Fire 375 Test 2 Review

Front 1

First step in risk management process

Back 1

Risk identification (loss exposures).

Front 2

second step in risk management process

Back 2

Risk evaluation

Front 3

third step in risk management process

Back 3

Develop and select methods for managing risk.

Front 4

fourth step in risk management process

Back 4

Implementation

Front 5

fifth step in risk management process

Back 5

Monitoring and adjusting the RM methods and strategies

Front 6

Risk mapping

Back 6

displays the results of risk profiling graphically

Tool for communicating risk

Front 7

risk mapping objectives

Back 7

Indentify risks and their interrelations.
aid in selecting appropriate strategies.
Compare and evaluate the firm’s current risk handling
Show the leftover risks
Ease communication

Front 8

Risk retention

Back 8

know about the details, e.g, what is captive?

Front 9

types of loss control

Back 9

Loss Prevention
reduce the frequency of losses
Loss Reduction
reduce the severity of a loss, given that one occurs
pre-loss activities and post-loss activities

Front 10

cost benefit analysis

Back 10

Cash flow analysis
PV(Benefit)?
PV(Cost)?
NPV>=0

Front 11

Risk Transfer examples

Back 11

Contract
waiver
insurance

Front 12

nature of insurance

Back 12

Risk Transfer
From P/H to Insurer
insurer
promise to pay for covered losses
P/H
Pay premium
insurance contract
stipulates the covered losses
Compensation: $, and/or service

Hint 12

Risk Pooling (Loss Sharing)
allows a more accurate prediction of future losses

Law of large numbers:
As a sample of observations is increased in size, the relative variation about the mean declines.

How risk can be reduced through risk pooling?
Reduce the s.d. of the average loss per participant. (more predictable)
But doesn’t change the expected loss per participant.

Front 13

Insured

Back 13

The person whose life/property is insured under the policy.

Front 14

Policy holder

Back 14

Owner of the policy

Front 15

insurer

Back 15

The third party that accepts the risks transferred by insureds.

Front 16

types of risk insurability are heavily influenced by premium loading

Back 16

Most affected are markets for
Exposures with low severity
Exposures with high frequency
Correlated loss exposures
Exposures where expected losses cannot be accurately predicted (parameter uncertainty)

Front 17

moral hazard

Back 17

the effect of insurance on the insured’s incentives to care about loss and take care to prevent losses.
Examples:
drive less carefully when insured
consume more health care when insured

Front 18

solutions for moral hazard

Back 18

Limit Coverage (e.g. deductible, coinsurance)
Monitor behavior and charge accordingly
Often not cost-effective
Use information about the past to predict the future
Experience rating system

Front 19

why moral hazard influences insurability

Back 19

Consumers will want contracts that reduce moral hazard; otherwise, they must pay higher premiums

Contracts will place some risk on the insureds

Deductibles
Coinsurance

Front 20

adverse selction

Back 20

Adverse selection occurs when
policyholders have different expected losses
insurers cannot classify and charge same price to all
At a given price,
higher risk consumers will buy more coverage
lower risk consumers will buy less coverage
Er ends up with more high risk Eds than expected, thus adverse selection

Hint 20

or buyers will purchase from an insurer that charges lower rates for a specific risk exposure, this phenomenon is called adverse selection.

Front 21

solutions for adverse selection

Back 21

Deductibles and coinsurance
Use information about the past to predict the future

Front 22

types of insurance

Back 22

Personal, Group, or Commercial Insurance
Personal insurance:
purchased by individuals and families
Group insurance:
Purchased by group, such as employer sponsored plans
Commercial insurance:
insurance for businesses and other organizations.

Hint 22

Life/Health or Property/Casualty Insurance
Life/health insurance:
covers exposures (human being) to the perils of death, medical expenses, disability, and old age.

Property/casualty insurance:
covers property exposures caused by perils such as fire, windstorm, and theft.
Private or Government Insurance
Government Insurance
Unemployment insurance
worker’s compensation insurance
disability insurance, title insurance, or medical malpractice insurance.
property insurance to property owners of coastal areas exposed to hurricanes and other windstorms.
Voluntary or Involuntary Insurance
Mandatory insurance
Social security
Unemployment insurance
WC insurance
Health insurance (soon, in 2014)

Front 23

types of insurers

Back 23

Insurers’ Corporate Structure
Stock Insurers:
Owner: stock holders
Distribution of profit: stock dividends
Mutual Insurers:
Owner: policyowners
Distribution of profit: policy dividends
Captive insurance company
provides insurance coverage to its parent company and other affiliated organizations.

Risk retention group:
A group that provides risk management and retention to a few players in the same industry who are too small to act on their own.

