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Finance 336 study guide

by: brenda salas

Finance 336 study guide fin 336

brenda salas
California State University Northridge

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these notes cover what's going to be on exam
principles of insurance
david russell
Study Guide
finance, principleofinsurance
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This 4 page Study Guide was uploaded by brenda salas on Monday September 26, 2016. The Study Guide belongs to fin 336 at California State University Northridge taught by david russell in Fall 2016. Since its upload, it has received 45 views. For similar materials see principles of insurance in Finance at California State University Northridge.

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Date Created: 09/26/16
Fin 336 STUDY GUIDE  Moral Hazard: Dishonest, Intentional. It increases the frequency or severity of loss. Morale Hazard (attitudinal hazard): Careless, indifference to a loss, increasing the  frequency or severity of loss. Peril: cause of loss (ex:fire,lighting,earthquake.etc) Risk Aversion : is a description of an investor who, when faced with two investments with a  similar expected return (but different risks), will prefer the one with the lower risk. Risk and  reward are certainly related. Adverse Selection: tendency of persons with a higher than average chance of loss to seek insurance at standard rates, which is not controlled by underwriting, results in higher than expected  loss levels. Brokers: represents the buyer, has a contract with the buyer  Agent: Represents the seller. Wants to be able to sell you the product. Assets – liabilities = Surplus Insurable Risk Characteristics  Large Number of Exposure Units (Usually Similar)   Losses are Accidental and Unintentional  Losses are Determinable and Measurable  Losses are Not Catastrophic*  when the event  happens to many policies at the  same time.  Frequency and Severity are Calculable they don’t all happen at the same time.  Premium is Economically Feasible  Insurance and Pooling: Is a mathematical concept; when the losses of the policies or stocks  move together. (catastrophic) pooling works well if the pool is diversified The law of large number: states that the greater the number of exposures the more  closely will the actual results approach the probable results that are expected from an  infinite number of exposures. Risk Management  Retention : keeping the risk, retains part or all of the losses  Avoidance: avoiding a risk  Loss Control: locks, surveillance camera, helmets, safety devices; that reduce the  frequency or severity of loss. It can help.  Non­Insurance Transfer: waivers  Insurance (Transfer): pooling of losses, payment of fortuitous losses, risk transfer,  indemnification. Steps in a Risk Management Process   Identify  loss Exposure   Measure and Analyze Exposures as such, Frequency and Severity  Select Appropriate combination Techniques  like Risk Control and Financing  Implement and Monitor the risk management process  Determine Appetite and Capacity for Risk Types of Insurers: Private  Stock insurers : is a corporation owned by stockholders  Mutual insurers: is a corp owned by the policyholders.  Lloyds of London: is not an insurance company, but is society of members (corp,  individuals & limited partnerships) who underwrite insurance in syndicates. [Marine,  aviation, catastrophe, professional indemnity, &auto insurance coverage.]  Reciprocal exchanges: (interinsurance exchange) can be defined as an unincorporated  organization in which insurance is exchanged among the members  Blue cross and blue shield plans: nonprofit community oriented prepayment plans that  cover hospital service    Health maintenance organization: (HMO) are organized plans of health care that provide  comprehensive health care services to their members.    Other types of private insurers:  captive insurers: is an insurer owned by a parent firm for the purposes of insuring the parent firms loss exposures. Saving bank life insurance: life insurance that was sold originally by mutual  savings banks in three states: Massachusetts, new york & Connecticut. Operations and Finances for insurance company 1. Ratemaking : the pricing of insurance and the calculation of insurance premiums. 2. Underwriting: the process of selecting, classifying, and pricing applicants for insurance.  They decided to accept or reject an application 3. Production: refers to the sales and marketing activities of insurers.  4. Claim settlement: a. Verification of a covered loss b. Fair and prompt payment of claims c. Personal assistance to the insured 5. Reinsurance: is an arrangement by which the primary insurer that initially writes the  insurance transfers to another insurer part or all of the potential losses associated with  such insurance.  6. Investments: life insurance investments, property and casualty insurance investment. Insurable Interest: need insurable interest To be able to insure something . What YOU collect  is what you lost Indemnity: to make them hold. To restore them with their pre loss condition. What YOU collect is what you lost. Exceptions for indemnity:  Valued Policy: arbitrary. Pays the face amount of insurance if a total loss occurs.  Valued Policy Laws: a law that exists in some states that requires payment of the  face amount of insurance to the insured if a total loss to real property occurs from  a peril specified in the law.  Replacement Cost Insurance:there is no deduction for physical depreciation in  determining the amount paid for a loss.  Life Insurance Subrogation: substitution of the insurer in place of the insured for the purpose of claiming  indemnity from a third party for a loss covered by insurance. Purposes:   Prevents the insured from collecting twice for the same loss  Used to hold the negligent person responsible for the loss  Helps to hold down insurance rates. Utmost Good Faith: a higher degree of honesty is imposed on both parties to an insurance  contract than is imposed on parties to other contracts. Chapter 8.  1)Solvency; they are able to pay their claims  2) Lack of Consumer Knowledge  3) Rate Reasonability  4) Availability: your able to get it, making sure that insurance is being offered. Is one of  the functions of regulators.  Insolvent: assets are less than liabilities. They aren’t able to pay back. non standard auto, they tend to sell to riskier drivers.  They want to make sure that people who make promises can honor them.   Paul vs. Virginia (1868) bridges across states, the US supreme court. Insurance is  not interstate commerce. The states regulated it.   US vs. South­Eastern Underwriters (1944) insurance is interstate commerce so the states should regulate. Insurance is regulated by state.  McCarran­Ferguson Act (1945) they continued regulation and taxation of the  insurance industry by the states are in the public interest. It also states that federal  antitrust laws apply to insurance only to the extent that the insurance industry is  not regulated by state law. This is handled by regulators: Licensing of insurers : have to give sales people permission Solvency and Surplus Requirements : surplus is the difference between an insurers assets and its liabilities. Rate Regulation: in certain states rates are regulated Policy Forms: (homeowners 3; appx 3) Sales Practices/consumer protection If there is a gray area and a customer disputes it with state farm, and if it’s ambiguous.  They would go in favor of the consumer. The reason for insurance policies to contain certain clauses is, to help protect the insurer and it  also clarifies what to do if a loss or claim occurs. 


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