- Define risk in the context of this class (uncertainty concerning loss) and contrast this definition with definitions from other disciplines
- Be able to classify different risks: pure vs. speculative, fundamental vs. particular, personal vs. property vs. liability
- Identify common types of pure risks faced by individuals: premature death, excessive longevity, poor health, unemployment, property, and liability
- Explain how risk might affect society in the absence of insurance
- General definitions of risk: Chance (probability) of loss - objective (both a priori and ex post) vs. subjective probabilities, objective risk and the effects of the law of large numbers, subjective risk
- Categories of risk: pure vs. speculative, fundamental vs. particular risk, financial risk, enterprise risk, personal risks, property risks (including direct and indirect losses), liability risks
- Other: hold harmless agreements
Chapter 2 - Defining insurance
- Discuss the four elements of insurance plans
- Identify the ideal requirements for the development of private insurance contracts
- Give examples of where these ideal requirements are not met
- Explain why government insurance is needed for some risks
- Differentiate insurance transactions from gambling and hedging
- Describe the social benefits and costs of insurance
- Definition of insurance: Pooling of losses (and the law of large numbers), fortuitous losses, risk transfer, indemnification, adverse selection, peril, casualty insurance, property and liability insurance, life insurance
- Other: hazard, physical hazard, moral hazard, morale hazard, legal hazard
- Discuss the pre- and post-loss objectives of the risk management process
- Explain the four steps of the risk management process and the role of the risk manager
- Identify loss exposures
- Analyze loss exposures using frequency and severity
- Treat the loss exposure
- Describe methods for loss control including avoidance, loss prevention, and loss reduction
- List risk financing alternatives including retention (assumption), noninsurance transfers, hedging, and insurance
- Implement and monitor performance
- Compare the advantages and disadvantages of retention vs. insurance
- List the ways that companies may finance their losses when assuming risk
- Risk mitigation techniques: Loss control, loss prevention, loss reduction, avoidance, insurance, hedging, retention/assumption, active vs. passive retention, noninsurance transfers, (group) captive, self-insurance, risk retention group, risk financing
- Risk measurement: frequency, severity, maximum probable loss, maximum possible loss, loss exposure
- Other: risk management, risk management policy statement
- Identify the key distinction for each of the different types of organizations that offer insurance
- Distinguish stock and mutual insurers
- List the reasons that a mutual would consider demutualizing
- Explain the changes in financial services industry including consolidation and convergence
- Differentiate the roles agents and brokers and the ability of agents to bind insurers
- Identify the different levels of agents' authority
- Discuss the different approaches used to market insurance
- Distinguish agency building systems and nonagency building systems
- Contrast general agents and branch offices
- Compare independent agents and captive agents
- Insurance organizations: mutuals (advance premium vs. assessment), demutualization and mutual holding companies, Blue Cross / Blue Shield plans, fraternals (fraternal benefit societies), Lloyd's of London, nonadmitted insurer, stock insurer, reciprocal exchange (pure vs. modified)
- Marketing types: agency building system, agent, broker, surplus lines broker, direct response, exclusive (captive) agents, independent agents, personal producing general agent
- Identify the different functional areas of insurers including rate making, underwriting, claims, production
- List the items commonly used in the underwriting process as well as the possible decisions made by underwriters while evaluating an application for insurance
- Explain the claims settlement process and the various individuals who may be involved in adjusting claims
- Discuss the reasons that insurers may use reinsurance and the types of reinsurance agreements that are used
- Facultative vs. treaty reinsurance
- Quota share vs. surplus share
- Insurer jobs: actuary, underwriter, adjustor, adjustment bureau, company adjustor, independent adjustor, public adjustor
- Reinsurance: ceding (primary) company, excess of loss reinsurance, facultative vs. treaty, quota share, surplus share, reinsurance pool, retention limit and number of lines of reinsurance
