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81 Cards in this Set
- Front
- Back
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risk
-2 requirements of the outcome |
the posibility of loss
-outcome must be uncertain/in doubt -at least one outcome is undesireable |
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objective risk
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can be measured statistically
-flipping a coin |
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subjective risk
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based on feelings/thinking
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law of large numbers
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the larger the sample size, the larger the actual results will match expected results
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pure risk
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loss/no loss possible
-state of nature, no action required -fortuitous losses (unexpected) -ex: car parked illegally will either be towed or still there |
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speculative risk
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gain possible
-action required, risk is created -losses not fortuitous (expected) -NOT INSURED |
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fundamental risk
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can happen to everyone
-ex: hurricane |
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particular risk
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can only happen to a few
-ex: not everyone's car in a certain garage will be stolen -design of insurance |
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enterprise risk
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encompassing all major types of risks faced by a company
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peril
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cause of loss (how)
-proximate cause |
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hazard
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condition which increases possiblity of loss (why)
-physical: icy road -moral: evil tendencies -morale: careless/indifferent -legal: bitten by a dog, regardless or why |
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3 types of pure risk
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personal, property, liability
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4 types of personal risk
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-premature death: outstanding financial debts
-outliving retirement income -poor health- can affect ability to earn income -unemployment (disability) |
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3 types of losses from personal risk
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can happen if any of the four personal risks occur
-loss of earned income -extra expenses -depletion of financial assets |
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property risk
-3 types |
risk of property loss from many causes
-direct: financial loss from physical damage -indirect: more than just the loss from physical damage (lost revenue, lost rent, etc) -extra expense: (indirect) after loss occurs you must continue to operate regardless of cost (ex. bank) |
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liability risk
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-when sued, no maximum amt
-a lien can freeze financials until you pay -high legal fees |
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6 intuitive risk treatment methods
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1. avoidance: eliminates some risks, has costs
2. prevention: - frequency 3. reduction: - severity 4. retention: active (dont care) v. passive (dont know) 5. transfers: lease, contract, incorporate 6. insurance |
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3 personal risk profiles
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risk averse, risk neutral, risk seeker (bc of age or the unknown)
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insurance
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exchange of a small, certain sum (premium) for a large, uncertain sum (possible loss)
-contributions of many pay for the losses of few |
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characteristics of insurance
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-pooling of exposures (losses)
-loss sharing on an equitable basis based on loss exposure -pmt of fortuitous losses -risk transfer (negative financial consequence) ***indemnification- put you in the same financial position after the loss as before |
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adverse selection
-consequences |
people trying purchase at avg rates with more risk
-application process -underwriting -policy provisions: suicide clause in life insurance |
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insurance v. gambling
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insurance: eliminates pure risk
gambling: creates speculative risk |
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personal lines
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insure real estate, personal property, and protection against legal liability
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commercial lines
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coverages for business firms, nonprofit org, and govt agencies
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private insurance
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voluntary, based on principle of equity (fair premium for amt of risk
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social insurance
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gov't insurance programs
-ex: FICA |
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compulsory
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medicare and FICA automatically taken out regardless of if you are registered to recieve.
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moral hazard
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dishonesty or character defects that increase the chance of a loss
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risk management
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process to identify exposures and select treatment of an economic entity's (buiness or personal)
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risk control
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minimizing loss in frequency and severity
-classroom and parking garage sprinklers |
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risk financing
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minimizing after loss has already occured
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pre-loss
-cost |
cost= money and resources
-reduces anxiety -meet legal obligations |
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noninsurance transfers
-examples |
pure risk and potential financial consequences can be transferred to another party
-leases, contracts, etc |
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commercial insurance
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mktplace, captives, self-insurance?
