Fundamentals of risk and insurance

■ FUNDAMENTALS OF RISK AND INSURANCE ■ ■ FUNDAMENTALS OF RISK AND INSURANCE ■ TENTH EDITION EMMETT J VAUGHAN THERESE M VAUGHAN John Wiley & Sons, Inc Vice President/Publisher Associate Publisher Associate Editor Senior Production Editor Executive Marketing Manager Creative Director Senior Designer Production Management Services Editorial Assistant Senior Media Editor Cover Photo Cover Design Bicentennial Logo Design Don Fowley Judith Joseph Brian Kamins Valerie A Vargas Amy Scholz Harry Nolan Kevin Murphy Aptara, Corp Sarah Vernon Allison Morris c Brian Baley/Getty Images, Inc David Levy Richard J Pacifico This book was set in 10/12 Cheltenham Light by Aptara, Corp and printed and bound by R R Donnelley & Sons, Inc The cover was printed by Phoenix Color, Corp The book is printed on acid-free paper ∞ Copyright c 2008 John Wiley & Sons, Inc All rights reserved No part of this publication may be reproduced, stored in a retrieval system or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning or otherwise, except as permitted under Sections 107 or 108 of the 1976 United States Copyright Act, without either the prior written permission of the Publisher, or authorization through payment of the appropriate per-copy fee to the Copyright Clearance Center, Inc 222 Rosewood Drive, Danvers, MA 01923, website www.copyright.com Requests to the Publisher for permission should be addressed to the Permissions Department, John Wiley & Sons, Inc., 111 River Street, Hoboken, NJ 07030-5774, (201)748-6011, fax (201)748- 6008, website http://www.wiley.com/go/permissions To order books or for customer service please, call 1-800-CALL WILEY (225-5945) ISBN-13 978-0-470-08753-4 Printed in the United States of America 10 To Dad This page intentionally left blank ■ ABOUT THE AUTHORS ■ Emmett J Vaughan was a Professor of Insurance at the University of Iowa for over 40 years, where he held the Partington Professorship in Insurance until his death in 2004 Professor Vaughan earned his undergraduate degree in economics from Creighton University and his M.A and Ph.D in economics and insurance from the University of Nebraska He was an enthusiastic teacher, prolific scholar, and beloved by his students He inspired hundreds of students to choose careers in insurance Therese M Vaughan is the Robb B Kelley Distinguished Professor of Insurance and Actuarial Science at Drake University Prior to joining Drake, she served as Iowa Insurance Commissioner for over 10 years and as President of the National Association of Insurance Commissioners Vaughan earned her undergraduate degree in economics and insurance from the University of Iowa and her Ph.D in insurance from the University of Pennsylvania vii This page intentionally left blank SUBJECT INDEX power failure exclusion, 465–466 riot or civil commotion peril, 469 smoke peril, 469 theft exclusions, 470 theft peril, 469 vandalism and malicious mischief peril, 469 vehicles peril, 469 volcanic eruption peril, 471 war exclusion, 466 water damage exclusion, 465 water overflow or discharge peril, 470 weight of ice, snow, or sleet peril, 470 windstorm and hail peril, 468–469 Homeowners Contents Broad Form, 471 Homeowners Comprehensive Form defined, 471 exclusions under, 471–472 theft coverage, 472 Homeowners Condominium Unit-Owners Form coverage, 472–473 defined, 472 endorsements to, 473 open-peril coverage, 473 Homeowners Modified Coverage Form, 474 Homeowners Defense Act, 653–654 Homeowners policies forms, 449, 464–476 general provisions, 446–461 historical development, 446–447 nature of, 447 program, 446–447 tailoring coverage under, 493 Homeowners pollution endorsements (CPL), 526 Homeowners Section I coverage, 447–461 abandonment of property provision, 459 Additional Coverages, 448, 455–458 appraisal, 458–459 assignment clause, 461 assisted living care coverage, 475 basic coverage, 448 broad form coverage, 448 broad-named peril coverage, 448 cancellation provision, 460–461 collapse, 457 concealment or fraud provision, 460 conditions, 458–461 Coverage A; dwelling, 448, 450 Coverage B: other structures, 448 Coverage C: personal property, 448 Coverage D: loss of use coverage, 448, 455 coverage on computers, 476 death provision, 461 debris removal, 455–456 deductibles, 458 duties after a loss, 458 earthquake, 475 fire department service charge, 456 glass/safety glazing material, 457 grave markers, 458 guaranteed replacement cost, 451 HO-3 exclusions, 465–467 inflation, 451 Inflation Guard Endorsement, 451 insurable interest and limit of liability, 458 insurer option, 459 landlord’s furnishings, 457 liberalization clause, 460 loss assessment coverage, 456–457 loss of use coverage, 455 loss payable clause, 460 loss payment provision, 459 loss settlement, 458 loss-to-a-pair-or-set, 458 mortgagee clause, 459 named-peril coverage, 448 no benefit to bailee provision, 459–460 nonrenewal provision, 461 nuclear hazard clause, 460 open-peril coverage, 448 optional perils, 474–475 ordinance or law exclusion, 457–458 other insurance, 459 other members of your household endorsement, 475 overview, 447–448 owned golf carts, 476 perils insured, 448–449 personal property coverage, 452–454 policy period, 460 property removed, 456 reasonable repairs, 456 recovered property provision, 460 refrigerated property coverage, 475 replacement cost coverage, 450–451 scheduled personal property endorsement, 476 sinkhole collapse, 475 subrogation provision, 461 suit against insurer provision, 459 trees, shrubs, plants, and lawn, 456 volcanic eruption period provision, 460 waiver or change-of-policy provisions, 460 water back up and sump overflow, 475 Homeowners Section II coverage Additional Coverages, 514, 522–524 assignment clause, 461 bankruptcy of insured, 524–525 cancellation provision, 460–461 Claim Expense, 522 conditions, 460–461, 524–525 Damage to Property of Others coverage, 522–524 death provision, 461 duties after loss, 524 duties of insured persons, 524 First Aid Expense, 522 liability exclusions, 515–521 I-11 liberalization clause, 460 limit of liability, 524 Loss Assessment Coverage, 524 Medical Payments to Others, 514, 521–522 nonrenewal provision, 461 other insurance, 525 payment of claim, 524 Personal Liability, 514–521 persons injured, 515 policy period provision, 460 severability of insurance, 524 subrogation provision, 461 suits against insurer, 524 waiver or change-of-policy provisions, 460 Honesty clause, 583 Hospice care (Medicare), 407 Hospital insurance benefits (Medicare), 406–407 Hospital insurance coverage (Medicare), 406 Hospital Insurance tax, 211 Hospitalization insurance, 391 Hovercraft liability exclusion (CPL), 517 Hull insurance, ocean marine, 590 Human life value, 186–189 discounted income flows, 187 illustrated, 187–189 present value, 187 time value of money, 187 Hurricane Season contracts, 159–160 Identity