Professional Documents
Culture Documents
LOMA 280
280
Principles
of
Insurance:
Life,
Health,
and
Annuities
LESSON
LESSON 22
Learning Objective 1
Distinguish between
speculative risk and pure risk.
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Lesson 2
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Lesson 2
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Lesson 2
Learning Objective 2
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Lesson 2
Risk Management
Risk management involves identifying and assessing
the risks we face.
Four risk management techniques that people and
businesses can use to eliminate or reduce their
exposure to financial risk are:
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Lesson 2
Avoiding Risk
Avoiding risk involves
not taking actions or
not participating in
activities that expose
us to risk. For example, we can avoid
the risk of financial loss in
the stock market by not
investing in it.
Sometimes, however,
avoiding risk is not
effective or practical.
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Lesson 2
Controlling Risk
Controlling risk
involves taking steps to
prevent or reduce
losses.
For example, a store owner
can reduce the likelihood of
a fire by banning smoking
and installing smoke
detectors and a sprinkler
system.
These are ways to attempt
to control risk by reducing
the likelihood of a loss and
lessening the severity of a
potential loss.
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Lesson 2
Accepting Risk
Accepting risk involves
assuming financial
responsibility for that
risk.
For example, an employer
Individuals and can provide a benefit plan
businesses sometimes for its employees by setting
decide to accept aside money to pay
employees’ medical
responsibility for a expenses.
given financial risk
rather than purchasing Accepting financial
insurance to cover the responsibility for losses
risk. associated with specific risks
is called self-insurance.
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Lesson 2
Transferring Risk
To transfer risk is to
shift the financial
responsibility for that
risk to another party,
generally in exchange
for a fee. The most common way for
individuals, families, and
businesses to transfer risk is to
purchase insurance coverage.
When an insurer agrees to
provide a person or a
business with insurance
coverage, the insurer issues
an insurance policy.
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Lesson 2
Transferring Risk
An insurance policy is a legally enforceable contract
between an insurance company and a policyowner.
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Lesson 2
Transferring Risk
In general, individuals and businesses purchase insurance policies
to cover three types of risk:
Personal risk Property damage risk Liability risk includes
includes the risk of includes the risk of the risk of economic
economic loss economic loss to loss resulting from
associated with death, automobile, home, or being held responsible
poor health, and personal belongings for harming others or
outliving one’s due to accident, their property. Liability
savings. Life and theft, fire, or natural insurance provides a
health insurance disaster. Property benefit payable on
protect against insurance provides a behalf of a covered
financial losses that benefit if insured party who is legally
result from the items are damaged responsible for
personal risks of or lost because of unintentionally harming
death, disability, specified perils. others or their property.
illness, accident, and
outliving one’s Property and liability insurance (also referred to
savings. as property and casualty insurance) are
commonly marketed together in one policy.
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Lesson 2
Transferring Risk
With transfer of risk, the insurance company becomes responsible
for the economic risk of the people and businesses it insures.
One way insurers manage this risk is by issuing policies on and
collecting premiums from many individuals who are transferring the
financial risk of a particular loss; insurers are able to spread the
cost of the few losses that are expected to occur among all the
insured persons. This concept is known as risk pooling.
Insurance, then, provides protection against the risk of economic
loss by applying a simple principle:
If the economic losses that actually result from a given peril can be
shared by large numbers of people who are all subject to the risk of
such losses and the probability of loss is relatively small for each
person, then the cost to each person will be relatively small.
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Lesson 2
Learning Objective 3
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Lesson 2
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Lesson 2
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Lesson 2
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Lesson 2
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Lesson 2
Learning Objective 4
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Lesson 2
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Lesson 2
1. Identifying 2. Classifying
the risks and the degree
that a of risk
proposed that a
insured proposed
presents insured
represents
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Lesson 2
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Lesson 2
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Lesson 2
1. Standard risks
2. Preferred risks
3. Substandard risks
4. Declined risks
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Lesson 2
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Lesson 2
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Lesson 2
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Lesson 2
Learning Objective 5
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Lesson 2
Insurable Interest
Laws in the United States and many countries require
that, when an insurance policy is issued, the
policyowner must have an insurable interest in the risk
that is insured—the policyowner must be likely to suffer
a genuine loss or detriment should the event insured
against occur.
For life insurance, the presence of an insurable interest
usually can be found by applying the following rule:
An insurable interest exists when the policyowner
is likely to benefit if the insured continues to live
and is likely to suffer some loss or detriment if the
insured dies.
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Lesson 2
Insurable Interest
Underwriters screen every life insurance application to make
sure that the insurable interest requirement imposed by law in
the applicable jurisdiction will be met when the policy is issued.
Insurers also make sure that applications meet the company’s
underwriting guidelines, which frequently include insurable
interest requirements that go beyond the requirements imposed
by law.
If the insurer determines that the proposed policyowner does not
meet insurable interest requirements, then the insurer will not
issue the policy.
Even if the insurable interest requirement imposed by the
applicable jurisdiction is met, an insurer can refuse to issue the
policy if its own, more stringent insurable interest requirements
are not met.
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Lesson 2
Insurable Interest
Insurable interest requirement…
when a person purchases life insurance on her own life
All persons are considered to have an insurable interest in their
own lives.
A person is always considered to have more to gain by living
than by dying.
Therefore, an insurable interest between the policyowner and
the insured is presumed when a person seeks to purchase
insurance on her own life.
Insurable interest laws do not require that the named
beneficiary have an insurable interest in the policyowner-
insured’s life.
However, most insurance company’s underwriting guidelines
require that the beneficiary also must have an insurable
interest in the life of the insured when a policy is issued.
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Lesson 2
Insurable Interest
Insurable interest requirement…
when a person purchases life insurance on another person’s life
(third-party policy)
Laws in many countries and in most states in the United States
require only that the policyowner have an insurable interest in
the insured’s life when the policy is issued.
However, most insurance company underwriting guidelines
and the laws in some states require both the policyowner and
the beneficiary of a third-party policy to have an insurable
interest in the insured’s life when the policy is issued.
The insurable interest requirement must be met before a life
insurance policy will be issued. After the policy is in force, the
presence or absence of insurable interest is no longer relevant.
Therefore, a beneficiary need not provide evidence of insurable
interest to receive the benefits of a life insurance policy.
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Lesson 2
Insurable Interest
Certain family relationships are assumed by law to create an
insurable interest between an insured and a policyowner or
beneficiary. In these family relationships, even if the policyowner or
beneficiary has no financial interest in the insured’s life, the bonds of
love and affection alone are sufficient to create an insurable interest.
According to laws in most jurisdictions, the insured’s
spouse mother grandparent sister
child father grandchild brother
are deemed to have an insurable interest in the life of the insured.
An insurable interest is not presumed when the policyowner or
beneficiary is more distantly related to the insured than these
relatives or when the parties are not related by blood or marriage.
In these cases, a financial interest in the continued life of the insured
must be demonstrated to satisfy the insurable interest requirement.
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Lesson 2
Insurable Interest
For health insurance, the insurable interest requirement is
met if the applicant can demonstrate a genuine risk of
economic loss should the proposed insured require medical
care or become disabled.
People rarely seek health insurance on someone in whom they
have no insurable interest. Typically, people seek health
insurance for themselves and for their dependents.
Applicants are generally considered to have an insurable
interest in their own health. Additionally, for disability income
insurance, businesses have an insurable interest in the health
of key employees.
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Lesson 2
End of Lesson 2
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