SPECULATIVE RISK
CONSCIOUS CHOICE INVOLVING 3 OUTCOMES: LOSS, GAIN, NO CHANGE
PURE RISK
OUTSIDE OF THE RISK TAKER’S CONTROL: ONLY OUTCOME IS LOSS
ONLY PURE RISKS ARE INSURABLE AND MANAGEABLE
NAME THE 4 RISK MANAGEMENT TECHNIQUES
- TRANSFERRING RISK
- INSURANCE TRANSFER
- NON-INSURANCE TRANSFER - REDUCING OR MITIGATING RISK
- LOSS PREVENTION - ATTEMPTS TO REDUCE THE POSSIBILITY OR FREQUENCY OF LOSS FOR ANY RISK THAT CANNOT BE AVOIDED
- LOSS REDUCTION - ATTEMPTS TO CONTROL TEH SEVERITY AND FINANCIAL IMPACT OF LOSSES - RETAINING RISK (SELF INSURE)
- ACTIVE DECISION TO ACCEPT CONSEQUENCES FOR FINANCIAL LOSSES ASSOCIATED WTIH SPECIFIC RISKS
- DEDUCTIBLES ARE AN EXAMPLE AS PLAN MEMBERS RETAIN SOME FINANCIAL IMPACT - AVOIDING RISK
- ELIMINATION - REMOVING THE SOURCE OF THE RISK
- SUBSTITUTION - REPLACING THE RISK FOR ANOTHER (HIRE TEMP. WORKERS VS. FULL TIME TO REDUCE # OF EMPLOYEES ON BENEFIT PLAN)
- SEPARATION - SEPARATING DISABILITY INTO STD (MORE PREDICTABLE, MORE QUANTIFIABLE) & LTD (LESS PREDICTABLE, EXACT LIABILITY UNKNOWN)
WHAT 3 RISKS DOES INSURANCE COVER?
- PROPERTY DAMAGE
- LIABILITY
- PERSONAL
RISK POOLING
TRANSFERRING RISK OF LOSS FROM ONE TO MANY AND SHARED BY EVERYONE IN THE POOL
LAW OF LARGE NUMBERS
THE MORE TIMES AN EVENT IS OBSERVED, THE MORE LIKELY IT IS THAT OBSERVED RESULT WILL APPROXIMATE (BE SIMILAR) THE TRUE PROBABILITY THAT THE EVENT WILL OCCUR.
MORTALITY
INCIDENCE OF DEATH
MORBIDITY
INCIDENCE OF SICKNESS AND ACCIDENTS
5 CHARACTERISTICS OF INSURABLE RISK
LOSS MUST
- OCCUR BY CHANCE
- BE DEFINITE (BY BOTH TIME & AMOUNT) - eg. LIFE CLAIM HAS LIMIT AND AMOUNT PAYABLE
- BE SIGNIFICANT
- BE PREDICTABLE BY THE INSURER
- NOT BE CATASTROPHIC TO THE INSURER - Where potential losses are greater than one insurer wants to assume, reinsurance may come into play with a transfer of risk
ADVERSE SELECTION or ANTI-SELECTION
Tendency to select insurance based on likelihood of loss
WHAT DOES THE UNDERWRITING PROCESS ENTAIL?
- IDENTIFYING RISK
- PHYSICAL HAZARDS - eg. Smoking increases the likelihood of illness
- MORAL HAZARD - eg. A proposed insured with a confirmed record of illegal behavior is likely to behave similarly in an insurance transaction - CLASSIFYING THE DEGREE OF THE RISK
- Intended to group individual risks having similar expectations of loss
WHAT ARE THE 4 RISK CLASSES?
- DECLINED RISK
- Applicant is considered to present a risk too great for the insurer to cover - SUBSTANDARD (IMPAIRED) RISK
- Significantly greater than average likelihood of loss but still insurable - STANDARD RISK
- Likelihood of loss is not significantly greater than average - PREFERRED RISK
- Significantly less than average likelihood of loss
WHO ARE THE 7 KEY PLAYERS IN GROUP INSURANCE ARRANGEMENTS?
- PLAN SPONSOR - Employer or organization
- PLAN ADVISOR
- PLAN MEMBERS - Individual that is eligible to be insured under the master contract
- INSURER - The party that promises to pay losses or benefits
- THIRD PARTY ADMINISTRATOR - processes claims and performs other administrative services in accordance with the contract (Processing, adjudication and negotiation of claims, record keeping)
- DEPENDENTS - Spouse and children of insured
- BENEFICIARIES - Individual designated by the plan member to receive the policy benefit
WHAT ARE THE 4 ELEMENTS OF A GB CONTRACT?
- BENEFIT - Amount payable by insurer to a claimant when the insured suffers a loss
- PREMIUM - The amount the policyholder must pay for a certain amount of insurance
- MASTER APPLICATION - A request for group insurance coverage that provides the details required to put the plan into effect.
- GROUP CONTRACT (MASTER APP) - The legally binding document outlining the insurance arrangement between an insurer and the group contract holder. This document governs the group and is signed and sponsored by the policy holder and not the individuals covered under the plan.
WHAT ARE THE MAIN ELEMENTS OF A GROUP CONTRACT (MASTER APP)?
- Type and level of coverage
- Insuring provisions - definitions, eligibility requirements, when the coverage starts and ends
- Benefit provisions - waiver of premium, qualifying period, benefit period, eligible expenses, exclusions and limitations
- General provisions - conformity to legislation and disclosure
WHAT 4 THINGS ARE REQUIRED TO FORM A VALID GROUP INSURANCE CONTRACT?
- Mutually agree to the contract terms
- Have contractual capacity
- Exchange legally adequate consideration
- form the contract for a lawful purpose
LIST 4 TYPES OF INSURABLE GROUPS
- Single-employer groups
- Multi-employer groups: typically members of a union
- Association groups: groups of employees who work for members of an association and individuals that are members of the association
- Creditor groups: groups of individuals who borrow from banks and other money lending institutions
CHARACTERISTICS UNDERWRITERS CONSIDER
- Purpose of the group
- Size - larger groups are more predictable
- Demographic make-up
- Geographical location of the group
- Flow of new members into the group
- Stability of the group
- Occupational activities of the group
- Required participation
- Determination of benefit levels
WHAT ARE THE 5 FUNDAMENTAL PRINCIPLES OF GROUP INSURANCE UNDERWRITING?
- Employees must be permanent and actively working
- Choices/Amount of coverage must be restricted
- Employee contributions must be deducted from their pay
- The plan sponsor must contribute at least some of the cost for the plan
- The risk must be spread
WHAT 2 GROUPS ARE NOT ELIGIBLE FOR GROUP INSURANCE?
- Clubs and lodges (Legions or Kiwanis) - there is no requirement to be actively at work
- Individuals participating in mass-marketed plans