theft, Illustration actuary, 309 Immediate annuities, 320 Immediate participation guarantee (IPG) plans, 437 Impaired property, 614 Implied authority, 167 Important insurance coverages, 62 Important risks, 29 Inception of coverage, flood insurance, 486–487 Income needs, 193–195 Income replacement coverage, 366 Incontestable clause, 264–265 Incurred losses, 149–150 Indemnification, 35 Indemnity actual cash value and, 171–173 defined, 169 double, 280–281 insurable interest and, 169–171 workers compensation insurance, 225 Independent adjusters, 140 Independent agents, 84–85 Independent practice association (IPA), 380, 381 Indeterminate outcome, Indeterminate premium policies, 295–296 benefit structure, 295–296 interest-sensitive whole life, 296 participating policy innovations, 296 I-12 Index annuities, 323–324 Index universal life insurance, 286 Indirect loss coverage, 585–587 Individual account proposal, 222 Individual annuities, 320 Individual health insurance cancelable policies, 371 change of beneficiary provision, 372 change of occupation provision, 372 claim forms provision, 372 conditionally renewable policies, 371 conformity with state statues provision, 373 continuance provisions, 370–371 grace period provision, 371 guaranteed renewable policies, 370–371 illegal occupation provision, 373 intoxicants and narcotics provision, 373 legal action provision, 372 misstatement of age provision, 372 no provision policies, 371 noncancelable policies, 370 notice of claim provision, 372 optional uniform provisions, 372–373 other insurance in this insurer provision, 372–373 overinsurance with medical expense coverage provision, 373 payment of claims provision, 372 physical examinations and autopsy provision, 372 policy provisions, 370–373 proof of loss provision, 372 reinstatement provision, 372 relation of earnings to insurance provision, 373 renewable at company’s option, 371 renewal provision, 371 time limit on certain defenses provision, 371 time of payment of claims provision, 372 uniform provisions, 371–372 unpaid premium provision, 373 Individual life insurance, 242 Individual Named Insured Endorsement (BAC), 622 Individual retirement accounts (IRAs), 329, 339–343 defined, 339–340 eligibility rules, 340 partial rollovers, 342 as portable pensions, 342 Roth, 342–343 SIMPLE, distributions, 338 traditional, 340–342 Industrial development bond insurance, 641 Industry loss warranties (ILWs), 160 Infants, legal liability, 499 Inflation Guard Endorsement, 451 Inflation protection SUBJECT INDEX homeowners Section I, 451 LTC insurance, 419 Informational filing, 113–114 Inherited property, 198–199 Injunction bonds, 637 Injuries to insured persons exclusion (CPL), 521 Inland marine insurance contract clauses, 173 defined, 46 Inland marine insurance (commercial), 592–595 accounts receivable insurance, 594 Annual Transit Policy, 593 bailee forms, 592 business floater forms, 592, 593–594 Camera Dealer’s Form, 594 consignment and sales floaters, 594 controlled forms, 593 dealers forms, 592, 594 defined, 592 difference-in-conditions coverage, 595 EDP policy, 595 Equipment Dealers Coverage Form, 594 equipment floaters, 594 Jeweler’s Block Policy, 594 Mail Coverage Form, 593 manufacturers output policy, 595 means of transportation forms, 592 miscellaneous policies, 592 Motor Truck Cargo Owner’s Policy, 593 Musical Instrument Dealer’s Form, 594 Parcel Post Policy, 593 processing and storage floaters, 594 property classes, 592 transportation forms, 592, 593 uncontrolled forms, 593 valuable papers insurance, 594–595 Inland marine insurance (individual), 487–494 cameras, 489 fine arts and antiques, 489–490 golfer’s equipment, 489 musical instruments, 490 personal floaters, 488 personal furs, 489 personal jewelry, 489 postage stamps and rare/current coins, 490 Scheduled Personal Property Endorsement, 488–490 scope of coverage, 488–489 silverware, 489 valuation options, 488 watercraft, 490–492 Inspections, 137 Installment annuities, 320 Installment distributions, 338–339, 356 Installment refund annuities, 321 Installments for a fixed amount, 268 Installments for a fixed period, 267–268 Insurable interest, 169–171 defined, 169 in life insurance, 170 in property and liability insurance, 169–170 Insurable risk elements, 42–44 Insurance banks and, 86–87 best buys, 59 as body of theory, buying, 61–67 commercial, alternatives, 67–71 courts and, 181 defined, individual viewpoint, 35 defined, society viewpoint, 41 economic contribution of, 42 fields of, 45–53 in the future, 644–668 gambling and, 42 globalization of, 647–651 losses and, 41 as method for dealing with risk, 13 nature and functions of, 34–42 private, 45–48 public guarantee programs, 51–53 social, 48–51 Insurance brokers, 83 Insurance companies See also Insurers accounting function, 142 actuarial departments, 131 capital stock, 77 captive, 69–70 convergence of banks and, 661 engineering function, 142 examination of, 107 groups, 86 legal function, 142 licensing, 106 life insurance, 303–305 loss adjustment, 139–141 mutual, 77–78 production department, 135 taxation of, 161–162 trusts and, 436–438 Insurance cycle, 93–94 Insurance derivatives, 158 Insurance exchanges, 80 Insurance fraud, 664 Insurance industry career opportunities, 666–668 changes in, 660–663 competition in, 90–94 consolidations, 660–661 cooperation in, 87–90 history, 74–76 market structure, 92–93 marketing systems, 83–87 nonsales opportunities, 667–668 private, 73–94 profitability, 94 regulation, 98–119 sales opportunities, 667 subsidies, 120–125 unwarranted criticism, 665–666 Insurance management, 21 Insurance managers, 21 SUBJECT INDEX Insurance Marketplace Standards Association (IMSA), 311 Insurance Service Office (ISO), 88, 597 Insurance trade organizations, 90 Insurance-purchasing groups, 70 Insured plans deposit administration plans, 436–437 group deferred annuities, 436 group permanent plans, 436 immediate participation guarantee (IPG) plans, 437 individual policies, 436 separate accounts, 438 unallocated funding instruments, 436–438 Insurers abroad, 648–649 admitted, 77 casualty, 76 classification by legal form of ownership, 77–83 classification by place of incorporation/licensing, 77 classification by type of product, 76–77 disability income, 361 domestic, 77, 105 examination of, 107 financial aspects, 146–162 financial stability, 64 foreign, 77, 105 fraternal, 78 functions of, 130–142 government, 81–83 insolvencies, 94 investments, 142 licensing of, 106 life, 152–155 nonadmitted, 77 number of, growth, 93 private, classification, 76–83 production function, 135 rating categories, 65 selecting, 64–67 treatment of policyholders, 66–67 Insuring agreements, contracts, 181 Integration, Pension See also permitted disparity Intentional injury exclusion (CPL), 517 Intentional loss exclusion (HO-3), 466 Inter vivos trusts, 200, 201 Interest in life insurance premium computation, 