RMI 2101 Lisa Zimmaro Chapter Topic 9 Review Requirements of an Insurance Risk o Pi Price of Insurance Administrative Costs Pure Premium Risk Charge o Pmax Maximum Amount a person firm is willing to pay for Insurance Price of Insurance Pmax Market Exists Price of Insurance Pmax No Market Risk is not insurable For Something to be Insured Insurance Interest Financial Interest Losses Random Accident Fraud Moral Hazard Increasing Decreasing Frequency Severity o Decrease Yes o Increase No Skin in the Game Deductibles Higher Premiums Losses Not Catastrophic to Insurer Affect multiple businesses o Can be catastrophic to Insured How Insurance Companies Avoid Catastrophic Loss o Diversify Geographically o Diversify Financially o Product Line TRIA Government s Insurance for Terror Losses being Definite Determinable o Make the claim worth while Higher Value o Prove Loss Definite o Proving Value is Determinable Appraise Pre Loss Documentation Diverse Selection Death Spiral Underwriting With Information They Are Getting From Insured Things you cant change o Gender Age Race Zip Code Credit Score Education Level Chapter 10 Principles of Insurance Contracts Indemnity can t collect more profit from Insurance after a loss Actual Cash Value ACV Depreciation RMI 2101 Lisa Zimmaro Replacement Cost RC An Exception Auto Valued o Actual Cash Value 7 000 o Replacement Cost 20 000 Profit Can t Profit From Insurance Indemnification Rule Avoid Moral Hazard o Exceptions Violations Replacement Cost Pre Determined Actual Cash Value Unique Items Life Insurance Subrogation o A hits B s car o B has a totaled car lost wages medical expenses o B s Insurance Company pays everything except Deductible Subrogation Behind the scenes effort that only involves insurance company o B s carrier will sue A and A s carrier to recover damages paid to B o Purpose of Subrogation Pay the negligent party at fault Controls Moral Hazard Keeps Premiums Low o Proceeds that goes to B s carrier are profit o Under Insurance Contract No one can profit from Insurance Including o Insurer can keep proceeds from Subrogation after the Insured has been Insurance Companies fully indemnified Example o Deductible 3 000 B 10 000 Loss B s Carrier Paid 7 000 Insurance Company gives you 7 000 3 000 10 000 Subrogation B s carrier gets 10 000 from A s carrier B gets 3 000 B s Carrier gets 7 000 and Insurance tries to get B s deductible back If B s carrier is successful in getting any back they must make B financially whole RMI 2101 Lisa Zimmaro o Pre accident status before they can keep the No one can profit from Insurance Insured cannot impair carrier s right to subrogation BUT Insurer cannot subrogate against its own Insured Principle of Utmost Good Faith Held to standards of Honesty Representation If Standards of honesty voided the Insurer can void coverage or deny the claim Statements made by Insured applicant for Insurance purposes Under what circumstances can the insurer deny the claim if statement is false o You lie on application o Insurer will deny if the true facts would either change terms of policy OR o Would have prevented Insurer from issuing policy in the first place Material Breach Lied Innocent Misrepresentation Nonmaterial Breach If there is a dispute Insurance Company must prove Faud Material Breach If they can prove documentation they can void coverage o Medical Record Subpoena o Google you In search of evidence proof to stop paying you Lack of Knowledge Defense Statement made was opinion or belief rather than a fact can t be held against you Insurer bears responsibility to prove fraudulent behavior or intent to deceive o Test Did Insured know certain facts and was fact material o Applicant knew fact would raise increase premium Material o Applicant Knew Insurance company wouldn t issue policy Material RMI 2101 Lisa Zimmaro Loss Matrix Review Question Which Financing Option Would We Choose No Loss Partial Loss Total Loss 0 1 000 10 000 100 00 0 Probability No Loss 0 90 0 07 0 029 0 001 1 Retention 2 Partial Loss a Face Amount 10 000 b Premium 550 3 Full Insurance RMI 2101 Lisa Zimmaro a Face Amount 100 000 b Premium 700 4 Deductible Insurance a Face Amount 100 000 b Deductible 1 000 c Premium 550 Retention Partial Insurance Full Insurance Deductible Insurance 0 0 90 1 000 0 07 10 000 0 029 100 000 0 001 0 1 000 10 000 100 000 550 550 550 90 000 550 90 550 700 700 700 700 550 550 1 000 1 550 550 1 000 1 550 550 1 000 1 550 o 0 0 90 1 000 0 07 10 000 0 029 100 000 0 001 460 o 550 0 90 550 0 07 550 0 029 90 550 0 001 640 o 550 0 90 1 550 0 07 1 550 0 029 1 550 0 001 650 Retention Partial Insurance Full Insurance o 700 Deductible Insurance 460 Retention Partial Insurance Full Insurance Deductible Insurance 700 640 650 Potential Questions For Test a Retention 1 Which Financing Option Has The Lowest Cost Cheapest Option 2 Worry Value Which Option Has The Lowest Cost Cheapest Option a The Associated with Worry Value Will be Given On Test RMI 2101 Lisa Zimmaro i Retention 460 ii Partial Insurance 640 2 500 3 140 iii Full Insurance 700 0 700 iv Deductible 650 1 000 1 650