- Other: medical information bureau (MIB), unearned premium reserve
- Explain the basic structure and composition of an insurer's two major financial statements
- Balance sheet
- Types of assets and liabilities unique to insurers, especially reserves
- (Policyholder) Surplus = Assets - Liabilities
- Income and expense statement
- Sources of revenue and expense for insurers
- Profit = Revenue - Expenses
- Discuss different methods for determining reserves
- Case reserves - judgment, average value, tabular methods
- Loss ratio method
- Unearned premium reserve
- Distinguish written and earned premium
- Calculate measures of insurer performance
- Combined ratio measures underwriting profit
- Operating ratio measures overall performance, including investment returns
- List the regulatory and business objectives of property/casualty ratemaking
- Differentiate methods of ratemaking
Chapter 7 definitions
- Insurer financial statements: balance sheet, income and expense statement, policyholder surplus (PHS), case reserves, earned vs. written premium, INBR, loss adjustment expenses (LAE), loss ratio method, loss reserves, unearned premium reserves
- Insurer performer measures: combined ratio, expense ratio, loss ratio, investment income ratio, operating ratio
- Ratemaking: class rating, gross premium, pure premium, exposure, experience rating, merit rating, judgment rating, loading, retrospective, schedule rating
- Discuss the reasons why insurance is regulated
- Explain the historical development that has lead to regulation by the states
- Formation and incorporation is a state issue
- Paul v. Virginia
- South-Eastern Underwriters Association case
- McCarran-Ferguson Act
- Financial Services Modernization act (Gramm-Leach-Bliley)
- Identify the specific areas of insurance regulation
- Licensing
- Solvency regulation
- Discuss some of the tools used to monitor solvency
- Rate regulation in property/casualty insurance
- Understand the goals in rate regulation
- Distinguish the different levels of state involvement
- Other areas such as policy forms and sales practices
- List some of the components that affect risk based capital requirements
- Understand the arguments for and against state vs. federal insurance regulation
- Explain the use of credit scores in insurance
- General - domestic insurer, foreign insurer, alien insurer,
- Solvency issues - admitted assets, reserves, policyholder surplus, risk based capital, guaranty funds, post assessment, IRIS ratios and FAST scores, statutory accounting
- Rate regulation - prior approval, file-and-use (use-and-file), flex rating, open competition,
- Other - credit-based insurance score, twisting, rebating, federal charters for life insurers
- Know the four principles underlying insurance contracts
- Discuss the purpose of the principle of indemnity
- List some exceptions to the principle of indemnity
- Give examples of appropriate insurable interest in property insurance and life insurance
- When must insurable interest exist in property insurance and life insurance?
- Explain the purpose of subrogation in property insurance
- Identify applications of the principle of utmost good faith, including representations, concealment, and warranties
- List the requirements for any valid contract and show these elements for the insurance transaction
- Distinguish insurance contracts from other common contracts
- Aleatory vs. commutative
- Unilateral vs. bilateral
- Conditional contract
- Personal vs. transferable
- Contract of adhesion
- Principle of indemnity: actual cash value, fair market value, broad evidence, replacement cost, subrogation, valued policy, valued policy laws
- Principle of utmost good faith: concealment, (mis)representation, material fact, warranty
- Insurance contracts: aleatory vs. commutative, conditional, consideration, contract of adhesion, legal purpose, legally competent, offer and acceptance, personal contract, bilateral vs. unilateral
- Other: insurable interest, pecuniary interest
Chapter 10 - Insurance Contracts
- List the major sections of an insurance contract including amendments such as riders and endorsements
- Describe the type of information on the declarations page
- Explain the kinds of exclusions in insurance contracts and the rationale for various exclusions
- Differentiate named perils and open peril coverages
- Determine how much a policyholder shares in losses through cost sharing mechanisms like deductibles and coinsurance
- Discuss the various kinds of deductibles and the purpose of deductibles
- Distinguish coinsurance in property insurance and health insurance
- Justify coinsurance in property insurance - what is the purpose?
