Shared Flashcard Set


C11:Principles and Practice of Insurance
Midterm/Final Study Notes

Additional Insurance Flashcards




Pure vs Speculative Risk
  • Pure Risk: when there is a chance of loss and no chance of profit (ex auto collision
  • Speculative Risk: when there is a chance of loss and a chance of profit (playing casino game where there is a chance to win or lose)
Difference between Peril and Hazard
  • Peril: an event that may cause a loss (
  • insurance is provided against loss arising from the occurrence of an insured peril
  • Hazard: condition that may cause a peril to occur or make the loss more severe
  • Hazards can be divided into physical hazards and moral hazards
Five Categories of Post loss Objectives for risk management
  1. Social Responsibility
  2. Survival
  3. Operational continuity
  4. Stable Earnings
  5. Sustained growth
5 Steps in Risk Management Process
  1. Identify and analyze exposure - to determine which perils could occur
  2. Formulate options- loss control, loss financing
  3. Select the best techniques- consider overall objectives and cost effectiveness
  4. Implement the Risk Management Plan- implementation plan, communication plan, method to allocate costs
  5. Monitoring Results - monitor and change plan if new exposures develop or are eliminated
Risk Exposures For Golf Course and loss control and financing techniques
  1. Stray golf balls- install nets at each hole
  2. Heart attack: install emergency contact equipment (defibrillators), CPR certify employees
  3. Serving tainted food: train in food safety, use trusted food suppliers
  4. Severe weather events causing injury: policy to close course when severe weather occurs
  5. Theft of golf carts: theft insurance, store unused carts in secure area
Spread of Risk by Insurers
  • Volume: insuring a large number of risk
  • Diversity of type of risk: write insurance on as many different types of risk as possible
  • Diversity of location- write in as many different places as practical
5 Secondary Functions of Insurance
  1. Aiding Security
  2. Aiding Credit
  3. Promoting loss prevention
  4. Providing Capital
  5. Providing employment
Major Types of Insurance
  • Fire
  • Liability
  • Automobile
  • Crime
  • Floater
  • Homeowners/tenant/condo insurance
  • Aviation
  • Marine
  • Casualty
Components of Insurance Model
  • group of people who are exposed to loss
  • pay into a pool of funds(through paying premiums)
  • pool of funds is managed by the insurer
  • fund used for member of the group who suffer a loss
  • to be indemnified
Types of Insurance Jobs
  • adjuster
  • underwriter
  • accountant
  • agent/broker
  • actuary
  • lawyer
General Insurance Examples
  • auto insurance
  • homeowner/tenant/condo insurance
  • real property (bridges, tunnels,)
  • floater policies
  • Accident insurance
Lloyd's Insurance Market
  • not an insurance company--an insurance market
  • consists of independent businesses that provide capital to the market and underwrite in syndicates
  • known for providing specialist insurance and reinsurance
  • Lloyd's does not deal with clients directly, but through  a global network of insurance brokers
  • syndicates are groups of members that employ professional underwriters to accept risk on their behalf
  • each syndicate is run by a managing agent
  • syndicates can compete for business or work together
How Stock Insurance Companies use Shareholder Capital
  • insurance company organized as a stick company has the same capital structure as any other capital enterprise
  • shareholders have an equitable interest in the corporation and hope to make a reasonable profit
  • stock insurers seek returns from both underwriting profit and investment income
  • after company is established is is anticipated that the insurer's income will cover its expenses
  • in theory if a company expenses exceed income it must draw on paid up capital and accumulated surplus to cover the difference
Law of Large Numbers
  • based on a very large number of insured risks; it should be possinle to estimate future losses with some degree of accuracy
  • by increasing # of policies accuracy of predicting loss estimates increased
  • can attract investors because of degree f accuracy of prediction
  • degree of accuracy will never reach certainty
  • random forces, human error, an increasingly complez commercial infrastructure, changing standards of social behaviour and costly global environmental changes mean can never be certain
Role of Actuarial Department
  • actuaries analyze the data and perform calculations that determine the price of insurance
  • actuaries are responsible for basic ratemaking
  • determine the amount of money that is adequate to cover certain required reserves
  • pricing actuaries are responsible for analyzing and performing calculations to price insurance
  • reserving actuaries determine the amount of money to be held in bulk claim reserves
Role of Claims Department
  • investigate and pay losses to indemnify insureds who suffer loss
  • head office responsible for admin and efficiency of the company's claim function
