FIN 361 Iowa State University Insurance Policies and Contracts Discussion Questions meet the requirement and write a report. finish it asap, let me know if

FIN 361 Iowa State University Insurance Policies and Contracts Discussion Questions meet the requirement and write a report. finish it asap, let me know if there is any question RISK MANAGEMENT FOR ENTERPRISES
AND INDIVIDUALS
Chapters 8-12
Regulation, Legal Doctrines and
Insurance Contracts
Learning Objectives
?In this section, we elaborate on:
?Insurance market conditions
?Insurance regulation and regulatory requirements.
?The law of agency relative to principals/agents and
authority in its role in manufacture/sale of insurance.
?The characteristics of contracts and the special nature
of insurance contracts.
?An understanding of the nature of property and liability
risks and the requirements of the contracts that enable
risk transfer.
2010 Flat
Knowledge,
Inc. Inc.
©©2010
FlatWorld
World
Knowledge,
-2
1 -9 2
Learning Objectives
?Additionally, in this section, we discuss:
?Special provisions that affect insurance contracts.
?Major elements of insurance contracts.
?How insurable property is classified.
?The ways in which valuation, deductibles, and
coinsurance clauses influence property coverage and
premiums.
2010 Flat
Knowledge,
Inc. Inc.
©©2010
FlatWorld
World
Knowledge,
-3
1 -9 3
Insurance Market Conditions (C8)
?Property/Casualty Market Conditions
?Soft market conditions occur when insurance losses
are low, capital is plentiful and premiums competitive.
?Hard market conditions occur when insurance losses
are above expectations, capital is scarce, reserves
deficient and premiums are increasing.
?Underwriting cycle is the movement of premiums in
time (function of supply and demand of insurance).
2010 Flat
Knowledge,
Inc. Inc.
©©2010
FlatWorld
World
Knowledge,
-4
1 -9 4
P&C Market Profitability
?Combined ratio is the loss ratio (losses divided by
premiums) plus the expense ratio (expenses divided by
premiums) and is a measure of Operational Profit.
?When the combined ratio is low, the industry lowers its
underwriting standards in order to obtain more cash
that can be invested—a strategy known as cash flow
underwriting.
?The level of combined ratio that is required for each
line of business to avoid losing money is called the
break-even combined ratio level.
2010 Flat
Knowledge,
Inc. Inc.
©©2010
FlatWorld
World
Knowledge,
-5
1 -9 5
L&H Market Conditions
?Life/Health Market Conditions
?Health insurance consists of coverage for medical
expenses, disability, and long-term care.
?As with life insurance, emphasis on product offerings
in the health segment has seen a transition over time in
response to the changing consumer attitudes and needs.
?The Affordable Care Act (ACA or Obama Care) has
changed the health insurance market by allowing
individuals and small businesses to get coverage
through state or the federal health exchange.
2010 Flat
Knowledge,
Inc. Inc.
©©2010
FlatWorld
World
Knowledge,
-6
1 -9 6
Regulation: Insurers can Fail
?Insurers can become insolvent and fail to pay
claims.
?Insolvency monitoring and regulation is important to a
well functioning market and economy
?Insurers are regulated at the State level
?Regulatory focus: fair products at fair and
equitable prices, sold by Financially Sound
Insurers
?Economic conditions impact the insurance
industry and the supply/demand for insurance
2010 Flat
Knowledge,
Inc. Inc.
©©2010
FlatWorld
World
Knowledge,
-7
1 -9 7
History of Insurance Regulation
?Paul vs Virginia: insurance transaction is intrastate commerce
?SEUA vs Federal Government: insurance
transaction is inter-state commerce
?Public Law 15: federal government defers right to
regulate insurance transaction to States
2010 Flat
Knowledge,
Inc. Inc.
©©2010
FlatWorld
World
Knowledge,
-8
1 -9 8
Common Types of Insurance
Regulatory Laws
2010 Flat
Knowledge,
Inc. Inc.