- Show how multiple policies may share losses (other insurance provisions)
Chapter 10 definitions
- Parts of an insurance contract: insuring agreement (named perils vs. open peril / all risk), declarations page, endorsements / riders, exclusions, named insured
- Cost sharing mechanisms: coinsurance clause, participation percentage (coinsurance in health insurance), aggregate (calendar year) deductible, straight deductible, corridor deductible, elimination period
- Other insurance provisions: pro rata, contribution by equal shares, coordination of benefits, primary and excess
- Other: equity in rating, large-loss principle
Chapter 11 Life insurance
- Define the concept of premature death and the associated costs to the family
- Justify the purchase of life insurance
- Assess the impact of premature death to various family types
- Discuss different methods for determining the amount of life insurance needed using human life value (just a brief discussion of what this means), needs approach, and capital retention
- Explain the key characteristic of the various types of life insurance available (Exhibit 11.6 on p. 234)
- Term vs. whole life - temporary vs. permanent coverage, death benefit only vs. savings component, increasing premium vs. fixed premium
- Quickly compare some advantages and disadvantages of term vs. whole life (the uses and limitations of each)
- Identify various types of term life insurance policies and common features - renewability, YRT, multi-year term, decreasing term, reentry term, and return of premium
- Describe the variations of whole life insurance - ordinary life, limited payment life, variable life, universal life, variable universal life, modified life, CAWL
Chapter 11 definitions
- Need for life insurance: capital retention approach, dependency period, readjustment period, human life value, needs approach, premature death
- Term life insurance: convertible, reentry term, renewable
- Whole life insurance: cash surrender value, CAWL, endowment insurance, legal reserve, limited payment whole life, modified life, ordinary life, single premium whole life, universal life, variable life, variable universal life
- Other: Second-to-die life insurance, net amount at risk
Chapter 12 Life insurance contracts
- Explain common provisions and clauses in life insurance contracts - e.g., incontestable clause, suicide clause, grace period and reinstatement, etc.
- Differentiate types of beneficiaries - primary vs. contingent, revocable vs. irrevocable, specific vs. class
- List the options available for owners or beneficiaries
- Dividend options: cash, reduce premiums, accumulation with interest, paid up additions
- Surrender (nonforfeiture) options: cash, reduced paid-up, extended term
- Settlement options: cash, interest, fixed period, fixed amount, life income
- Introduce additional benefits available, including riders - WOP, guaranteed purchase, double indemnity, COLA, accelerated death benefits
Chapter 12 definitions
- Basic clauses and provisions: assignment (absolute or collateral), automatic premium loan, class vs. specific beneficiary, contingent vs. primary beneficiary, entire contract clause, grace period, incontestable clause, ownership clause, suicide clause, irrevocable vs. revocable beneficiary, misstatement of age or sex clause, policy loans, reduced paid-up insurance
- Options for dividends / surrender / settlement: nonforfeiture, participating / nonparticipating, extended term insurance, interest only option, fixed amount, fixed period, life income, paid up additions
- Additional benefits: accelerated death benefits, accidental death benefit, double indemnity, cost of living rider, waiver of premium, guaranteed purchase option, viatical settlement
- Basic annuity principles
- Explain the concept of an annuity and how a life annuity can help reduce the risk of insufficient income during retirement
- Differentiate categories of annuities
- Settlement options - recognize how income guarantees reduce annual payments of life annuities
- Deferred vs. immediate
- Two distinct phases in deferred annuities - accumulation and annuitization (liquidation)
- Immediate annuities simply take a lump sum deposit and translate it to life income stream
- Fixed vs. variable - insurer guarantees vs. the inflation protection of variable annuities
- Death benefits of variable annuities
- Equity indexed annuities provide the protection of fixed annuities with some participation in stock market returns
- Taxation of annuities
- If purchased privately, premiums are typically NOT tax deductible, but investment income grows tax deferred
- Determining how much of annuity payments is taxable involves an exclusion ratio, which is the fraction of each annuity payment that is NOT taxable
- Traditional IRAs are retirement accounts that have significant tax benefits
- Money deposited while working is tax deductible (up to $5000 per year) and grows tax deferred until money is withdrawn from the account during retirement
- Contributions are tax deductible if not covered under an employer plan - or if income is not too high
- Withdrawals:
- If contributions were tax deductible, all distributions are fully taxable
- Not allowed before 59 1/2 years except when there are hardships - 10% penalty
- MUST begin after 70 1/2
- Roth IRAs make contributions after tax, but investments income grows tax free
- Distributions are tax free - no required withdrawal at 70 1/2
- Basic terminology - annuity, accumulation period, annuitant, annuitization (liquidation) period
- Annuity types - deferred annuity vs. immediate annuity, fixed annuity, variable annuity, equity indexed annuity, flexible premium deferred annuity, single premium deferred annuity
