FINA 338 Exam 2

insurance

pooling of fortuitous losses by transfer of such risks to insurers, who agree to indemnify insureds for such losses, to provide other pecuniary benefits on their occurrence, or to render services connected with the risk

pooling

spreading of losses incurred by the few over the entire group, so that in the process, average loss is substituted for actual loss

law of large numbers

the greater the number of exposures, the more closely will the actual results approach the probable results that are expected from an infinite number of exposures

fortuitous loss

one that is unforeseen and unexpected by the insured and occurs as a result of chance

risk transfer

pure risk is transferred from the insured to the insurer, who typically is in a stronger financial position to pay the loss than the insured

indemnification

the insured is restored to his or her approximate financial position prior to the occurrence of the loss

requirements of insurable risk

1. there must be a large number of exposure units
2. the loss must be accidental and unintentional
3. the loss must be determinable and measurable
4. the loss should not be catastrophic
5. the chance of loss must be calculable
6. the premium must be economically feasible

reinsurance

an arrangement by which the primary insurer that initially writes the insurance transfers to another insurer part or all of the potential losses associated with such insurance

adverse selection

tendency of persons with a higher-than-average chance of loss to seek insurance at standard rates, which, if not controlled by underwriting, results in higher-than-expected loss levels

underwriting

the process of selecting and classifying applicants for insurance

casualty insurance

broad field of insurance that covers whatever is not covered by fire, marine, and life insurance; casualty lines include auto, liability, burglary and theft, workers comp, and health insurance

personal lines

coverages that insures the buildings and personal property of individuals and families or provide them with protection against legal liability

principle of indemnity

states that the insurer agrees to pay no more than the actual amount of the loss (the insured should not profit from a loss)

actual cash value

replacement cost less depreciation

fair market value

the price a willing buyer would pay a willing seller in a free market

broad evidence rule

the determination of actual cash value should include all relevant factors an expert would use to determine the value of the property

valued policy

pays the face amount of insurance if a total loss occurs

valued policy law

requires payment of the face amount of insurance to the insured if a total loss to real property occurs from a peril specified in the law

replacement cost insurance

no deduction for physical depreciation in determining the amount paid for a loss

principle of insurable interest

states that the insured must be in a position to lose financially if a covered loss occurs

subrogation

substitution of the insurer in place of the insured for the purpose of claiming indemnity from a third party for a loss covered by insurance (the insurer is entitled to recover from a negligent third party any loss payments made to the insured)

principle of utmost good faith

a higher degree of honesty is imposed on both parties to an insurance contract than is imposed on parties to other contracts

representations

statements made by the applicant for insurance

material

if the insurer knew the true facts, the policy would not have been issued, or it would have been issued on different terms

concealment

intentional failure of the applicant for insurance to reveal a material fact to the insurer

warranty

statement that becomes part of the insurance contract and is guaranteed by the maker to be true in all respects

binder

temporary contract for insurance and can be either written or oral

exchange of consideration

the value that each party gives to the other

legally competent

parties must have legal capacity to enter into a binding contract

aleatory contract

contract where the values exchanged may not be equal but depend on an uncertain event

commutative contract

one in which the values exchanged by both parties are theoretically equal

unilateral contract

only one party makes a legally enforceable promise

conditional contract

insurer's obligation to pay a claim depends on whether the insured or the beneficiary has complied with all policy conditions

conditions

provisions inserted in the policy that qualify or place limitations on the insurer's promise to perform

personal contract

contract is between the insured and the insurer

contract of adhesion

the insured must accept the entire contract with all of its terms and conditions

principle of reasonable expectations

an insured is entitled to coverage under a policy that he or she reasonably expects it to provide, regardless of policy provisions

waiver

voluntary relinquishment of a known legal right

estoppel

the loss of a legal defense because of previous actions that are now inconsistent with that defense

declarations

statements that provide information about the particular property or activity to be insured

insuring agreement

summarizes the major promises of the insurer

named-perils policy

only those perils specifically named in the policy are covered

open-perils policy (special coverage policy)

if the loss is not excluded, then it is covered

named insured

person or party named on the declarations page of the policy

first named insured

first name that appears on the declarations page of the policy as an insured

other insureds

persons or parties who are insured under the named insured's policy even though they are not specifically named in the policy

additional insured

person or party who is added to the named insured's policy by an endorsement

endorsements and riders

in property and casualty insurance, a written provision that adds to, deletes from, or modifies the provisions in the original contract.
in life and health insurance, a provision that amends or changes the original policy

deductible

provision by which a specified amount is subtracted from the total loss payment that otherwise would be payable

straight deductible

the insured must pay a certain number of dollars of loss before the insurer is required to make a payment

aggregate deductible

all losses that occur during a specified time period, usually a policy year, are accumulated to satisfy the deductible amount

calendar-year deductible

type of aggregate deductible that is found in individual and group medical expense policies

elimination (waiting) period

stated period of time at the beginning of a loss during which no insurance benefits are paid

coinsurance clause

encourages the insured to insure the property to a stated percentage of its insurable value. if not met at the time of the loss, the insured must share in the loss as a coinsurer

coinsurance percentage clause

provision that requires the insured to pay a specified percentage of covered medical expenses in excess of the deductible

premature death

the death of a family head with outstanding unfulfilled financial obligations

human life value

present value of the family's share of the deceased breadwinner's future earnings

whole life insurance

cash-value policy that provides lifetime protection

ordinary life insurance

a level-premium policy that accumulates cash values and provides lifetime protection to age 121

net amount at risk

the difference between the legal reserve and face amount of insurance

cash-surrender values

amount paid to a policy holder who surrenders the policy

variable life insurance

a fixed-premium policy in which the death benefit and cash values vary according to the investment experience of a separate account, which is similar to a mutual fund maintained by the insurer

universal life insurance (flexible premium life insurance)

a flexible premium policy that provides protection under a contract that separates the protection and saving components

current assumption whole life insurance

a nonparticipating whole life policy in which the cash values are based on the insurer's current mortality, investment, and expense experience

employee benefits

employer-sponsored benefits, other than wages, that enhance the economic security of individuals and families and are partly or fully paid for by employers

health maintenance organization (HMO)

organized system of healthcare that provides comprehensive medical services to its members on a prepaid basis

preferred provider organization (PPO)

plan that contracts with healthcare providers to provide certain medical services to the plan members at discounted fees

point-of-service plan (POS)

managed care plan that combines the basic characteristics of an HMO and PPO

consumer directed health plan (CDHP)

plan that combines a high-deductible health plan with a health savings account or health reimbursement arrangement

health reimbursement arrangement (HRA)

employer-funded plan with favorable tax advantages that reimburse employees for medical expenses not covered by the employer's standard insurance plan