Hint 23

Federal Insuring Organizations
The Social Security Administration
The Federal Deposit Insurance Corporation
The Securities Investor Protection Corporation
The Federal Crop Insurance Corporation
The Federal Crime Insurance Program
Fair Access to Insurance Requirements (FAIR) plans
The National Flood Insurance Program
The Veterans Administration
The Pension Benefit Guaranty Corp
The Overseas Private Investment Corporation (OPIC)

Front 24

principal

Back 24

insurer

Front 25

third party

Back 25

policy holder

Front 26

apparent authority

Back 26

The implied authority of the agent to fulfill the principal’s responsibilities

Front 27

binding authority

Back 27

secures (binds) coverage for an insured without any additional input from the insurer.

Front 28

general binder

Back 28

immediate coverage, canceled if found unacceptable

Front 29

conditional binder

Back 29

coverage exists conditional on acceptance

Front 30

conditional premium receipt

Back 30

covered upon the receipt of the premium, conditional on Ed’s insurability.
The effective date: (if insurable)
the date of the conditional receipt or, if later, the time of the physical examination.
If uninsurable
then the coverage never existed.
with life insurance in the US.

Front 31

Binding Premium Receipt

Back 31

Immediate coverage
Effective date:
the date the receipt is given
Er can ultimately reject the application
in life insurance
Not very common
in property insurance
common.

Front 32

wiaver

Back 32

the intentional relinquishment of a known right.
If agent assumes a known undesirable risk on behalf of the ER, the principal (the insurer) will waive the right to refuse coverage at a later date.

Front 33

estoppels

Back 33

occurs when the Er or its agent has led the Ed into believing that coverage exists and, as a consequence, the Er cannot later claim that no coverage existed.
“When an Ed specifically requests a certain kind of coverage when applying for insurance and is not told it is not available, that coverage likely exists, even if the policy wording states otherwise, because the agent implied such coverage at the time of sale, and the insurer is estopped from denying it.”

Front 34

agency estoppels

Back 34

An agency relationship may be created by estoppel when the conduct of the principal implies that an agency exists.

Front 35

offer and acceptance

Back 35

If the applicant does not pay a premium at the time of the application,
the Er making the offer.

Hint 35

If the applicant pays a premium at the time of the application
The applicant making the offer.

Front 36

consideration

Back 36

Insured:
application + premium payment
Insurer:
Promise to provide coverage

Front 37

competent parties

Back 37

legally capable of entering into a contract.
Purpose:
to prevent one party from taking advantage of another
If one party was not of legal capacity, a contract will be declared either void or voidable.

Hint 37

Legal capacity of insurer:
licensed and complies with insurance laws
Legal capacity of applicant:
Usually alright, except
Minor
Definition for the purpose of purchase insurance: <14~18, with 15 being the most popular
Intoxicated persons
Mentally incompetent
enemy alien

Front 38

legal purpose

Back 38

Must be formed for a legal purpose and not contrary to public policy, e.g.,
A contract with an enemy alien is held to be against public policy and void.
If the contract is negotiated with intent to murder, it is illegal and void.

Front 39

legal form or appropriate language

Back 39

For insurance contract
written version of standardized insurance policy provisions and attachments
approved by the state before being offered for sale.

Front 40

utmost good faith

Back 40

misrepresentations vs. concealments
the importance of materiality
Contestability period

Hint 40

If a life insurance policyholder lies about his health status (say, vascular disease, cancer, or heart disease), and later dies in a car accident, could life insurer void the contract during the contestability period?

Front 41

Contracts of Adhesion

Back 41

insureds have no input in the design of a policy’s terms.
implication
Ambiguities are interpreted in favor of policyholder

Courts interpret contracts as would a reasonable person not trained in the law (Doctrine of Reasonable Expectations)

Front 42

indemnity

Back 42

no more (and no less) than the actual loss suffered by the insured

Hint 42

When the amount of loss can be assessed at low cost following the loss,

Front 43

valued contract

Back 43

a pre-determined amount

Hint 43

When moral hazard is less likely to be a problem, and to avoid costly haggling following a loss

Front 44

indemnity principle

Back 44

The doctrine of indemnity is implemented and supported by:
Insurable interest
Subrogation
Actual cash value provision
Other insurance provisions

Front 45

insurable interest

Back 45

financial interest in life or property that is subject to loss.
Different for life and property/liability
Life: only at the inception
property:
at inception and at the time of the loss, and
the covered amount subject to the extent of such interest.

Front 46

subrogation

Back 46

gives the insurer the right to recovery
a common law right

Front 47

actual cash value provision

Back 47

Actual cash value:
replacement cost less physical depreciation
fair market value
The amount a willing buyer would pay
replacement cost
no deduction for depreciation of the property.

Front 48

pro rata

Back 48

divide coverage in proportion to amount of coverage

Front 49

excess coverage

Back 49

one policy pays losses in excess of the other policy’s limit