- Settlement options - cash refund option, installment refund option, life annuity with no refund, life annuity with guaranteed payments, joint and survivor annuity
- IRA - Traditional IRA, Roth IRA
- Other definitions - exclusion ratio, accumulation unit and annuity units (variable annuities)
Chapter 15 - Individual health insurance coverage
- Discuss major problems with the US health care system
- Medical expense coverage
- Hospital-surgical insurance (base plans) cover only expenses incurred in a hospital and have low limits
- Major medical insurance provides broader coverage with higher limits
- Can either supplement basic plans or provide comprehensive coverage
- Contains cost sharing provisions such as deductibles and coinsurance up to stop loss limit (out of pocket maximum)
- Health savings accounts are investment accounts that are combined with high deductible health plans
- Tax benefits include tax deductible contributions up to $3000 annually as long as health plan has at least $1150 deductible, investment income is tax free, and withdrawals are tax free if used for medical expenses
- HSAs have some pros and cons
- Long term care insurance provides for payment for individuals who require medical or custodial assistance in a nursing facility or at home
- Disability income insurance replaces lost wages due to disability
- Several definitions of "total disability," but commonly "own occ" and "any occ" are used by individual policies
- Partial/residual benefits may be available
- Individual health insurance policies are generally guaranteed renewable, but other options may apply
Chapter 15 terms
- Medical expense coverage - Hospital-surgical insurance, stop-loss limit (out of pocket maximum), coinsurance, deductibles (calendar year, family deductible, corridor deductible), major medical insurance (supplemental and comprehensive), health savings accounts (HSAs), internal limits (for certain covered medical expenses), reasonable and customary or scheduled approach
- Long-term care - activities of daily living, benefit triggers
- Disability income insurance - elimination period (also LTC), waiver of premium, partial and residual disability
- Guaranteed renewable, noncancelable, nonrenewable for stated reasons only, optionally renewable
Chapter 16 - Group life and health
- Differentiate individual and group insurance contracts - e.g., no EOI for group insurance
- Discuss the underwriting principles in group insurance - how to reduce adverse selection of individual group members
- Group life insurance is usually YRT
- Many group medical expense options are available
- Self insured plans have larger employers pay for medical costs of employees
- May include ASO contracts and/or stop loss protection
- Traditional indemnity plans have little or no managed care features - fee for service
- Hospital-surgical expense insurance (base plans) - similar to what's available with individuals
- Major medical insurance is more comprehensive (Base +MM has corridor deductible or comprehensive MM)
- Managed care plans have cost containment provisions by limiting the choice of doctors and fixing payments to doctors
- Severaly types of HMOs organize the medical resources for a fixed fee from members
- PPOs negotiate reduced fees with network doctors, but members can go out of network
- POS plans combine in-network HMO coverage, with out-of-network PPO benefits
- Consumer driven health plans give employees a choice of plans designed to make them cost sensitive
- Medical expense plan provisions
- Preexisting conditions limitation reduces coverage for issues that existed before coverage started
- COB determines which policy is primary if covered by more than one policy
- COBRA continues coverage for employees who leave employer
- Group dental and disability coverages are made available
- Cafeteria plans allow employees to select the benefit package to meet their own needs
Chapter 16 terms
- Group insurance - cafeteria plans, experience rating, administrative services only (ASO), group dental, group disability (STD and LTD)
- Group medical expense coverages - self insured plans, traditional indemnity insurance, basic medical expense plans (hospital-surgical expense), Blue Cross and Blue Shield plans, comprehensive major medical, consumer-driven health plans, HMO and HMO types (staff, IPA, network, group), PPO, POS, supplemental major medical
- Group medical expense provisions - COBRA, coinsurance, corridor deductible, coordination of benefits, pre-existing conditions limitation, portability
- Other - capitation fee, gatekeeper, flexible spending account, managed care, stop loss coverage
Chapter 17 - Employer retirement plans
- Discuss the tax advantages of employer provided "qualified" retirement plans
- Employer contributions are tax-deductible for employer and not taxable for individuals
- Investment earnings accumulate tax-deferred
- Benefits are not taxed until withdrawn
- Maximum benefits
- In 2011, maximum annual benefit for DB plan is $195,000 (or level of salary)
- In 2011, maximum contribution to DC plan is $49,000 (or level of salary)
- Qualified plans must meet minimum coverage requirements to avoid discriminating toward HCEs - 70/70/70 rule (at least one)
- Ratio test - percentage of non-HCEs covered must be 70% of HCEs covered
- Average benefits non-HCEs is at least 70% of HCE benefit
- Age 21 with one year of service
- Must define benefits for three different retirement ages - normal, early, and deferred
- Defined benefit formulas include flat dollar benefit, flat dollar benefit per year of service, unit-benefit, flat % of earnings
- Discuss different vesting schedules (graded or cliff) for both DB and DC plans
- Types of employer provided plans - know the key distinctive feature
- DB vs. DC - what does employer provide? who has investment risk?
