1. Fundamentals of Risk and Insurance

2. Chapter 1 The Problem of Risk
1. The concept of risk
Risk: a condition in which there is a possibility of an adverse deviation from a desired outcome that is expected or hoped for

3. Peril: a cause of a loss Hazard: a condition that may create or increase the chance of a loss arising from a given peril
Three categories of hazards:
Physical hazards
Moral hazard
Morale hazard

4. 2. Classifications of risk
Pure risk and speculative risk
Pure risk: the situations that involve only the chance of loss or no loss
Speculative risk: a situation in which there is a possibility of loss, but also a possibility of gain

5. Chapter 2 Introduction to risk management
Risk management is a scientific approach to dealing with pure risks by anticipating possible accidental losses and designing and implementing procedures that minimize the occurrence of loss or the financial impact of the losses that do occur

6. 2. Risk management tools Include two broad approaches:
(1) Risk control focuses on minimizing the risk of loss
A. Risk avoidance
B. Risk reduction: loss prevention & loss control
(2) Risk financing focuses on finding funds to meet losses

7. (2) Risk financing focuses on finding funds to meet losses
A. Risk retention (assumption)
Intentional and unintentional
B. Risk transfer
Insurance, hedging
Assume all risks that are not significant in relation to the company’s financial strength
Insure all risks not assumed

8. 3. Risk management process
(1) Determination of objectives
(2) Identification of risks
(3) Evaluation of risks
(4) Considering alternatives and selecting the risk treatment device
(5) Implementing the decision
(6) Evaluation and review

9. Determination of objectives
Post-loss objectives
Pre-loss objectives
Survival
Economy
Continuity of operations
Reduction in anxiety
Earning stability
Meeting externally imposed obligations
Continued growth
Social responsibility

10. Chapter 3 The insurance device
1. The nature and functions of insurance
(1) Risk sharing and risk transfer
A. Transferring or shifting risk from one individual to a group
B. Sharing losses, on some equitable basis, by all members of the group

11. (2) Insurance defined from the viewpoint of the individual
Insurance is an economic device whereby the individual substitutes a small certain cost (the premium) for a large uncertain financial loss (the contingency insured against) that would exist if it were not for the insurance

12. (3) Risk reduction through pooling
The law of large numbers
The larger the sample, the more accurate will be the estimate of the probability
Once the estimate has been made, it must be applied to a sufficient large number of exposure units to permit the underlying probability to work itself out
To make the estimate more accurate, we use variance and standard deviation
The integration of inevitability and chance

13. (4) Insurance defined from the viewpoint of society
Each insured, and each class of insureds should bear the mathematically fare share of the insurance pool’s losses and expenses
(4) Insurance defined from the viewpoint of society
Insurance is an economic device for reducing and eliminating risk through the process of combining a sufficient number of homogeneous exposures into a group to make the losses predictable for the group as a whole

14. (5) Elements of an insurable risk
A. There must be a sufficient large number of homogeneous exposure units to make the losses reasonably predictable
B. The loss produced by the risk must be definite and measurable
C. The loss must be fortuitous or accidental
D. The loss must not be catastrophic

15. (6) The fields of insurance
A. Private (Voluntary) insurance
Life insurance
Health insurance
Property and liability insurance
Including named-peril coverage and open-peril coverage
B. Social insurance

16. Chapter 5 the private insurance industry
1. Insurers classification by legal form of ownership
A. Capital stock insurance companies
B. Mutual insurance companies
C. Reciprocals or interinsurance exchange
D. Lloyd’s associations
E. Health expense associations
F. Government insurers

17. 2. Marketing systems The insurance occupations Agent Broker
Underwriter
Loss adjuster
actuary

18. (1) Life insurance distribution system
A. General agents
B. Branch office system—branch manager
(2) Property and liability distribution system (refer to the book)
A. Independent agents (U.S.A.)
B. Direct writers

19. Chapter 6 regulation of the insurance industry
Regulation represents the rules by which the game is played
The government as market regulator: to protect the weak group