249–252 as life insurance settlement option, 267 universal life, 311 variable life, 311 Interest maintenance reserve, 153 Interest-adjusted method, 306 Interest-sensitive whole life, 296 Internal explosion, 480 Internal Revenue Code (IRC), 161, 236, 284, 294, 313–314, 322, 354 International Accounting Standards Board (IASB), 651 International Association of Insurance Supervisors (IAIS), 651 Interstate compacts, 660 Interstate Insurance Product Regulation Compact, 118 Intestate, 199 Investigation, 141 Investment annuities as, 326–327 function, 141–142 life insurance as, 302–303 Investment generation method (IGM), 296 Investor-owned life insurance, 310–311 Invitees, property owner liability, 505 Irrevocable beneficiary, 264 Irrevocable life insurance trusts (ILIT), 201 Janitor insurance, 443 Jeweler’s Block Policy, 594 Jewelry, 489 Job mobility, 330 John Hancock Mutual Life Insurance Co v Harris Trust & Savings Bank, 437 Joint life annuities, 320, 321 in retirement planning, 357 single life versus, 320–321 Joint mortgage protection policy, 290 Joint underwriting associations (JUAs), 89, 538 Joint-and-last-survivor annuities, 320–321 Joint-and-several liability, 503–504 Judgment rating, 132 Judicial bonds, 635–637 Junk bonds, 304 Juvenile insurance, 294–295 Keogh plans, 333 Key-person insurance, 442 Labor and materials bond, 635 Landlord’s furnishings, 457 Large-loss principle, 62 Last clear chance doctrine, 507 Last-in first-out treatment, 294 Law of averages, 319 Law of large numbers, 36–38 defined, 36–37 dual application, 40–41 Laws of contracts, 165–168 unwritten, 180 valued policy, 172 workers compensation, 224 Leasehold interest insurance, 587 Legal functions, 142 Legal hazards, Legal liability, 498 actual damage or loss, 501–502 bankruptcy and, 507–508 charitable institutions, 499 collateral source rule, 502 fire, 614 government bodies, 499 infants, 499 joint-and-several, 503–504 I-13 mentally incompetent, 499 property owner obligations to others, 504–505 vicarious, 503 Legal object, 167 Legal system, as risk source, Less risk, Level premium, 234–235 Liability absolute, 500 bailee, 626–627 contingent, 610 contingent employer, 438 contractual, 610 exclusions, 554–556 joint-and-several, 503–504 legal, 498 life insurers, 152–153 pension fiduciary, 619 personal and advertising injury, 614–615 vicarious, 503, 533 umbrella policy, 629–630 Liability insurance, 512–528 See also Commercial liability insurance automobile, 532 Business Auto Coverage Form (BAC), 620–622 Business Owners Policy, 602 Comprehensive Personal Liability (CPL), 513–526 crisis, 508 defined, 46 general nature, 512–513 professional, 526–527 third-party coverage, 513 types, 491 umbrella policy, 527–528 unintentional torts and, 498 Liability risks, Liberalization clause, homeowners, 460 License and permit bonds, 637 Licensees, property owner liability, 504–505 Lienholders Single Interest Endorsement (MH 04 04), 483 Life annuity, 202 Life income accelerated benefits rider, 421 joint and survivor, 269 options, 268–269 payments, 269 with period certain, 268 with refund, 268–269 straight, 268 Life insurance actuarial basis, 248–259 adjustable, 241 amount needed, 189 business uses, 426–444 buying, 299–316 cash value policies, 233 claim representatives, 139 code definition of, 236–237 company selection, 303–305 I-14 Life insurance (continued) competition, 93 corporate-owned (COLI), 443–444 credit, 244 decisions in purchasing, 299–313 defined, 45 distribution system, 84 divorce and, 192, 314–316 endowment, 232, 241 estate liquidity need, 195–197 fraternal, 245 group, 242–244 income needs, 193–195 individual, 242 industry reform initiatives, 311 insurable interest in, 170–171 interest, 249–252 introduction to, 230–246 as investment, 302–303 level premium concept, 234–235 lifestyles and, 191–192 misrepresentation in, 177 mortality, 249 needs classification, 192–195 net level premium, 254–255 net single premium, 252–254 nonforfeiture value, 235 nonparticipating, 241–242 as not a contract of indemnity, 232 participating, 241–242 physical examinations, 137 policy availability, 304 policy reserves, 255–257 premium computation, 248–255 products, 237–242 rates, regulation, 111–112 reinsurance in, 156 as risk-pooling plan, 230–231 savings bank, 245 stranger-owned, 310–311 tax considerations, 302, 313–316 tax treatment, 235–237 term, 233, 237–238, 300–302 total in force (US), 244–245 trust agreement, 201 unique characteristics, 230–232 universal life, 232, 239–240 variable life, 232, 240 variable universal life, 240 veterans’, 246 whole-life, 232, 238–239, 535 Life insurance company taxable income (LICTI), 162 Life insurance contracts, 172–173 See also Contracts accidental death benefit, 280–281 automatic premium loan provision, 276–277 availability, 304 aviation exclusions, 266 beneficiary clause, 263–264 benefit-certain, 257–259 benefit-uncertain, 257–259 cash surrender value, 275 common disaster clause, 282–283 SUBJECT INDEX cost-of-living riders, 283–284 disability waiver of premium provision, 279–280 dividend provisions, 277–279 entire contract clause, 262–263 extended term insurance, 275–276 general provisions, 262–267 grace period, 265 guaranteed insurability option, 281–282 inception, 262 incontestable clause, 264–265 installments for a fixed amount, 268 installments for a fixed period, 267–268 interest option, 267 life income options, 268–269 misstatement of age clause, 265 nonforfeiture values, 273–277 optional provisions, 279–284 other provisions, 273–286 ownership clause, 263 paid-up reduced amount, 275 policy loan provision, 276 restatement, 265–266 rights of creditors to proceeds, 283 settlement options, 267–271 specialized, 289–297 spendthrift clause, 283 suicide clause, 266 taxation of proceeds, 269–271 types, 232–235 universal life provisions, 284–286 waiver of premium and accidental death benefit provision, 281–282 war clause, 267 Life insurance cost comparison, 305–308 comparison techniques, 308 consideration, 304–305 interest-adjusted method, 306 net payment cost index, 306, 307 net-cost comparisons, 305–306 premium payment options, 308 surrender cost index, 306–307 universal life, 311–312 variable life, 311–312 “you get what you pay for” and, 305 Life Insurance Illustration Questionnaire (IQ), 311 Life Insurance Illustrations Model Regulation (NAIC), 308–309 Life insurance special forms, 289–297 advantages/disadvantages, 297 family income policy, 291 family income rider, 291–292 family protection policy, 292 graded-premium whole life, 293–294 indeterminate premium policies, 295–296 interest-sensitive whole life, 296 investment generation method (IGM), 296 joint mortgage protection policy, 290 juvenile insurance, 294–295 low-load, 296–297 modified endowment contracts (MECs), 294 modified whole life, 293 mortgage redemption policy, 290 no-load, 296–297 return-of-cash-value policy, 292–293 