©©2010
FlatWorld
World
Knowledge,
-9
1 -9 9
Insurance Regulation
?Every state has an insurance department to
administer insurance laws
?The Executive is known as the commissioner (or
superintendent) of insurance.
?The National Association of Insurance
Commissioners (NAIC)
?Is not a regulatory agency, but an “association” of
insurance commissioners
?Purpose: creation of model laws for adoption by the
states and to encourage regulatory uniformity.
2010 Flat
Knowledge,
Inc. Inc.
©©2010
FlatWorld
World
Knowledge,
– 10
1 -9 10
Insurance Regulation
?The state insurance commissioner is empowered
to:
?Grant, deny, or suspend licenses of both insurers and
insurance agents.
?Obtain an annual report from insurers (financial
statements).
?Examine insurers’ business operations.
?Act as a liquidator or rehabilitator of insolvent insurers.
?Investigate complaints and originate investigations.
2010 Flat
Knowledge,
Inc. Inc.
©©2010
FlatWorld
World
Knowledge,
– 11
1 -9 11
Insurance Regulation
?Decide whether to grant all, part, or none of an
insurer’s request for higher rates.
?Propose new legislation to the legislature.
?Approve or reject an insurer’s proposed new or
amended insurance contract.
?Promulgate regulations that interpret insurance laws.
2010 Flat
Knowledge,
Inc. Inc.
©©2010
FlatWorld
World
Knowledge,
– 12
1 -9 12
Licensing Requirements
? All agents and insurers must be licensed in the state(s)
where they are conducting business.
?Domestic insurers: Companies chartered in a state –
Principal Financial is domestic to Iowa.
?Foreign insurers: are those formed in another state –
State Farm is domestic to Illinois, but foreign to Iowa.
?Alien insurers: are those organized in another country
– Lloyds of London is alien and writes primary
coverage on an “ad hoc” basis.
? Holding a license implies that the insurer meets specified
regulatory requirements designed to protect the consumer.
2010 Flat
Knowledge,
Inc. Inc.
©©2010
FlatWorld
World
Knowledge,
– 13
1 -9 13
Licensing Requirements
?A license may be denied under certain
circumstances.
?If the management is incompetent or unethical, or
lacking in managerial skill.
?If any company has been in any way associated with a
person whose business activities the insurance
commissioner believes are characterized by bad faith.
2010 Flat
Knowledge,
Inc. Inc.
©©2010
FlatWorld
World
Knowledge,
– 14
1 -9 14
Financial Requirements
?Stock insurers must have a specified amount of
capital and surplus.
?Mutual insurers must have a minimum amount of
surplus.
?A multiple-line insurer must have more capital
(and/or surplus) than a company offering only one
line of insurance.
2010 Flat
Knowledge,
Inc. Inc.
©©2010
FlatWorld
World
Knowledge,
– 15
1 -9 15
Financial/Solvency Regulations
?Investment and reserve requirements
?Risk-based capital
?Describes assets, such as equities held as investments,
with values that may vary widely over time.
?State guaranty fund associations are security
deposit pools made up of involuntary contributions
from solvent, state-regulated insurance companies
doing business in their respective states to ensure
that insureds do not bear the entire burden of
losses when an insurer becomes insolvent.
2010 Flat
Knowledge,
Inc. Inc.
©©2010
FlatWorld
World
Knowledge,
– 16
1 -9 16
Accounting Compliance
?Insurance companies are required to submit
uniform financial statements to the regulators.
?These statements are based on statutory
accounting as opposed to the generally accepted
accounting (GAP) system, which is the
acceptable system of accounting for publicly
traded firms (SEC required for Stock Insurers).
?Statutory accounting (SAP) is the system of
reporting of insurance that allows companies to
account differently for accrued losses (NAIC
required for ALL Insurers).
2010 Flat
Knowledge,
Inc. Inc.
©©2010
FlatWorld
World
Knowledge,
– 17
1 -9 17
Policy and Rate Regulation
?The state insurance commissioners have extensive
power in approving
?policy forms and
?controlling the rates for insurance.