  • branch offices may have considerable autonomy in some cases
  • all contact with adjuster would be through branch
  • branch claims handle claims in their jurisdiction
  • investigate, negotiate and settlement of the claim according to the provisions of the contract take place in the branch
Role of Finance, Accounting, and Investment Department
  • responsible for keeping the books of account and producing financial statements and income tax returns
  • handles accounts payable/receivable
  • files statistical reports
  • branch handles day to day transactions
  • investment department manages investment portfolio
Independant Brokerage System
  • large insurance companies market their policies through the independent brokerage system
  • appoint independent brokers to be their sales force to bring clients to them
  • pay commission for each policy they issue on behalf of the broker's clients
  • client list belongs to brokers 
  • broker can represent more than one insurer or a single insurer
Implied vs Express Contract
  • express: contract where the terms of the agreement have been specifically stated and agreed to by both parties. Can be oral or written
  • written avoids any misunderstanding on responsibilities and obligations
  • Implied: parties acted in such a way as to imply that a principal agent relationship exists even though there may not have been an expressed statement by either party
  • could result in dispute due to lack of specific terms
Binding Authority
  • capacity to confirm to people applying for insurance that they have coverage against certain happenings or events that if they occur cause loss
  • gives authority to intermediary to bind an insurer to a contract of insurance and to issue a binder
  • Agents/brokers can bind up to a certain limit
  • binding authority is stated in the agency agreement or contract
  • if loss occurs before actual policy is issued but the binder has been issued the loss is covered in the same manner as if the policy had been issued. 
Principal- Agent Relationship: Broker Responsibility
  • act within terms of contract between them and their principals
  • follow instruction as to what type of risk is to be written
  • collect premiums and hold in trust until the are sent to insurer
  • send premiums to insurer within a specified time limit
  • submit application promptly
  • advise the insurer of all claims notified to the agent or broker
Key Responsibilities of Brokers to Clients
  • Assist in completion of insurance contracts between clients and insurers
  • act within the scope of the contract and with the insurer and within the authority of their license
  • broker's responsibility to the client is based on the business relationship that exists between them 
  • client places trust in broker so the broker's activities must be above reproach from both client and insurer
  • public look to brokers for advice as to what insurance is most suitable for their needs
  • avoid acting for both insured and insurer at the same time to avoid conflict of interest
What is makes a successful broker
  • identify needs of clients
  • match needs with products from insurers
  • operate with the scope of their contract with insurer
  • act within binding authority
  • use good business sense
  • time manage effectively and look for new business
  • listen to customers
  • be efficient
Office of the Superintendent of Financial Institutions(OSFI)
  • regulate and monitor federally chartered and foreign insurance companies
  • supervise and enforce safeguards so that inadequately financed insurancee companies are not established and existing ones remain healthy
  • works with Insurance Companies Act
  • concerned with supervision and control that will affect admin of company funds and ensure that public is adequately protected against misuse or mismanagement of funds
  • there to ensure financial integrity of insurer 
Role of Provincial/Territorial Insurance Acts
  • superintendent issue licenses for private sector insurance companies operating in the province or territory,brokers agents and adjusters
  • sets out basic provisions of life insurance, accident and sickness insurance, fire insurance and automobile insurance policies
  • prescribes statutory conditions required to form part if each of these policies
  • each province has its own act
  • general rules such as what is a contract, basic contents of a policy, grounds fro voiding policy
Self Regulation of Insurance Brokers
  1. provincial/territorial regulators must permit self regulation before it can occur
  2. Set qualification standards
  3. set operational requirements
  4. police their own memberships
  5. registration replaces licensing
Personal Information Protection and Electronic Documents Act(PIPEDA)
  • act that governs the collection and use of personal information
  • federal statute 
  • personal information collected must be relevant
  • all info collected, being collected, or has been collected or will be collected must be held in strict confidence
  • can only be used for purpose it is collected for