20. 1. The why of government regulation of insurance
(1) Rationale for regulation of the insurance industry
A. Vested-in-the-public-interest
Solvency
Complex nature of insurance contracts
B. Destructive-competition
Due to the unique nature of pricing

21. (2) Goals of insurance regulation solvency equity
2. Regulation today
The current regulatory structure:
Legislative branch
Judicial branch
Executive branch

22. 3. Areas regulated (1) Solvency regulation A. Licensing of companies
B. Reporting and financial analysis
C. Risk-based capital
D. Examination of companies
E. Regulation of reserves
F. Investments: admitted/nonadmitted assets
G. Dealing with insolvencies

23. (2) Market regulation A. Unfair practices B. Policy forms
C. Competence of agents
D. Consumer complaints and assistance

24. Ways for rate regulation:
(3) Regulation of rates
Principles:
Adequacy
Not be excessive
Not discriminate unfairly
Ways for rate regulation:
Prior approval
No filing
File-and-use
Informational filing
Flex-rating

25. Chapter 7 functions of insurers
Ratemaking
Methods:
Judgment rating
Schedule rating
Experience rating: credibility factor
Retrospective rating

26. (2) Principle of the rate of premium
A. Fairness
B. Solvency: avoid vicious competition
C. Comparative stability
D. Encouraging loss reduction

27. (3) Setting of the property premium rate
Rate of loss=compensation÷insurance amount
Credibility factor: usual 10 percent
(This is also the adjustment rate)
Rate of property premium:
Rate of lossX(1+10%)X(1+g) ÷(1+y)
g: extra rate, y: investment gain.
(4) Rate of life premium

28. Chapter 11 introduction to life insurance
Life insurance is a risk-pooling plan
Life insurance does not violate the requirements of an insurable risk, for it is not the possibility of death itself that is insured, but rather untimely death
Life insurance is not a contract of indemnity

29. 1. Types of life insurance contracts
Term insurance
(pure insurance protection)
Cash value insurance
(protection and savings)
Whole-life insurance
Endowment insurance
Universal life insurance
Adjustable life insurance
Variable life insurance

30. (1) Reasons for difference in term and cash value insurance
(2) The level premium concept
2. Current life insurance products
(1) Term insurance
Renewable term
Convertible term
Advantages of term life insurance: A. Greatest amount of protection for a given outlay B. meet temporary insurance needs

31. Disadvantage: adverse selection
(2) Whole life insurance
A. Straight whole life
B. Limited-pay whole life
(3) Universal life insurance
Advantages of Universal Life Insurance
Flexibility of Premium Payments
Ability to earn a great return when interest rates rise
Flexibility of death benefits

32. Universal life insurance:
People buy a term policy and invest an additional amount with the insurance company.
The minimum premium is to keep a term insurance in force.
The insured is allowed to determine the amount and frequency of the premium payments within limits.
A guaranteed rate is specified in the contract, while an excess interest rate is determined by a formula or by company declaration.

33. (4) Variable life insurance
A modification of universal life insurance
One insured has two accounts: an insurance account and a separate account
(5) Adjustable life insurance
(6) Endowment life insurance
(7) Participating and nonparticipating life insurance
The dividends

34. 3. General classifications of life insurance
(1) Ordinary life insurance
(2) Industrial life insurance
Small amount but higher frequency of premiums
(3) Group life insurance
Provided to a well-defined group of people who are associated for some purpose other than purchasing life insurance
Generally costs less than similar individually purchased insurance
(4) Credit life insurance

35. Chapter 13 The life insurance contract
1. Inception of the life insurance contract
Conditional binding receipt: usually called a binder, which is the temporary life insurance contract after the payment of a premium.
The binder has the same legal effect as the formal insurance contract

36. 2. General provisions of life insurance contracts
Entire contract clause
Ownership clause
Beneficiary clause: primary or contingent
Revocable or irrevocable
Incontestable clause
Misstatement of age clause
Grace period
Reinstatement