return-of-premium policy, 292–293 single-premium life, 294 survivorship whole life, 290 Life insurers assets, 152 financial operations, 152–155 financial problems, 303 financial strength and integrity, 303–304 liabilities, 152–153 policyholders’ surplus, 153 summary of operations, 153–154 surplus drain, 154–155 Life securitizations, 158–159 Life settlement, 310 Life-contingency risk, 352 Lightning peril, 468 Limited health insurance policies, 394 Limited international corporations, 648 Limited Theft Coverage Endorsement (DP 04 73), 482 Limited-pay whole life, 239 Liquidity risk, 15 Liquor liability coverage (CGL), 618 Liquor liability exclusion (CGL), 612–613 Litigation bonds, 635, 636–637 Living benefits, 421 Living trusts, 201 Lloyds of London, 75, 79–80 Loading, 312 Longevity insurance, 320 Long-term care (LTC) insurance, 416–422 activities of daily living (ADLs), 419 annuities and, 421 benefit limits, 418 cost of, 420–421 coverage trigger, 418–419 defined, 416 development, 417–418 elimination periods, 418 exposure, 416 inflation protection, 419 life insurance accelerated benefits alternative, 421 Medicare and, 416–417 NAIC model law, 417–418 nonforfeiture provisions, 419–420 policy coverage, 418–420 pool money concept, 418 renewability, 419 respite care benefit, 418 tax-qualified (TQ-LTCI), 420 unintentional lapses, 419 viatication, 421–422 Long-Term Care Model Act, 417 Long-Term Care Partnership programs, 423 Long-term disability insurance, 362–363 SUBJECT INDEX Loss adjustment, 139–141 Loss assessment coverage, 456–457 Loss Assessment coverage (HO Section II), 524 Loss control, 18 Loss of benefits, OASDHI, 215–218 Loss payable clause, homeowners Section I, 460 Loss payment, homeowners Section I, 459 Loss prevention, 18 Loss ratios expected, 131 permissible, 132 Loss reserves, 149–150 Loss settlement, 141 Loss settlement provisions (HO-8), 474 Loss unit concept, 29 Losses actuaries prediction, automobile ownership/operation, 551 converted, 143 future, expectation of, 40 homeowner Section I, 458 incurred, 149–150 insurance and, 41 mandated underwriting, 120–121 paid, 149 possibility of, 2, 3, potential, amount, severity, 9–10 Loss-to-a-pair-or-set clause, 458 Lost instrument bonds, 638 Low-cost auto insurance policies, 535–536 Low-load life insurance policies, 296–297 Lump-sum death benefit, OASDHI, 213 Lump-sum distributions, 339 Mail Coverage Form, 593 Maintenance of benefits proposal, 221–222 Major medical policies, 379, 391–393 characteristics, 392 comprehensive, 392–393 defined, 391–392 supplemental, 392 Malpractice insurance, 526–527 Managed care attack on, 396–397 defined, 382 organizations, 380–382 Mandated benefits, health insurance, 388 Mandated underwriting losses, 120–121 Manufacturers output policy, 595 Manufacturer’s Selling Price Endorsement, 583 Marine insurance, 46 Market failure theory, 99–100 Market regulation, 109–111 Market risk, 15 Marketing agent, 83–84 distribution systems, 84–85 systems, 83–87 World Wide Web and, 85 Market-value-adjusted annuities, 323 Massachusetts plan, 400 Material fact, 176 McCarran-Ferguson Act, 104–105 future of, 657–658 pressure for repeal, 115 repeal as states-rights issue, 117–118 repeal consequences, 117 Means of transportation forms, 592 Medicaid, 383–384 eligibility, 388 look-back period, 422 planning, 422–423 spend-down requirement, 422 spousal impoverishment provisions, 422–423 Medical expense benefits, workers compensation, 227 exposure, 205 regular, 391 Medical expense insurance, 378–400 See also Health insurance base plan coverage, 391 Blue Cross/Blue Shield, 379 buying, 395–396 CHAMPUS program, 384 coinsurance, 380 commercial companies, 379 coordination of benefits, 394 defined, 378–379 dental expense coverage, 394–395 employer self-insured plans, 382 employer-sponsored domination, 387 ERISA, 382 fee-for-service, 379–380 first-dollar coverages, 396 future of, 396–400 health maintenance organizations (HMOs), 380–381, 393 historical development, 379–382 limited policies, 394 major medical, 379, 391–393 managed care organizations, 380–382 market, 379–382, 382–384 Medicaid, 383–384 Medicare, 380, 383 multiemployer welfare arrangements (MEWA), 382–383 other coverages, 394–395 point-of-service (POS) plans, 381 policy exclusions, 393–394 preferred provider organizations (PPOs), 381 prescription drugs, 395 private sector, 382–383 public sector, 383–384 State Children’s Health Insurance Program (SCHIP), 384 I-15 taxes and, 396 traditional coverage, 391–393 Medical Information Bureau (MIB), 137 Medical malpractice pools, 89 Medical payments coverage automobile, 532 aviation insurance, 628 BAC, 622 CGL, 615 CPL, 514, 521–522 Personal Automobile Policy, 557–558, 570–571 Medical Savings Accounts Plans, 413 Medicare, 50, 380 Advantage, 646 amendments, 404 approved amount, 408 assignment, 408 benefits, 210 cost controls, 406 defined, 404 diagnostic-related groups (DRGs), 406 eligibility, 388, 404–405 employer group coverage, 406 enrollment periods, 405 financial condition of, 415–416 fraud, 416 future of, 415–416, 645–646 home health care (Part A), 407 hospice care (Part A), 407 Hospital Insurance (HI) Trust Fund, 645 hospital insurance benefits (Part A), 406–407 hospital insurance coverage (Part A), 406 Medical Savings Accounts (MSAs), 646 Part A, 404, 405, 406–407, 414–415 Part B, 405, 407–408, 414, 645 Part C, 404, 411–412 Part D, 413–415, 645 participating/nonparticipating physicians, 408–409 payments to organizations, 413 prescription drug coverage, 413–415 preventative care, 408 private contracts outside, 409 prospective payment system (PPS), 406 Resource-Based Relative Value Schedule (RBRVS), 408 skilled nursing facility care (Part A), 407 supplement policies, 409–411 supplemental medical insurance (SMI), 405 Medicare Advantage (MA), 411–413 benefits, 412 defined, 411 goal, 412 HMO plans, 412 MSA plans, 413 MSN plans, 413 I-16 Medicare Advantage (MA) (continued) PFFS plans, 412–413 PPO plans, 412 Medicare long-term care inadequacy, 416–417 Medicare Prescription Drug, Improvement and Modernization Act of 2003 (MMA-2003), 404, 405 Medicare Select policies, 411 Medicare Special Needs Plan, 413 Medigap policies, 409–411 defined, 404, 409 federal standards, 410–411 open enrollment period, 411 Plan K, 410 Plan L, 410 premiums, 411 regulation, 409 standard contracts, 409–410 Mentally incompetent, legal liability, 499 Merritt Committee investigation, 104 Minimax regret strategies, 58 Minimum premium plan (MPP), 430 Misrepresentation, 176–178 defined, 176 examples, 177–178 with fraudulent intent, 177 in life insurance, 177 Mississippi rule, 506 Misstatement of age clause, 265 Mobile equipment exclusion (CGL), 613 Mobilehome program coverage on personal property, 483 defined, 482 eligibility, 482 Lienholders Single Interest Endorsement (MH 04 04), 483 loss of use, 483 property removal, 483 Transportation/Moving Endorsement (MH 04 03), 483 Model Replacement Regulation (NAIC), 309–310 Modified endowment contract (MEC), 294 Modified Loss Settlement Endorsement (DP 00 08), 481 Modified no-fault, 539–540 Modified whole life, 293 Money market fund insurance, 641 Money orders and counterfeit paper currency, 601 Monoline fire dwelling program, 480–482 See also Property insurance coverages, 481 current, 480 eligibility, 480 endorsements, 481–482 Limited Theft Coverage Endorsement (DP 04 73), 482 Modified Loss Settlement Endorsement (DP 00 08), 481 personal liability supplement, 482 Theft Coverage Endorsement (DP 04 72), 481–482 SUBJECT INDEX Monoline organization, 76 Moral hazards, Morale hazards, More risk, Mortality, 249 gender-neutral tables, 271 universal and variable life, 312 Mortgage loan insurance, 81 Mortgage redemption policy, 290 Mortgagee clause, homeowners Section I, 459 Mother’s benefit, OASDHI, 213 Motor Carrier Coverage Form, 625 Motor home endorsement, 569 Motor Truck Cargo Owner’s Policy, 593 Motor vehicle liability exclusion (CPL), 515–516 Multiemployer welfare arrangements (MEWA), 382–383, 659 Multinational corporations (MNCs), 648 Multiple-line underwriting, 76 Municipal bond guarantee insurance, 641 Municipal lease insurance, 641 Musical Instrument Dealer’s Form, 594 Musical instruments, 490 Mutual insurance companies, 77–78 Named Non-Owner Policy coverage (PAP), 567 Named Storms contracts, 160 Named-peril coverage, 448 Nanotechnology, 662 National Association of Insurance Commissioners (NAIC), 105–119, 106 All Industry Model Rating Law, 112 Annual Statement blank, 146 Consumer Information Source (CIS) Web site, 110 Financial Analysis Division (FAD), 106 Financial Regulation Standards Accreditation Program, 109 Insurance Receivership Model Act (IRMA), 108 Interstate Insurance Product Regulation Compact, 118, 659–660 Life Insurance Illustrations Model Regulation, 308–309 Life Insurance Solicitation Model Regulation, 306 Long-Term Care Model Act, 417 Model Life Insurance Solicitation Regulation, 112 Model Replacement Regulation, 309–310 Privacy of Consumer Financial and Health Information Model Regulation, 110 RBC standards, 107 reform efforts, 659–660 Reinsurance Supervisory Review Department (RSRD), 650 reinsurance modernization proposal, 650 System for Electronic Rate and Form Filing (SERFF), 118 Uniform Accident and Sickness Policy Provision Law (UPPL), 371 Uniform Producer Licensing Model Act, 118 National Association of Mutual Insurance Companies, 90 National Banking Act of 1864, 86 National Council on Compensation Insurance, 88 National Credit Union Administration (NCUA), 52 National Flood Insurance Program (NFIP), 81, 483, 487, 595–596, 654 See also Flood insurance National Flood Insurance Reform Act of 1994, 485 National health insurance, 398–399 employer-mandated, 398 individual mandates, 398–399 single-payer plan, 398 National Insurance Producer Registry (NIPR), 118 Needs analysis, 189–195 capital, 195 chart, 194 disability risk, 203–204 divorce and income needs, 192 income needs, 193–195 lifestyle and, 191–192 needs classification, 192–195 Neglect exclusion (HO-3), 466 Negligence, 497–509 absolute liability and, 500 assumption of risk, 505–506 comparative, 506–507 contributory, 506 defenses, 505–508 last clear chance, 507 legal liability and, 498 on part of injured party, 506–507 per se, 500 as proximate cause of damage, 502–505 prudent man rule, 500 res ipsa loquitur, 500–501 Net level premium, 254–255 Net line, 155 Net payment cost index, 306, 307 Net single premium, 236, 252–254 computation process, 253 defined, 252 Net-cost comparisons, 305–306 Newborn and Mothers Health Protection Act of 1996 (NMHPA), 394 No benefit to bailee provision, homeowners Section I, 459–460 No-fault automobile insurance, 539–543 See also Automobile insurance choice, 540 cost experience, 541–542 defined, 539 existing state laws, 540–541 expanded first-party coverage, 540 SUBJECT INDEX legislation prospects, 542–543 modified, 539–540 proposal differences, 539–540 pure, 539 No-file law, 113 No-load life insurance policies, 296–297 Nominator, 324 Nonadmitted and Reinsurance Reform Act of 2007, 659 Nonadmitted assets, 147 Nonadmitted insurers, 77 Nonbuilding replacement cost (HO Section I), 476 Nonemployee crime coverages, 599–601 computer fraud, 600–601 forgery or alteration insuring agreement, 599 funds transfer fraud, 601 inside the premises robbery or safe burglary of other property, 600 inside the premises theft of money and securities, 599–600 money orders and counterfeit paper currency, 601 outside the premises insuring agreement, 600 Nonforfeiture provision, long-term care insurance, 419–420 Nonforfeiture values, 235, 273–277 automatic premium loan, 276–277 cash option, 274–275 extended term insurance, 275–276 paid-up reduced amount, 275 policy loan provisions, 276 Nonoccupational disability insurance, 364 Nonparticipating life insurance, 241–242 Nonrenewal, homeowners, 461 Nuclear energy pools, 86 Nuclear exclusion (CPL), 520–521, 522 Nuclear hazard clause, homeowners Section I, 460 Nuclear hazard exclusion (HO-3), 466 Objectives, risk management policy, 25–26 value maximization, 25 Occupational disease, 226 Occupational Safety and Health Act (OSHA), 60 Occurrence form (CGL), 610, 611, 616–617 Occurrence-first-reported coverage, 527, 617–618 Ocean marine insurance, 590–591 average condition, 591 cargo, 590 defined, 46 freight, 590 hull, 590 perils insured, 590–591 protection and indemnity, 590 valuation, 591 warehouse-to-warehouse clause, 591 Odds, 59 Off-premises theft exclusions, 470 Old-Age, Survivors, Disability, and Health Insurance Program (OASDHI), 50, 210–223 amount of benefits, 212 average indexed monthly earnings (AIME), 212 bailout plan, 219 benefit classes, 210 benefit levels change proposals, 220 classes of benefits, 212–214 currently insured status, 211 disability benefits, 210 disqualifying income, 216 eligibility, 210–211 financing, 211–212 financing change proposals, 220 fully insured status, 211 individual account proposal, 222 loss of benefits, 215–218 maintenance of benefits proposal, 221–222 Medicare benefits, 210 old-age benefits, 210 pay-as-you-go system, 218–220 personal security accounts proposal, 222 primary insurance amount computation, 212 privatizing, 220–221, 223 proposed reform models, 222–223 qualification requirements, 210–211 qualification requirements summary, 214–215 quarter of coverage, 211 retirement benefits, 212–213 soundness of the program, 218–223 survivors’ benefits, 210 taxation of benefits, 216–218 Old-Age and Survivors Trust Fund, 219 Old-age benefits, 210 Omnibus Budget Reconciliation Act of 1990 (OBRA), 162 Omnibus Budget Reconciliation Act of 1993 (OBRA-93), 423 Open competition, 113 Open-peril coverage, 448 HO-3, 465–468 HO-6, 473 Operational risk, 15 Operations research and management science, 14 Optional insurance