer and lets them know that they have opened an in home daycare and the insurer takes no action to exclude the risk or cancel the policy, then the insurer waives its right to deny coverage in a claim situation.)
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Estoppels and situations where it may apply
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Court doctrine that bars a person from asserting a claim or right that contradicts what that person has said or done previously. (Insurer may tell an insured that it approves repairs but after repairs are made denies coverage
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Questions of Liability and Questions of Coverage
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liability claims, courts can apply the law to determine if the insured is legally obligate to pay damages to a third party. Coverage- both property\liability claims courts can apply the law to interpret the insurance policy and determine whether the insurer is obligated to pay the claim to or on behalf of, the insured, if so, to what extent
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A question of law vs. questions of fact-
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Trials with no jury, the judge determines the law, finds facts, and applies the law to the facts. In jury trials, the jury hears the evidence and decides the facts, and the judge decides all questions of law. Judges to not make factual determinations in jury trial cases and juries do not answer legal questions.
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Alternatives in coverage disputes
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can arise when it is unclear if coverage applies to particular claim. Disagreement over the facts of the case, interpretation of the insurance policy, actions\inactions of insured\insurer, or applications of waiver and estoppels
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Unfair claims settlement practices act
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a minimum set of standards by which insurers are to abide during claim settlements. May be sanctioned or fined by the state
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Types of information in Declarations
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standard information that is declared on the policy but also information unique to the p particular policy- Policy number, policy period, name of insurer, name of the insurance agent, name of the insured, name of persons\organization whose additional interest is insured.. Ie mortgagee, additional insured, mailing address of the insured, physical address and description of the covered property or operation.
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The DICE review method of post-loss policy analysis
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- acronym represents 4 of the six categories of property-casualty policy provisions: declarations, insuring agreements, conditions, and exclusions. The DICE method creates a decision tree to determine whether the policy provides coverage.
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