?Rates are regulated for auto, property, and liability
coverages, and workers’ compensation.
2010 Flat
Knowledge,
Inc. Inc.
©©2010
FlatWorld
World
Knowledge,
– 18
1 -9 18
Rate Filing Regulation
?Prior approval: Method of regulation in which an
insurer or its rating bureau must file its new rates
and have them approved by the commissioner
before using them. Used for many class rates.
?File-and-use: Method of regulation that allows an
insurer to begin using a new rate as soon as it is
filed with the commissioner.
?Open competition: no rate filings by an insurer,
as the underlying assumption is that market
competition is a sufficient regulator of rates.
2010 Flat
Knowledge,
Inc. Inc.
©©2010
FlatWorld
World
Knowledge,
– 19
1 -9 19
Control of Agent’s Activities
?Insurance laws also prohibit certain activities on
the part of agents and brokers, such as
?Twisting: Inducing a policyholder to cancel one
contract and buy another by misrepresenting the facts
or providing incomplete policy comparisons.
?Rebating: Providing substantial value as an
inducement to purchase insurance.
?Unfair practice: A catch-all term that can be applied
to many undesirable activities of agents, claim
adjusters, and insurers.
2010 Flat
Knowledge,
Inc. Inc.
©©2010
FlatWorld
World
Knowledge,
– 20
1 -9 20
Control of Claims Adjusting
?Insurance commissioners control claims adjusting
practices primarily through policyholder
complaints.
?The most common form of punishment for
wrongdoing is either a reprimand or fine against
the insurer.
2010 Flat
Knowledge,
Inc. Inc.
©©2010
FlatWorld
World
Knowledge,
– 21
1 -9 21
Contracts Introduction (C9)
?Contract (or policy): Document received when
one transfer risks to the insurance company;
?the only physical/tangible product received at the time
of the transaction.
?Relational contracts: Contracts whose provisions
are dynamic with respect to the environment in
which they are executed.
?Incomplete contracts: Contracts that contain
terms that are implicit rather than explicit.
2010 Flat
Knowledge,
Inc. Inc.
©©2010
FlatWorld
World
Knowledge,
– 22
1 -9 22
Agency Law: Application to Insurance
? The law of agency deals basically with the legal
consequences of people acting on behalf of other people
or organizations.
? Agency involves three parties:
? Principal: Individual who creates an agency relationship with a
second party by authorizing him or her to make contracts with
third parties (policyholders) on the principal’s behalf.
? Agent: Individual who is authorized to make contracts with a
third party.
? Apparent authority: The implied authority of the agent to
fulfill the principal’s responsibilities.
2010 Flat
Knowledge,
Inc. Inc.
©©2010
FlatWorld
World
Knowledge,
– 23
1 -9 23
Agents
?Governed by Law of Agency
?Many agency examples besides Insurance
?Actors
?Principal
?Agent/broker
?Apparent (Ostensible) Authority
?What the public perceives is the agents authority
2010 Flat
Knowledge,
Inc. Inc.
©©2010
FlatWorld
World
Knowledge,
– 24
1 -9 24
Entering into the Contract
?Application is an offer to buy insurance.
?Binder is a temporary contract (written or oral) to
provide coverage until the policy is issued by the
agent or the company. Common property/liability
practice.
?Two factors influence the grant of binding
authority to an agent:
?Companies preference for specialists in the
underwriting department.
?Cancelable policies.
2010 Flat
Knowledge,
Inc. Inc.
©©2010
FlatWorld
World
Knowledge,
– 25
1 -9 25
Agency Law: Application to Insurance
?Binding authority secures (binds) coverage for an
insured without any additional input from the
insurer and creates a Binding Receipt.
?Conditional binder implies that coverage exists
only if the underwriter ultimately accepts the
application for insurance and may create a
Conditional Receipt.
2010 Flat
Knowledge,
Inc. Inc.