coverages, 62 Oral contracts, 166 Ordinance or Law Coverage Endorsement (BPP), 582 Ordinance or Law Enforcement coverage, boiler and machine insurance, 589 Ordinance or law exclusion, 457–458, 465 Ostensible authority, 167 I-17 Other insurance provision inland marine insurance, 173–174 life insurance, 273–286 pro rata clause, 173 Other members of your household endorsement (HO Section I), 475 Out of state coverage, PAP, 557 Outcomes risk and, Overseas Private Investor Corporation (OPIC), 82 Owners and Contractors Protective Liability Coverage (CGL), 618 Ownership clause, 263 Ownership of renewals, 85 Package modification factor, 601 Package policies, 76 Paid losses, 149 Paid-up reduced amount, 275 Parameters, 37 Parcel Post Policy, 593 Parents’ benefit, OASDHI, 214 Parol evidence rule, 180 Partial disability benefit, 367 Partial permanent disability, workers compensation, 227–228 Partial temporary disability, workers compensation, 227 Participating life insurance, 241–242 Participation rate, 286 Particular average loss, 591 Particular risks, Partitioned-portfolio IGM, 296 Pascal’s wager, 57–58 Patients’ bill of rights legislation, 397 Paul v Virginia, 103 Pay-As-You-Drive programs, 546, 547 Pay-as-you-go system, OASDHI, 218–220 Payoff matrix, 57 Pension Benefit Guarantee Corporation (PBGC), 52, 438–439 Pension fiduciary liability, 619 Pension Protection Act of 2006, 432–433 Pensions, 431–438 See also Qualified retirement plans amortization rules, 435 asset valuation, 435 at-risk plans, 435 benefit restrictions, 435 defined contribution plans, 434 ERISA, 431–432 funding, 434–435 insured plans, 436–438 legislation affecting, 431–433 liability valuation, 435 maximization, 358 portable, 342 qualification requirements, 433–434 TEFRA, 432 top-heavy plans, 434 trust fund plans, 436 I-18 Perils See also specific perils defined, risk versus, Period-certain annuities, 321 Period-certain payments, 337 Permissible loss ratio, 132 Permitted disparity, 336 Permitted Incidental Occupancies Endorsement, 518 Personal and advertising injury exclusion (CGL), 614 Personal Automobile Policy, 550–572 See also Automobile insurance aftermarket parts, 564 All-Terrain Vehicle Policy, 567 bankruptcy provision, 565 bodily injury and, 557 buying, 569–571 changes provision, 565 collision coverage, 561 conditions, 564–566 cost differences, 571 covered auto, 553–554, 558 defined, 551 duties after an accident or loss, 564–565 eligibility, 551 endorsements to, 566–569 Extended Non-Owned Coverage, 566–567 fraud provision, 565 Garage Policy, 555 general nature of, 550–552 Go-Cart Liability Policy, 567 insurer right to recover payment provision, 565 legal action against insurer provision, 565 liability coverage, purchasing, 570 liability exclusions, 554–556 liability insuring agreement, 552–554 limits of liability, 557 limits of liability—payment of loss, 564 loss other than by collision, 561 medical payment recovery limitations, 558 medical payments coverage, 557–558 medical payments coverage, purchasing, 570–571 medical payments exclusions, 558 motor home endorsement, 569 Named Non-Owner Policy coverage, 567 other liability coverage provisions, 556–557 out of state coverage, 557 persons insured under liability coverage, 552–553 physical damage coverage, 560–564 physical damage coverage, purchasing, 571 physical damage exclusions, 562–563 physical damage to non-owned autos, 561–562 policy format, 552 SUBJECT INDEX policy period and territory provision, 565 Snowmobile Endorsement, 569 Snowmobile Policy, 567 supplemental payments, 556–557 termination provision, 565–566 transfer of interest in policy provision, 566 transportation expense, 564 two or more auto policies provision, 566 underinsured motorist coverage, 560 uninsured motorist coverage, 558–560 uninsured motorist coverage, purchasing, 571 your covered auto and, 568 Personal contracts, 174–175 Personal furs, 489 Personal injury liability endorsements (CPL), 525 Personal Liability coverage (CPL), 514–521 Personal property coverage, 451–455 Building and Personal Coverage, 577 flood insurance, 486 HO Section I, 448, 452–454 mobilehome program, 483 perils insured (HO-3), 468–471 property exclusion, 453–454 replacement cost, 452–453 secondary residence, 452 subject to dollar limits, 454–455 Personal property of others, 577 Personal risks defined, disability, 203–205 management objectives, 185–186 management steps, 185–186 managing, 184–207 medical expense exposure, 205 premature death, 186–201 superannuation, 201–203 unemployment, 205–207 Personal savings, in retirement planning, 348–349 Personal security accounts proposal, 222 Personal-producing general agents (PPGAs), 84 Persons insured, CPL, 515–521 PFFS plans, 412–413 Philadelphia Contributionship for the Insurance of Houses from Loss by Fire, 75 Physical damage coverage, 532, 560–564 See also Personal Automobile Policy aftermarket parts, 564 aviation insurance, 628 BAC, 622 collision coverage, 561 diminished value exclusion, 563 exclusions, 562–563 insuring agreement, 560–561 limit of liability—payment of loss, 564 loss other than by collision, 561 to non-owned autos, 561–562 purchasing, 571 transportation expense, 564 Physical examinations, 137 Physical hazards, Pittman v West American Insurance Company, 178 Plate glass coverage, 584 Point estimates, 37 Point-of-service (POS) plans, 381 Policies automobile, 550–572 cash payment, 172–173 cash value, 233 checklists, 28 commercial property coverage, 576 comprehensive major medical, 392–393 extra risk, 136 flood insurance, 485–487 homeowners, 446–476 indeterminate premium, 295–296 individual health insurance, 370–371 life insurance, 257–297 major medical, 379, 391–393 Medigap, 409–411 package, 76 rated, 136 retrospectively rated, 143 umbrella liability, 527–528 valued, 171–172 Policy forms, regulation, 109–110 Policy limits (CGL), 616 Policy loan provision, 276 Policy period provision homeowners, 460 PAP, 565 Policy reserves, 152–153 Policy-based IGM, 296 Policyholders, treatment of, 66–67 Policyholders’ surplus, 148 Pollutant cleanup/removal, commercial property, 578 Pollution exclusion (CGL), 613 Pollution Liability Coverage Form (CGL), 618–619 Pool money concept, 418 Pools beach and windstorm, 89 distressed and residual-risk, 88–90 nuclear energy, 86 risk reduction through, 35–41 risk-sharing, 71 workers compensation assigned-risk, 89 Portability health insurance, 388 pensions, 342 Portfolio average method, 296 Portfolio commercial coverages, 575–584 Post Office insurance coverages, 81 Postage stamps, 490 SUBJECT INDEX Postretirement death benefits, 337 Postselection underwriting, 138 Power failure exclusion (HO-3), 465–466 Preadmission certification programs, 390 Preexisting condition exclusions, 388 Preferred provider organizations (PPOs), 381, 412 Preferred-risk classification, 136 Premature death estate liquidity need, 195–197 human life