  • must obtain permission to use for any other purpose
  • exception: when agents and brokers are required by a court of law to disclose the clients information
Accidental and Deliberate Privacy Breach
  • Accidental: employee loses a memory stick or laptop containing client's personal information
  • Deliberate: hacker gains unauthorized access to a firm's information systems to steal its customers' banking information
Principle of Contribution
  • when more than one insurance contract is covering a loss an insured may only collect an amount equal to the loss
  • if these contracts or applicable statute law contain no provision forbidding other insurance; the insured could choose to collect the applicable amount from each of them
  • if insureds were to collect from each this would be against principle of indemnity
  • contribution is the sharing of loss or liability between two or more insurance companies covering the same risk
Elements to form insurance contract
  • common law:offer/acceptance, considerations, genuine intent to form legal contract, legal capacity, legality of purpose
  • Quebec: consent, capacity to contract, cause of contract, object of contract
  • distinct elements specific to insurance: insurable interest, indemnity,utmost good faith
Role of Indemnity
  • indemnify is to place people back in the same financial position that they were in immediately before the loss
  • principle of indemnity is that the insured are to collect the amount of their financial loss-no more no less
  • methods of calculating indemnity include actual cash value and replacement value
  • amount of indemnity owed is usually the subject of some negotiation between parties to the contract
  • insurance policies of compensation are not contracts of indemnity
Five Steps in Ratemaking
  • Classify risks
  • Gather stats on past losses
  • calculate pure premium
  • determine total premium, including loadings
  • Calculate the rate or unit cost
Reasons for underwriters to reject risk
  • insurer may not insure that class of business
  • risk may be too hazardous: if more hazardous than average then the potential for loss is almost certain
  • risk may be substandard
  • potential for improving or upgrading may exist, but the applicant is not prepared to carry out suggested improvements
Information needed on insurance app
  • Named insured
  • Policy term
  • Subject of insurance
  • Loss Payees
  • Loss history
  • Prior insurance
  • Broker's report
  • Signature
Function of Insurance Policies
  • evidence of the insurance contract that states the terms and provisions of the agreement made between insurer and insured
Certificates of Insurance
  • modified form of a policy that certifies its existence, issued as a convenience to a party with an interest in the insurance
Cover Notes and Binders
  • Cover note: a form of temporary insurance issued by agents and brokers to confirm to the insured that the described insurance has been set up
  • Binder: a form of temporary insurance issued to record the agreement to insure a risk pending the writing of a policy
  • any writing on the back of a policy that varies the terms of the contract 
  • in practice usually an attachment to a policy
How to terminate insurance
  • termination conditions state requirements that must be met for a policy to be cancelled
  • for fire, a&s and auto these conditions are in the Statutory Conditions/General Conditions
  • most casualty policies even if not subject to Statutory Conditions contain a termination clause
  • insurer can cancel by giving a set number of days notice in writing by registered mail or hand delivery and returning the pro rata premium 
  • insured can cancel anytime, but the insurer will retain premium collected on a short rate basis
5 sections of insurance policies
  • coverage summary:parties to the contract,inception-expiry, term,premium and rate, amounts insured
  • insuring agreement: subject matter of the insurance, perils insured against, exclusions, circumstances under which insured may receive proceeds of insurance
  • Statutory conditions:fire,auto,a&s policies, must be printed
  • policy conditions: provisions that state the rights and duties of the insured and insurer
  • signature clause: policy is signed by insurer only
Pro Rata/short rate  Cancellation
  • pro rata policy holder is fully refunded premium pid
  • short rate policy holder is refunded premium with penalty 
  • courts will construe policy conditions strictly against the insurer
  • if it has not complied with every detail of the conditions a policy's cancellation will not be effective and will remain in force until conditions are met
Cover Note
  • name and address of insured
  • address at which risk is located
  • time and date of commencement/expiry
  • amount of insurance bound
  • name of insurer bound
  • exact type and form of contract under which the risk is bound
  • any special terms, such as deductible
  • any other information required to meet provincial legislation
  • an insured property is not totally destroyed or lost, some portion of the property remains and usually has some value