©©2010
FlatWorld
World
Knowledge,
– 26
1 -9 26
Agency Law: Application to Insurance
?Waiver and Estoppel – agent’s error or ommission
?Waiver is the intentional relinquishment of a known
right.
?To waive a right, a person must know he or she has the
right, and must give it up intentionally.
?Estoppel occurs when the insurer or its agent has led
the insured into believing that coverage exists and, as a
consequence, the insurer cannot later claim that no
coverage existed.
2010 Flat
Knowledge,
Inc. Inc.
©©2010
FlatWorld
World
Knowledge,
– 27
1 -9 27
Legal Requirements of a Contract
?Enforceable contract minimum requirements:
?Offer and acceptance: The process of two parties
entering into a contract.
?Consideration: The price parties demand for agreeing
to carry out his or her part of the contract.
?Competent parties: undiminished mental capacity.
?A contract must have a legal purpose; it must not be
for the performance of an activity prohibited by law.
?The contract must be in legal form.
2010 Flat
Knowledge,
Inc. Inc.
©©2010
FlatWorld
World
Knowledge,
– 28
1 -9 28
Distinguishing Characteristics of
Insurance Contracts
?Insurance contracts are:
?Based on utmost good faith; full/fair disclosure
?Representations: Statements concerning an insured’s
exposures.
?Concealment: Intentionally withholding a material fact.
?Personal
?Insurance contracts are personal, meaning they insure
against loss to a person, not to the person’s property.
2010 Flat
Knowledge,
Inc. Inc.
©©2010
FlatWorld
World
Knowledge,
– 29
1 -9 29
Distinguishing Characteristics of
Insurance Contracts
?Contracts of Adhesion
?Adhesion: Situation in which insureds have no input in the
design of a policy’s terms.
?The current approach to the interpretation of contracts of
adhesion is threefold:
? To favor the insured when terms of the contract drafted by the
insurer are ambiguous.
? To read the contract as an insured would.
? To determine the coverage on the basis of the reasonable
expectations of the insured.
2010 Flat
Knowledge,
Inc. Inc.
©©2010
FlatWorld
World
Knowledge,
– 30
1 -9 30
Distinguishing Characteristics of
Insurance Contracts
?Contracts of indemnity (payment contracts)
?Indemnity means the insurer agrees to pay no more (and no
less) than the actual loss suffered by the insured.
?Principle of indemnity: insureds should not be able to
profit from a loss
?The principle of indemnity is implemented and supported
by several legal principles and policy provisions, including
the following:
? Insurable interest
? Subrogation
? Actual cash value provision
? Other insurance provisions
2010 Flat
Knowledge,
Inc. Inc.
©©2010
FlatWorld
World
Knowledge,
– 31
1 -9 31
Distinguishing Characteristics of
Insurance Contracts
? Insurable interest
? Is financial interest in life or property that is subject to loss.
? Many situations constitute an insurable interest, the most
common is ownership of property.
? Life insurance requires an insurable interest only at the
inception of the contract.
? In the case of property insurance, not only must an insurable
interest exist at the time of the loss, but the amount the insured is
able to collect is limited by the extent of such interest.
? Most life insurance contracts are considered to be valued
policies, or contracts that agree to pay a stated sum upon the
occurrence of the event insured against, rather than to indemnify
for loss sustained.
2010 Flat
Knowledge,
Inc. Inc.
©©2010
FlatWorld
World
Knowledge,
– 32
1 -9 32
Distinguishing Characteristics of
Insurance Contracts
? Subrogation
? Situation that gives the insurer whatever claim against third
parties the insured may have as a result of the loss for which the
insurer paid.
? The right of subrogation is a common law right the insurer has
without a contractual agreement.
? Actual cash value provision
? Actual cash value: The replacement cost at the time of the loss,
less physical depreciation including obsolescence.
? Property insurance is often written on a replacement cost basis,
which means that there is no deduction for depreciation of the
property.
2010 Flat
Knowledge,
Inc. Inc.