value, 186–189 identifying risks, 186 measuring risks, 186–195 needs analysis, 189–195 risks, 186–201 trusts, 200–201 Premature withdrawals, 321, 338 Premises rented to others endorsement (CPL), 525 Premium tax, 161 Premiums basic, 143 defined, 131 earned, 149, 154 gross, 131 level, 234–235 Medigap, 411 net single, 236 payment options, 308 pure, 131 universal life insurance, 239 Preretirement death benefits, 337 Prescription drug coverage, Medicare, 413–415 Prescription drug insurance, 395 Present value, 187 of future benefits, 257 of future claims, 254 Presumptive disability, 368–369 Prevailing commissioners standard table, 236 Price competition, 91–92 Primary beneficiary, 263 Principles-based reserving, 153 Priority rankings based on severity, 29 for insurance expenditures, 61–62 probability and, 29–30 Privacy, Gramm-Leach-Bliley Act and, 110–111 Private insurance, 45–48 classifications, 45 defined, 45 health, 45–46 history, 74–76 industry, 73–94 life, 45 property and liability, 46–48 Privatization, Social Security, 220–221, 223 Pro rata clause, contracts, 173 Probability classifications, 30 determining, 36–38 distribution, 37 empirical, 37 estimates, 37, 38–40 interpretations, 36 parameters, 37 point estimates, 37 a posteriori, 37 a priori, 36–37 sample statistics, 37 Probability theory, 36–38 Processing and storage floaters, 594 Product Liability Risk Retention Act of 1986, 663 Product recall exclusion (CGL), 614 Production function, 135 Professional liability insurance, 526–527 Professional liabliity exclusion (CPL), 518 Profit-sharing contracts, 136 Profit-sharing plans, 332 Property and liability insurance, 46–48 competition, 93 distribution systems, 84–85 federal income taxes, 162 insurable interest in, 169–170 rates, regulation, 112–114 reinsurance in, 155–156 types of, 46–48 Property and liability insurers combined ratio, 152 earned premiums concept, 149 expenses incurred, 150 financial operations, 148–152 incurred losses, 149–150 investment results, 151–152 summary of operations, 150–152 Property Casualty Insurers Association of America, 90 Property Claim Services (PCS) options, 159 Property crime, 664 Property damage boiler and machinery insurance, 588–589 impaired property exclusion (CGL), 614 Property insurance See also Homeowners policies Businessowners Policy, 601–602 buying, 492–494 commercial, 574–602 defined, 46 flood insurance, 483–487 form selection, 492–493 inland marine coverage (individual), 487–492 mobilehome program, 482–483 monoline fire dwelling program, 480–482 pricing and cost considerations, 492 title insurance, 494–495 Property owned by an insured exclusion (CPL), 520 Property owner obligations to others, 504–505 children, 505 I-19 invitees, 505 licensees, 504–505 trespassers, 504 Property rented to or in care of the insured exclusion (CPL), 520 Property risks, Proportional coverage, trade credit insurance, 639 Prospective payment system (PPS), 406 Prudent man rule, 500 Public adjusters, 140 Public benefit guarantee programs, 51–53 defined, 45 FDIC, 51, 52 as insurance, 53 NCUA, 52 PBGC, 52–53 SIPC, 52 state insurer insolvency funds, 53 unsatisfied judgment funds, 53 Public choice theory of regulation, 100, 119 Public Law 15, 104–105 Public official bonds, 637–638 Public Official Liability Policy (CGL), 619 Punitive damages, 501 Purchasing groups, 70, 115 Pure captives, 69 Pure life annuities, 321 Pure no-fault, 539 Pure premium, 131 Pure risk, 6–8 classifications, 7–8 defined, growing number and variety of, 8–9 Qualified Automatic Contribution Arrangement, 333 Qualified Disabled and Working Individual (QDWI), 414, 415 Qualified Individual (QI), 414 Qualified Medicare Beneficiary (QMB), 414 Qualified profit-sharing plans, 332 Qualified retirement plans, 328–329 See also Pensions advantages to younger/older employees, 330 benefit limits, 335–336 career average salary, 330 cash balance, 331–332 commencement of benefits, 337–338 contribution limits, 335–336 DB(k), 334 death benefits, 339 defined, 328 defined benefit, 329–330 defined contribution, 329, 331 disability benefits, 337 distribution requirements, 337–338 employee stock ownership plan (ESOP), 333 employer-sponsored, 329 estate taxes, 339 I-20 Qualified retirement plans (continued) federal regulation, 328–329 final average salary, 329–330 forfeitures, 330–331 installment distributions, 338–339 investment risk, 330 IRAs, 329, 339–343 job mobility, 330 Keogh, 333 loan transaction limitations, 339 lump-sum distributions, 339 noncontributory, 328 period-certain payments, 337 permitted disparity, 336 postretirement death benefits, 337 premature withdrawals, 338 preretirement death benefits, 337 profit-sharing, 332 protection for inflation, 331 qualification requirements, 329 required joint-and-survivor option, 337 requirements, 334–336 in retirement planning, 347–348 savers tax credit, 336–337 Section 401(k), 332–333, 336 Section 403(b), 334, 336 Section 457, 334 SIMPLE, 334 simplified employee pension (SEP), 333–334, 336 tax treatment, 328 taxation on distributions, 338–339 vesting requirements, 334–335 Quality competition, 92 Quantitative performance standards, 31 Quarter of coverage, OASDHI, 211 Quota share treaty, 155–156 Railroad Protective Liability Coverage (CGL), 618 Railroad retirement, disability, and unemployment programs, 50 Rain insurance, 587 Randomness, 43–44 Range, 38 Rate maps, flood insurance, 484 Rated policies, 136 Ratemaking catastrophe modeling and, 134 defined, 131 life insurance, 248–255 Rates adequacy, 111 class, 132 defined, 130, 131 file-and-use laws, 113 flex-rating, 114 gross, 131 individual, 132–133 informational filing, 113–114 level, adjusting, 133–134 life insurance, 111–112 no filing approach, 113 premiums versus, 131 SUBJECT INDEX property and liability, regulation, 112–114 regulation, 111–114 requirements, 111 types, 132–135 Rating automobile insurance, 543–547 categories, 65 experience, 133 gender-neutral, 121–122 judgment, 132 organizations, 88 retrospective, 133 retrospective plans, 143–144 schedule, 132 social, 121 Reasonable expectations, 180 Reasonable repairs, 456 Reciprocals, 78–79 attorney-in-fact, 79 defined, 78 Recovered property provision, homeowners Section I, 460 Recurrent disability, 365 Redefining, 122–123 Reformation, 176 Refrigerated property coverage (HO Section I), 475 Regular medical expense, 391 Regulation, 98–119 See also Insurance industry areas, 105–119 capture theory, 100 changes in, 657–660 competence of agents, 110 consumer complaints and assistance, 110 current, 105 defined, 99 destructive-competitive rationale, 101–102 economic theories, 99–101 examination of companies, 107 by executive branch, 105 federal, arguments favoring, 115–116 federal control varieties, 117 Financial Analysis Solvency Tracking (FAST), 106 global influences, 651 goals, 102 government approach, 99–101 history, 102–105 insolvencies, dealing