  • if the insured is reimbursed for the loss as though the property were totally destroyed-a total loss- the insurer is entitled to possession of the property remaining
  • the insurer can then sell that property and retain the proceeds as salvage
  • this enables the insurer to reduce its loss
  • if insured wants to keep salvage then its value is deducted from the total loss settlement so that the insured does not profit from the loss
Claims: Prescription
  • allow a person to make a claim at any time after an event has occurred would be unjust and would produce chaos
  • difficult to investigate, prove or disprove claim if it were reported years after events occurred
  • many actions could be started long after the parties concerned and witnesses have disappeared
  • each coinsurance clause contains provisions stating when adequate insurance is considered to exist
  • may be expressed as a % of the value of the property or as a specifically stated amount
  • percentage required is mainly governed by the type of property covered, 100, 90, 80, 50 are usual
  • when a dollar amount is stipulated it is called a stated amount coinsurance clause
  • if at the time of loss the insured is carrying an amount of insurance that is less than the policy coinsurance requirement, the coinsurance penalty will apply
Key Steps in Claims Process
  • insured reports loss to broker, agent, insurers online reporting tool or call centre
  • claims handler records the prelim information and asks for details of incident
  • claims handler does an initial check of policy coverage
  • if loss looks covered, a loss adjuster is assigned to the claim to the claim and proceeds with next steps
  • verify coverage, investigate loss,evaluate/asses/deny claim, arrive at settlement, recommend payment, review for subrogation, salvage, and contribution
Claims: Role of broker
  • assist the client in reporting the loss to the insurer
  • explain the claims process to the client, thereby reducing anxiety and settling realistic expectations
  • monitor the progress of the claim
  • advocate on the insured's behalf when the client has concerns
  • advocate for the insurance carrier when needed
Claims: Role of Adjuster
  • make sure they have authority to handle claim
  • supply the insurer with relevant docs such as preliminary notice of loss or accident report
  • investigate(interview insured, visit scene of loss, contact third parties, witnesses, police officers, others who may have info on loss)
  • keep insurer informed of all developments and follow the insurer's instructions-how this is done is dependent on the type of adjuster
Insurance Bureau of Canada
  • advocate industry positions with consumers, government, members, and other stakeholders
  • identify/monitor issues,develop policy positions, respond to legal developments
  • stay on top of issues of strategic importance to industry
  • investigative services- insurance crime related investigations, auto theft, and loss recovery services, info exchange, public affairs and marketing
  • insurance information- access to web based business apps and other info related to auto insurance in canada
Facility Association
  • all drivers must be able to obtain insurance
  • to ensure access to insurance for high risk drivers industry developed a pooling arrangement where all high risk drivers could be underwritten in a common pool
  • profits or losses of the pool are shared by all auto insurers in the province or territory where it is operating
  • under the pooling arrangement several companies become servicing carriers and are available to those drivers who are experiencing difficulty obtaining insurance
  • all agents and brokers in the province or territory have one of these servicing carriers to underwrite and provide all necessary insurance services
  • premiums are higher to reflect loss exp of high risk drivers
Elements of Good Client Service by Agents/Brokers
  • Reputation as a dependable source of insurance advice
  • adequate capacity and range of coverages
  • accurate and adequate accounting and office methods
  • good handling of claims
  • appropriate handling of complaints
Complaint Resolution
  • broker: clients can engage with broker who may assist in resolving issues
  • insurer complaint handling protocol:client can deal directly with insurer through its own system of complaint handling
  • Ombudsman:in some jurisdictions an ombudsman employed by the insurer or by the insurance regulator is available to answer insurance queries or to help resolve claims complaints
  • Consumer Information Centre:IBC maintains a national telephone hotline to answer any consumer questions
  • General Insurance Ombudservice(GIO):claims problems that are not resolved are referred to the GIO after the insurer issues a final position letter
  • legal right held by most insurance companies to pursue a third party that caused an insurance loss to the insured
  • done in order to recover the amount of the claim paid by the insurer to the insured for the loss
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