Fundamentals Of Insurance

Front 1

Requirement of insurable risk - Law of large numbers

Back 1

As number in a group increases, the more closely the actual loss in the group for a given time will approach the expected losses. Variance declines with larger sample size

Front 2

Requirement of insurable risk - Identifiable and measurable loss

Back 2

Amount of loss must be difficult to falsify and financially measurable

Front 3

Requirement of insurable risk - Fortuitous or accidental loss

Back 3

Pure risk (no potential for gain). May or may not happen, beyond control of insured. Loss unexpected and unintentional

Front 4

Requirement of insurable risk - Loss cannot be catastrophic

Back 4

Cannot threaten large percentage of insured units at the same time. Must spread risk across broad range of units. Governments tend to handle with insurance and or providing aid in catastrophic loss

Hint 4

Cannot threaten large percentage of insured units at the same time. Must spread Rask I’m on broad range of units. Governments tend to handle with insurance and or providing aid in catastrophic loss

Front 5

Requirement of insurable risk - Economically affordable premiums (Just a reminder, no answer)

Back 5

No definition, just a reminder

Front 6

Requirement of insurable risk - Random selection vs adverse selection

Back 6

Random in terms of proportionally good and bad risks. Underwriting helps control for adverse action which is those with higher risk more inclined to apply for insurance

Front 7

Requirement of insurable risk - Pure risk

Back 7

No potential for gain, insurers generally only insure pure risks

Front 8

Requirement of insurable risk - Low frequency, high severity but not catastrophic

Back 8

Potential severity motivates people to buy insurance but frequency of risk keeps premiums low

Front 9

6 required elements of an insurance contract

Back 9

1. Offer and acceptance - agent can do some written or oral but life and health must always be written. Agent can bind acceptance without payment for immediate coverage

2. Consideration – insured pays premium and agrees to conditions of contract. Insurer agrees to pay for possible losses

3. Legal object or purpose - insurable interest must exist

4. Competent parties - company must comply with state regulations

5. Legal form - often governed by state law. Some clauses required like free look provision

6. Voidable contract - if deemed unenforceable due to concealment or misrepresentation of relevant info at application

Front 10

Principle of indemnity in insurance contracts

Back 10

Covers losses to the extent of financial loss or legal liability. Make insured financially whole but not profit from the loss. Insurance is contracts of indemnity.

Front 11

Doctrine of insurable interest in insurance contracts

Back 11

Insured can only file claim if she has financial interest.

With life insurance, insurable interest at the time policy is issued.

With property and casualty insurance, insurable interest at the time of loss.

Front 12

Doctrine of actual cash value and pro rata clause in insurance contract

Back 12

Payment cannot exceed cash value of loss, even if insurance exceeds amount of total loss.

Pro rata clause - Protects insurance from over ensuring risk and moral hazards. Insurer only liable for amount proportional to loss.

Front 13

Subrogation rights in insurance contracts

Back 13

If property and casualty insurer has paid claim and negligence of third-party-caused loss, insurer has priority rights against party responsible for loss.

Insured can also recover amount up to what was paid out of pocket for deductibles and coinsurance after insurer has fully covered its costs

Front 14

Personal nature of insurance contracts

Back 14

Most policies not transferable to another without consent of insurer except life insurance.

Life insurance an exception because almost any assignment does not alter risk to insurance company.

Front 15

Adhesion in insurance contracts

Back 15

Imbalanced bargaining power of insurance company over insured. But courts usually rule in favor of insured in cases of ambiguity

Front 16

Unilateral nature of insurance contract

Back 16

Only insurer has legally enforceable promise as long as insured complies with conditions of policy and pays premiums

Front 17

Conditional nature of insurance contract

Back 17

Both parties must comply with conditions but insurer only has to fulfill obligations after insured has complied with conditions.

When insured does not fulfill obligations, not usually legally enforceable but can hinder or prevent payment of claims

Front 18

Aleatory nature of insurance contracts

Back 18

Exchange of unequal values ultimately determined by chance. Insured pays premiums that could be more than financial reimbursement if has small claims or no claims. On the other hand, substantial claims could greatly exceed premiums paid

Front 19

Utmost good faith nature of insurance contract

Back 19

Insurer must assume insured is not Misrepresenting or concealing when applying or making a claim. Insured must depend on insurer to fulfill promises

Front 20

Waiver and estoppel in insurance contract

Back 20

This is why insurance may be legally responsible to pay claim it wouldn’t ordinarily have to pay.

Waiver - intentional relinquishment by insurer of a known legal right

Estoppel - when one person makes a statement believed truthful to another person who then relies on that statement to the point the second person incurs damage. First person a.k.a. agent is estopped or barred from denying he made a specific statement to the second person aka insured

Front 21

Agent vs broker in insurance contract

Back 21

Agent - employee of insurance company or represents several companies. Agent’s actions legally attributed to insurer as extension of insurance company

Broker - Represents applicant or insured. Actions are not legally attributed to insurer

Front 22

7 Parts of an insurance policy

Back 22

1. Declarations - Facts and information unique to policy. Insurer, insured, property or activity being insured, location of property, other parties such as owner or beneficiary, I’m out of coverage, period of coverage, premium amount, effective date, policy number, deductible, waiting period

2. Definitions

3. Insuring agreement - Explains promises and applications of ensure. Whether named perils or open perils

4. Exclusions

5. Conditions including payment of premiums, cooperation and legal proceedings, taking medical exams

6. Miscellaneous provisions

7. Endorsements and riders - endorsements alter exclusions or conditions, or enhance or expand coverage. Riders can be added to life insurance to expand coverage for extra premium

Front 23

4 cost control provisions in life insurance policies

Back 23

1. Benefit limits - limit of overall coverage and or specific types of covered risks

2. Deductibles - eliminates benefit cost and relatively high administrative costs of small claims. Can structure as a waiting or elimination period

3. Insurance to value - limits payment for partial or total claims for underinsured property

4. Coinsurance - Property and medical insurance, helps keep cost of coverage down

Hint 23

1. Benefit limits - limit of overall coverage and or specific types of covered risks
2. Deductibles - eliminates benefit cost and relatively high administrative costs of small claims. Can structure as a waiting or elimination period
3. Insurance to value - limits payment for partial or total claims for underinsured property
4. Coinsurance - Property and medical insurance, helps keep cost of coverage down

Front 24

3 Provisions when multiple insurance providers involved in claims

Back 24

1. Pro rata liability - Each and chair covers it share of loss in proportion to but not more than its share of total insurance provided

2. Contribution by equal shares - each company pays equal share but does not exceed limit of liability for each policy. Pays up to point that loss is repaid and contract limits have been reached

3. Primary and excess - primary insurer pays up to coverage limit then access provider pays remaining balance up to coverage limit. Birthday rule limits gender discrimination for married couple’s dependents. Plan of parent whose birthday is first in the calendar year is the primary plan.