- Cash balance plan is a defined benefit plan with hypothetical account balances where employer credits a fixed investment return
- 401(k) defers compensation into a retirement account that is directed by the employee
- Maximum deferral in 2011 is $16,500 (more for older workers)
- 403(b) is similar to 401(k), but for public schools and tax-exempt organizations
- Profit sharing plan has more discretion on employer provided contributions
- Keogh plans are for self-employed persons (unincorporated)
- SEPs and SIMPLE plans have employers set up IRAs for employees
- Pension plans must select funding agency and funding instruments
- Insured plans may be funding through separate accounts directed by the plan or GICs
- Retirement plan requirements - 70/70 discrimination tests (ratio, average benefit), qualified plan, graded vs. cliff vesting, minimum age/service requirements
- Retirement plan terminology - career or final average earnings, retirement age (normal, early, deferred), funding agency, funding instrument
- Types of retirement plans - defined benefit vs. defined contribution, cash balance plan, money purchase plan, Keogh plan, SEP, SIMPLE plan, profit sharing plan, 401(k), 403(b)/TSA
- Other - GICs, HCEs, PBGC, separate accounts, trust fund vs. insured plans, ERISA
Chapter 18 Social Insurance
- Define social insurance programs and list the reasons for initiating these programs
- Differentiate private insurance from social insurance
- e.g., social insurance is compulsory, focuses on social adequacy, no formal means test, etc.
- Discuss various features of the OASDI program (Social Security)
- Types of benefits: retirement (for retiree, spouse and children), survivor (for children and spouses, and disability (for the disabled and dependents)
- Differences between eligibility requirements (fully insured, currently insured, and disability insured)
- Define "disability" in the context of OASDI
- Look at taxation and financing of the OASDI program
- Describe the different "parts"/benefits to Medicare including the original plans (A&B), Medicare Advantage Plans (C), and prescription drug coverage (D)
- Describe the financing/required premiums for each part
- Explain the objectives of unemployment insurance
- List the requirements for receiving unemployment benefits
- Describe the benefits and financing of unemployment insurance
- Review the legal defenses used by employers that led to workers compensation laws
- Indicate how employers can meet the requirements for providing workers compensation benefits to employees
Chapter 18 terms
- OASDI: Retirement age (full vs. early), earning "credits" (fully insured, currently insured, disability insured), PIA and AIME, COLA, earnings test (which might reduce retirement benefits)
- Medicare: Parts A through D, DRGs, Medicare Advantage Plans, Medigap (Medicare Supplement) policies
- Unemployment insurance: experience rating, exte
- Workers compensation: legal defenses (assumption of risk, fellow servant doctrine, contributory negligence), experience rating, liability without fault
- Social insurance: fully funded, individual equity vs. social adequacy, means (needs) testing
- To be held negligent, four elements must be shown
- Person had a legal duty to protect others from harm
- The individual failed to perform that duty
- Another person was injured
- There is a proximate cause relationship
- Types of damages may be awarded
- Compensatory damages are related to losses incurred
- Special damages can be measured and documented
- General damages include pain and suffering and cannot be measured
- Punitive damages are a monetary punishment designed to deter others
- There are several defenses if sued for negligence
- Contributory negligence says the injured party contributed to their loss and should get nothing
- Last clear chance rule says that even though plaintiff contributed to their accident, the defendant had the last opportunity to avoid the loss and therefore should be held liable
- Comparative negligence says award should be reduced since the plaintiff was partly responsible
- Assumption of risk says plaintiff knew of how dangerous the activity was and therefore should not be able to collect
- Negligence can be imputed to others based on relationships (e.g., employee-employer or dram shop)