37. Suicide clause Aviation exclusions War clause
3. Settlement options
(1) Interest option
(2) Installments for a fixed period
(3) Installments of a fixed amount
(4) Life income options
Straight life income
Life income with period certain
Life income with refund
Joint and survivor income

38. Example of payments under any one of the above life income options
Chapter 15 Disability income insurance
1. General nature of disability income insurance
Periodic payments to the person insured when he or she is unable to work because of injury or illness
Benefit eligibility presumes a loss of income

39. (2) Methods of marketing
(1) Types of insurers Property and liability insurers, life insurers and specialty health insurers
(2) Methods of marketing
Mainly sold on a group basis
(3) Short-term versus long-term disability coverage
Short-term: up to 2 years with an elimination period (waiting period)
Long-term: from the date of disability to retirement with an elimination period. It is a logical complement to life insurance

40. Chapter 16 coverage for medical expenses
The insurance product
1. Traditional forms of medical expense insurance:
(1) Base plan coverage
Hospitalization, surgical expense coverage and physician’s coverage are written together
Covers the costs of both hospitalization and outpatient
First dollar coverage: base plan coverage policies often have no-deductible provision

41. A. Hospitalization insurance Blue Cross service plans provide a semiprivate room in a participating hospital for a stated number of days, rather than a cash benefit
Hospital expense policies offered by commercial insurers reimburse some or all of the cost of room and board when the insured is confined to a hospital
Policies of both Blue Cross and commercial insurance companies cover incidental hospital expenses

42. (2) Major Medical Insurance
B. Surgical expense insurance Specify a maximum amount of coverage. If one patient needs more than one procedures, the most expensive treatment determines the payment
UCR charges
C. Physician’s expense insurance
(2) Major Medical Insurance
Major medical policies have a substantial deductible provision
Major medical policies have a participation provision
Major medical policies have a high limit of liability
See the example

43. 2. Exclusions under health insurance policies (12 exclusions)
3. Coordination of benefit
In the double-income family, one or both partners may be covered under two policies
The coordination of benefit is to eliminate double payment when two policies exist
An individual’s policy applies before the spouse’s policy
Children are covered under the policy of the parent whose birthday is earliest in the year

44. Chapter 19 the automobile and its legal environment
Automobile coverage is a type of property insurance with the apparent elements of life insurance
The purchase of the automobile coverage is not a mere personal choice, instead, it is a social obligation

45. 1. A brief overview of automobile coverages
(1) Automobile liability insurance (also called the third party liability), which covers the injuries to other persons and damages to caused
Single limit of liability
Split limits of liability
Insureds---the named insured and her consentients
Exclusions

46. (3) Physical damage coverage, also called damage to the auto
(2) Medical payments coverage It is written with a maximum limit per person per accident
(3) Physical damage coverage, also called damage to the auto
Insures against loss of the policyholder’s own automobile
The coverage is written under two insurance agreements: A. other than collision B. collision
Exclusions

47. (4) Uninsured motorists coverage
Purpose: protect people from the loss of accident caused by another uninsured motorist
Uninsured motorist:
Drivers without insurance
Drivers with less insurance than the minimum required by the state law
Hit-and –run Drivers
Drivers with coverage provided by insolvent insurers

48. 2. The no-fault concept No-fault vs. tort system
The no-fault insurance provides one more option to the insureds so that it is more flexible
Under the no-fault system, there is no attempt to fix blame or to place the burden of the loss on the party causing it
All parties receive compensation from their own insurer, regardless of who caused the accident
No-fault insurance is to speed the compensation in less serious traffic accidents

49. (2) Modified no-fault proposals
Pure no-fault proposals the tort system would be abolished for bodily injuries arising from auto accidents
(2) Modified no-fault proposals
Tort action would be retained for losses above the amount recovered under first-party coverage
(3) Expanded first-party coverage
No exemption from tort liability
Most important, the responsibility of the negligent driver is retained by permitting subrogation by the insurer paying the first-party benefits