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rate making
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pricing of insurance
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underwriting
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process of selecting, classifying, and pricing applicants for insurance
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basic underwriting principles
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1. select applicants: actual loss not likely to exceed loss experience
2. balance within each classification (above-avg insured offsets below-avg insured) 3. equity among the policy owners |
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application for underwriting
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varies by insurance and shows all info about applicant
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agent's report
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evaluation of prospective insured
-estimated annual income, net worth, relationship between agent and applicant, etc |
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inspection report
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required if moral hazard
-outside firm invesigate the applicant for insurance and gives info to company |
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MIB: Medical Information Bureau
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-important in life insurance
-trade association that companies belong to. they report any health impairments, which are recorded and given to other companies. |
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claim settlement objectives
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1. verify loss has occured
2. the fair and prompt payment of claims 3. provide personal assistancen to insured after loss occurs |
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ceding company
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in reinsurance: the primary isurer that initially writes the business
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reinsurer
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in reinsurance: accepts responsibility in part or full from ceding company
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net retention
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the amt of insurance retained by the ceding company for its own actaions
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faculative reinsurance
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an optional, case-by-case method that is used when the ceding company receives an application for insurance that exceeds its retention limit
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treaty reinsurance
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the primary issuer has agreed to cede insurance to the reinsurer, and the reinsurer has agreed to accept business
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quota-share treaty
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ceding insurer and reinsurer agree to share premiums and loses based on a proportion
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excess of loss
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-catastrophe bonds
-losses>retention limit are paid by the reinsurer up to a max limit |
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catastrophe bonds
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corporate bonds that permit the issuer of the bond to skip or reduce scheduled int pmts is a catastrophic loss occurs
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electronic data processing
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computerized programs that speed up the processing and storing of info by eliminating routine tasks
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loss control services
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included in typical property and casualty insurance providers
-ex: fire alarms, etc |
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3 rate making methods in product and casulty
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-judgement rating
-class rating -merit rating (schedule, experience, retrospective) |
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judgement rating
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each exposure is individually evaluated (judged) and the rate is determined largely by the judgement of the underwriter
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class rating
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exposures with similar characteristics are placed in the same underwriting class, and each is charged with the same rate
-reflects avg loss experience |
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merit rating
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rating plan by which class rates are adjusted based on individual loss experience
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schedule rating
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each exposure is individually rated. a basis rate is determined for ech exposure which is then modified basked on undesirable/desirable physical features
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experience rating
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the class rate is adjusted based on past loss experience. the experience is then used to determine the premium for the next policy period
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retrospective rating
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the insured's loss experience during the current policy period determines the actual premium paid for that period
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Paul v. Virginia
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must obtain a license throught the state to practice insurance
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SE underwrites association case
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gov't could regulate insurance
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McCarran-Ferguson act
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gov't cant regulate insurance (after SEUA case)
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financial modernization act of 1999
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insurance companies must protect peoples private information
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subrogation
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the negligible person is responsible for damages
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material misrepresentation
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must disclose any info that would change how/if the policy is issued
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concealment in applications
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even if question wasnt asked, you still must tell
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contract of adhesion
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"take it or leave it" contract
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unilateral contract
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only one party makes a legally enforceable promise
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personal contract
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only valid for person named
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aleatory contract
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exchanging things of unequal value
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conditional contract
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the insurer has provisions that the insured must abide by or else no pmt
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apparent authority
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whatever authority consumer believes, the court will support
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estoppel
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when one person makes a factual statement--> the other person assumes it is fact --> first person is responsible for that
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parts of an insurance contract
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declarations (info page), definitions, insuring agreement (named and open perils), exclusions, conditions
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legal wrongs (tort)
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failure of perform a specific duty
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negligence
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failure to exercise the standard of care required by law to protect others
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compensatory damages: special
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economic- lost wages, medical costs, property damages
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compensatory damages: general
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pain and suffering, loss of consortium
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punitive damages
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awards designed to punish people so that others dont committ the same crime
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comparitive negligence
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if both sides are responsible for damages, the financial burden is shared based on fault
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assumptions of risk
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if the risk is understood and recognized, no damages can be recovered from injuries
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