©©2010
FlatWorld
World
Knowledge,
– 33
1 -9 33
Distinguishing Characteristics of
Insurance Contracts
? Other insurance provisions
? The purpose of other insurance provisions in insurance
contracts is to prevent insureds from making a profit by
collecting from more than one insurance policy for the same
loss.
? Provisions that violate the Principle of Indemnity
? Replacement cost coverage
? Valued policy provision
? Valued policy laws
? Cash payment policy provision
2010 Flat
Knowledge,
Inc. Inc.
©©2010
FlatWorld
World
Knowledge,
– 34
1 -9 34
The Insurance Contract (C10)
?Insurance policies are composed of five major
parts:
?Declarations
?Insuring agreement
?Exclusions
?Conditions
?Endorsements and riders
2010 Flat
Knowledge,
Inc. Inc.
©©2010
FlatWorld
World
Knowledge,
– 35
1 -9 35
Declarations
?Declarations are statements that identify the
person(s) or organization(s) covered by the
contract, give information about the loss exposure,
and provide the basis upon which the contract is
issued and the premium determined.
?All insurance policies specify the period of
coverage, or the time duration for which coverage
applies.
2010 Flat
Knowledge,
Inc. Inc.
©©2010
FlatWorld
World
Knowledge,
– 36
1 -9 36
Declarations
?All insurance policies have clauses that place
limitations of liability (maximum amount payable
by the insurance policy) on the insurer.
?An insured might retain a portion of covered
losses through a variety of policy provisions; the
existence of such provisions is noted in the
declarations section of the policy.
2010 Flat
Knowledge,
Inc. Inc.
©©2010
FlatWorld
World
Knowledge,
– 37
1 -9 37
Insuring Clauses/Agreement
?The insuring clause or agreement, is a general
statement of the promises the insurer makes to
the insured.
?Insuring clauses may vary greatly from policy to
policy; most, however, specify the perils and
exposures covered.
?A named-perils policy covers only losses caused
by the perils listed in the policy.
2010 Flat
Knowledge,
Inc. Inc.
©©2010
FlatWorld
World
Knowledge,
– 38
1 -9 38
Insuring Clause/Agreement
?An open-perils policy (formerly called “all risk”)
covers losses caused by all perils except those
excluded; most popular in property policies.
?This policy usually requires a higher premium
than a named-perils policy, but it is often
preferable because it is less likely to leave gaps in
coverage.
2010 Flat
Knowledge,
Inc. Inc.
©©2010
FlatWorld
World
Knowledge,
– 39
1 -9 39
Insuring Clauses/Agreements
?Exposures to Loss
?In defining the exposures, important information, such
as the basis of valuation and types of losses covered, is
needed.
?The types of covered losses include: direct loss,
consequential or indirect loss, business interruption
losses, contingent business interruption losses, and
extra expense losses.
?Liability policies, on the other hand, may cover
liability for property damage, bodily injury, personal
injury, and/or punitive damages.
2010 Flat
Knowledge,
Inc. Inc.
©©2010
FlatWorld
World
Knowledge,
– 40
1 -9 40
Exclusions and Exceptions
?Exclusions are perils, risks, losses, and properties
that are not covered in an all-risk policy.
?Exclusions exist to:
?Avoid financial catastrophe for the insurer.
?Limit coverage of nonfortuitous events.
?Avoid duplication of coverage by policies specifically
intended to insure the exposure.
?These reasons for exclusions are manifested in
limitations on locations, perils, property, and
losses.
2010 Flat
Knowledge,
Inc. Inc.
©©2010
FlatWorld
World
Knowledge,
– 41
1 -9 41
Conditions
? Conditions enumerate the duties of the parties to the
contract and, in some cases, define the terms used.
? Many conditions found in insurance contracts are
common to all; others are characteristic of only
certain types of contracts. Few examples being:
?Notice and proof of loss
?Suspension of coverage and voidance of coverage
?Cooperation of…
Purchase answer to see full
attachment