50. 3. Cost of automobile insurance
Most automobile rating systems begin with three basic factors
A. Age and sex of the driver
B. Use of the automobile
C. The driver’s record
In China, the region in which the automobile is used is also considered
Poor vs. rich, plain vs. mountainous

51. Chapter 20 commercial property insurance
Can be classified into 7 broad categories:
1. Commercial property insurance
2. Boiler and machinery insurance
3. Transportation insurance
4. Crime insurance
5. Commercial liability insurance
6. Commercial automobile insurance
7. Workers compensation and employers’ liability insurance

52. 1. Commercial property direct loss coverage
Commercial Package Policy: Insureds must purchase at least two of the package’s components, and as many as they need
1. Commercial property direct loss coverage
(1) Building and Personal Property Form
A. Property Covered:
Building
Your Personal Property
Personal Property of others

53. B. Perils insured basic form, broad form, special form
C. Other provisions:
property excluded from coverage, deductibles, actual cash value
D. Coinsurance
Guard against the possible intentional inadequate coverage

54. E. Reporting form coverage
Reporting forms are designed to meet the needs of business firms whose stocks of merchandise fluctuate over time
The insured must report 100 percent of the values of the property insured. Late reports or underreporting of values, intentional or otherwise, may result in a penalty at the time of a loss

55. 2. Commercial property coverage for indirect loss
Commercial property forms do not provide coverage for the indirect loss resulting from damage to the insured property.
Such protection must be obtained under a separate form for an additional premium

56. (1) Business interruption insurance
Business income forms
Business income coverage (and extra expense)
Business income coverage (without extra expense)
If the business is interrupted, payment is made for the loss of business income, defined as the net profit that would have been earned and the necessary expenses that continue during the period of restoration

57. (2) Contingent business interruption and extra expenses
A. Contributing property
B. Manufacturing property
C. Recipient property
D. Leader property

58. 3. Transportation coverages
(1) Ocean marine insurance
A. Hull insurance
Protects the owner of a vessel against loss to the ship itself
The coverage is written on an open-perils basis
B. Cargo insurance
Main form of ocean marine insurance, written separately from hull insurance
C. Freight insurance
D. Protection and indemnity

59. Perils insured---open perils agreement Valuation
Average conditions:
particular average & general average
(2) Inland marine insurance
Not limited to the transportation in the rivers
6 forms of coverage

60. 4. Insurance against dishonesty
(1) Employee crime coverage
Also called fidelity bonds
A. Schedule bonds
Cover the specific person or position that is listed in the policy
B. Blanket bonds
Cover all the employees, regardless of position

61. Chapter 21 commercial liability insurance
(2) Nonemployee crime coverage protect against burglary, robbery, theft, forgery, some of which with evidence
Chapter 21 commercial liability insurance
1. Employers liability and workers compensation
To protect both the employees and the employer
The largest firms self-insure

62. (1) Workers compensation insurance
A. The insuring agreement obligates the insurer to pay the benefits for which the insured is liable under the workers compensation law
B. There are no exclusions under the coverage and no maximum limit on the insurer’s liability
C. It makes the insurer directly and primarily liable to employees who are entitled to benefits

63. (2) Employer liability insurance
D. The insurer’s obligation to employees is not affected by any default of the insured
E. The insurer’s liability to the employees is governed by the workers compensation law, the insurer’s obligation to the employer is governed by the policy terms
(2) Employer liability insurance
If an injured employee brought suit, the legal principles generally favored the employer

64. 2. General liability insurance
Protect the firm against the peril of legal liability that involves injuries to persons other than employees of the insured
(1) General liability exposure
Every business firm is subject to one or a combination of the following liability exposures

65. A. Ownership and maintenance of premises
B. Conduct of business operations
C. Products:
Negligence, breach of warranty, strict liability
D. Completed operations
E. Contingent liability
F. Contractual liability