- Property owners must protect others while on their property, but the standard of care varies for trespassers, licensees, and invitees
- The tort liability system currently has problems
- The number of suits is increasing and juries are awarding larger judgments
- Awards enrich lawyers, not the injured party and the legal process takes too much time
- Tort reform issues include
- Moving large class action suits to federal court
- Capping awards and protecting vulnerable industries
- Modifying joint and several liability
- Alternative dispute resolution
- Torts - plaintiff, tortfeasor, categories of torts (intential torts, negligence, and strict liability),
- Negligence - compensatory damages, special damages, general damages, punitive damages, contributory negligence, (pure) comparative negligence, last clear chance rule, assumption of risk, res ipsa loquitur, attractive nuisance, sovereign immunity, joint and several liability
- Imputed negligence - dram shop laws, vicarious liability law, respondeat superior
- Other - trespassers vs. licensees vs. invitees, arbitration and mediation, collateral source rule
- Differentiate the differentiate the different ISO forms for homeowners insurance (e.g. HO-2, HO-3, etc)
- Identify the insured persons under the policy
- Distinguish the sections and parts of HO-3
- Section I covers the property
- Perils covered and excluded (open peril for dwelling and named perils for property)
- Coverage A is on the dwelling
- Coverage B is for other structures (e.g., the garage)
- Limit is 10% of Coverage A
- Excludes structures rented or used in business
- Coverage C is for personal property
- Limit is 50% of Coverage A
- Property excludes land, pets, aircraft
- Some items are scheduled due to moral hazard concerns
- Coverage D is Loss of Use when there are additional living expenses incurred after a loss
- Limit is 30% of Coverage A
- Additional coverages
- Removal of debris, glass, etc.
- Exclusions for Section I
- Earthquake
- Flood
- War, nuclear hazard
- Section II covers personal liability
- Coverage E is protection against legal liability caused by negligence that resulted in bodily injury or property damage to others
- Coverage F is for medical payments to others (no negligence is needed)
- Additional coverages
- Exclusions for Section II
- Workers comp
- Business and professional liability
- Motor vehicle liability
- Determine how much of the loss will be reimbursed
- Losses to dwelling is paid on basis of replacement cost while personal property is paid on basis of ACV
- Explain how loss payments are reduced if coinsurance requirement is not met
- Define the need for certain endorsements
- Inflation guard
- Earthquake
- Personal property replacement cost
- Scheduled personal property
- Home business
- List and describe the factors that influence the cost of homeowners insurance
- Suggests ways that individuals might reduce premiums for homeowners coverage
- Homeowners policies - Insurance Services Office (ISO), HO-2, HO-3, HO-4, HO-5, HO-6, HO-8
- Homeowners terminology / specific policy clauses - mortgage clause, replacement cost coverage, coinsurance, appraisal clause, contractual liability
- Other - Insurance (FICO) score, CLUE, personal umbrella liability policy
- List the various vehicles (including new cars) and people that are covered under the PAP
- Summarize the different parts of the PAP
- Part A - Liability coverage protection if insured causes bodily injury or property damage
- Part B - Medical payments
- List covered persons
- Part C - Uninsured (and Underinsured) Motorist coverage
- Part D - Damage to your auto
- Differentiate collision and comprehensive coverages
- Part E - Duties after a loss
- Part F - General provisions
- Coverage is only good in US (and territories) and Canada
- Explain some common exclusions
- Workers comp
- Business vehicles, including use as taxi
- Personal property
- Discuss other insurance provisions
- Often the owner's insurance is primary and nonowner's insurance is excess
- PAP terms - split vs. single limits, owned vs. nonowned autos
- Coverages - uninsured/underinsured motorist coverage, collision damage waiver, gap insurance, collision coverage, other-than-collision (comprehensive) coverage
- Other - diminution in value
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