66. 3. Commercial automobile insurance
Four commercial automobile forms:
Business auto coverage
Garage coverage
Truckers coverage
Motor carriers coverage
(1) Business auto coverage form
Similar in all the aspects with that of the personal auto policy

67. (2) Garage coverage form
To provide comprehensive liability coverage for garages, sales agencies, repair shops, service stations, storage garages and public parking places
Hazards covered:
Premises and operations
Products and completed operations
Automobile liability

68. (3) Truckers coverage form
A modified version of the Business Auto Coverage Form designed to meet the special needs of truckers.
Extend the coverage from the licensed truckers to the independent owner-operators

69. 4. Aviation insurance
Purchased by the owners and operators of aircraft, airport operators, and by companies building and supplying parts for aircraft, but not passengers
Including planes, helicopters, hot air balloons, hang gliders and space satellites

70. (1) Aircraft liability insurance
A. Passenger
B. Bodily injury excluding passengers
C. Property damage liability
(2) Hull coverage
The core problem facing aviation insurers is the weakening of law of large numbers

71. Chapter 22 surety bonds and credit insurance
Both are designed to protect against financial losses from default by someone on whom the insured depends
1. Surety bonds
It is reserved for the nonfidelity field

72. One party (the surety) agrees to be held responsible to a second party (the obligee) for the obligations of a third party (the principal)
The principal buys the surety bond. The surety lends its name and credit to guarantee the obligation of the principal. If the principal fails to perform, the surety is responsible to the obligee for the amount of the bond.

73. (1) Suretyship distinguished from insurance
A. The most frequently stated distinction is that a surety bond is a three-party contract, whereas the insurance policy is a two-party contract
B. The most important distinction is one of the basic philosophy regarding losses. In the insurance field, the insurer generally expects losses. In the surety field, no losses are expected.

74. The main categories of surety bonds:
C. Whereas actuarial science is the basis for insurance rates, the fee for a surety bond is a payment for investigation and certification
The main categories of surety bonds:
Contract bonds
Court bonds
License and permit bonds
Public official bonds
Miscellaneous bonds

75. 2. Credit insurance Purchased by the creditor
It is sold only to manufacturers and wholesalers, which protects against loss resulting from the inability to collect accounts due to insolvency or unwillingness or inability to pay by the purchasers
Back coverage policies: cover losses arising out of defaults during the policy period

76. A. Extraordinary coverage
Forward coverage policies: cover losses stemming from sales during the policy period
(1) Types of policies
A. Extraordinary coverage
Generally purchased by companies that deal with a limited number of buyers.
It is issued after an investigation of the individual debtors and acceptance of each one by the insurer.
The insurer is permitted to cancel coverage as to future shipments to any debtor.

77. B. General coverage It includes protection on all policyholder’s customers with a credit rating
Investigation of the individual customers is not needed because the coverage on each account is determined by a table of mercantile ratings, selected by the insured and incorporated into the contract.
Only debtors whose credit rating comes within the limitations of the ratings adopted by the insured are covered.

78. (2) Coinsurance and the normal loss
The insured shall assume two proportions of each net loss:
A. Coinsurance percentage (10% or 20%)
B. Annual deductible (known as the primary loss or normal loss)
It is calculated from the previous experience of the firm insured or as a percentage of the firm’s net sales from tables that express bad debt ratios for various industries

79. Loss settlement is made on an annual basis, with the coinsurance percentage applied to each loss before the application of the normal loss deductible
(3) Collection service
The collection service is one of the most attractive aspects of credit insurance
If the insured is required or permitted to turn past due accounts over to the insurer, accounts that are overdue a stated period under the original terms of sale are turned over to the insurer for collection. If the insurer succeeds, a small service charge is made for the collection. If it is unsuccessful, the account becomes a loss under the policy.

80. 3. Credit enhancement insurance
Also called financial guarantee, is a combination of suretyship and insurance
The insurer “insures” the purchaser of bonds and other debt instruments that the debt will be paid and substitutes its financial strength for the financial strength of the borrower