with, 108 by judicial branch, 105 by legislative branch, 105 licensing of companies, 106 life insurance rates, 111–112 market, 109–111 market failure theory, 99–100 policy forms, 109–110 property and liability rates, 112–114 public choice theory, 100, 119 purchasing groups, 115 of rates, 111–114 rationales, 101–102 reasons for, 98–99 reporting and financial analysis, 106, 206 of reserves, 107–108 risk-based capital (RBC), 106–107 risk-retention groups, 114–115 solvency, 106–109 state, arguments favoring, 116–117 state, continuation of, 117 state insolvency funds, 108 state versus federal, 115–119 twisting, 109 unfair practices, 108–109 vested-in-the-public-interest rationale, 101 Rehabilitation benefits, workers compensation, 228 Rehabilitation provision, 368 Reinstatement, 265–266 Reinsurance, 155–161 automatic treaty, 155 defined, 155 European countries, 650 excess-loss treaty, 156 facultative, 155 facultative treaty, 155 functions of, 156–157 in global sector, 650–651 in life insurance, 156 NAIC modernization proposal, 650 nature of, 155 pooling, 156 in property and liability insurance, 155–156 quota share treaty, 155–156 risk-financing alternatives to, 157–161 surplus treaty, 156 treaty types, 155 Reinsurance pools, 537–538 Reinsurance Supervisory Review Department (RSRD), 650 Released bill of lading, 625 Remaindermen, 200 Removal bonds, 637 Renewable term insurance, 237 Renewal and conversion provisions, 238 Rental unit coverage (HO-6), 473 Replacement cost coverage, 450–451 guaranteed, 451 less depreciation, 450 personal property, 452–453 Replacement cost coverage (BPP), 578 Replevin bonds, 636 Reporting forms, commercial property insurance, 583–584 Reputational risk, 15 Required distributions, 356 Required insured status, OASDHI, 214 Reserve fund accumulation, Reserves aggregate, 235 asset valuation, 153 defined, 148 interest maintenance, 153 life insurance policies, 255–257 SUBJECT INDEX loss, 149–150 policy, 152–153 on supplementary contracts, 153 for unpaid claims, 153 Residual disability benefit, 367–368 Resource-Based Relative Value Schedule (RBRVS), 406, 408 Respite care benefit, 418 Respondeat superior, 503 Respondentia contracts, 74 Resumption of operations provision, 585 Retired lives reserve, 429 Retirement benefits, 212–213 children’s benefit, 213 family maximum, 213 mother’s or father’s benefit, 213 spouse’s benefit, 213 Retirement planning accumulation, 353–354 aggregate need estimation, 350–351 annuities, 349 distribution management, 354–358 funding sources, 347–349 illustrated summary, 352–353 income projection, 351–352 inflation-adjusted need projection, 353 installment distributions, 356 minimum distribution option, 356 needs estimation, 350–353 nonvariable annuities, 357 pension maximization, 358 personal savings, 348–349 plan construction, 349–358 process overview, 346–349 profit-sharing plans, 347–348 qualified pensions, 347–348 required distributions, 356 resources inventory, 351–352 single/joint-life annuities, 357 Social Security in, 347 steps, 347 unmet need, 352 urgency deficit, 349 variable annuity, 356–357 Retirement risk, 202 alternatives, 346 annuity principle, 346 causes, 346 disability and, 374 insufficient funds, 346 managing, 345–358 overview, 345–349 Retirement security, 647 Retroactive date, claims-made form, 616 Retrospective rating, 133, 143–144 Return-of-cash-value policy, 292–293 Return-of-premium policy, 292–293 Reversionary annuities, 324 Revocable beneficiary, 263–264 Riot or civil commotion peril, 469 Risk accommodation, 137 analysis questionnaires, 28 avoidance, 18 burden of, characteristics as tool determinant, 60 classifications, 5–6 compliance, 15 concept, 1–8 credit, 15 critical, 29 current definitions, defined, definition, this book, 2–3 degree of, 4–5 detrimental effects, dynamic, from failure of others, 7–8 fundamental, hazards versus, important, 29 insurable, 21 liability, life-contingency, 352 liquid, 15 market, 15 operational, 15 outcomes and, particular, peril versus, personal, 7, 184–207 preferred, 136 problem of, 1–11 property, pure, 6–7, 8–9 reputational, 15 retirement, 202, 345–358 speculative, 6–7, standard, 136 static, strategic, 15 substandard, 136 uncertainty relationship, 3, unimportant, 29 Risk and Insurance Management Society (RIMS), 15 Risk control, 18–19, 21 avoidance, 18 defined, 17 reduction, 18–19 Risk evaluation defined, 28 priority ranking based on severity, 29 probability and priority rankings, 29–30 Risk financing, 19–20 cost, 63 defined, 17–18 retention, 19–20 tax considerations, 63–64 transfer, 20 Risk identification combination approach, 28 techniques, 27 tools, 27–28 I-21 Risk management, 10–11, 12–31 applications, 55–71 audits, 31 as business function, 20–23 contribution to organization, 21–22 costs, 31 decision implementation, 30 defined, 12–13, 16–17 enterprise, 15–16 essence, 24 evaluation, 28–30 evaluation and review, 30–31 expert systems, 28 history of, 13–15 individual and, 24 insurance management versus, 21 misconception, 23–24 objectives, 24–26 opportunities, 668 philosophy, 15 policy, 25–26 primary goal, 25 process, 24–31 risk exposure identification, 26–27 risk identification, 27 risk treatment device, 30 rules, 58–60 as “scientific approach,” 16–17 tools, 17–20 Risk management decisions, 55–61 decision theory and, 56–58 rules, 58–60 utility theory and, 56 Risk Management in the Business Enterprise (Mehr and Hedges), 24 Risk managers, 12, 13, 668 defined, 22 financial, 16 financial orientation, 23 focus of, 24 insurance manager versus, 21 job of, 22–23 position in organization, 23 Risk reduction, 18–19 retention and, 206–207 as special case, 60–61 through pooling, 35–41 Risk retention, 19–20 Risk Retention Act of 1986, 70–71 Risk sharing, 34–35, 71 Risk transfer, 34–35 as essential insurance feature, 41–42 types of, 20 Risk-based capital (RBC), 106–107 Risk-retention groups, 70 state regulation, 663 Rollovers, 313–314 Roth contributions, 336 Roth IRAs, 342–343 Rules of risk management, 58–60 I-22 Safeco Insurance Company v Gonacha, 177–178 Sales opportunities, 667 Sample statistics, 37 Savings bank life insurance, 245 SBA surety bond program, 81–82 Schedule bonds, 597 Schedule rating, 132–133 Scheduled personal property endorsement (HO Section I), 476 Second surgical opinion programs, 390 Second-injury funds, 228 Second-to-die policy, 290 Section 401(k) plans, 332–333, 647 defined, 332 employee participation, 333 IRC treatment, 333 Roth contributions to, 336 Section 403(b) plans, 334, 336 Section 457 plans, 334 Securities Investor Protection Corporation (SIPC), 52 Securitizations, 157–158 accounts receivable, 640 defined, 157 life, 158–159 Security activities, 20 health and retirement, 644–647 Self-directed annuities, 325 Self-insurance, 44–45, 67–69 defined, 67 disadvantages, 68–69 growth, 68 reasons for, 68 Separate accounts, 438 Servicemen’s and veterans’ life insurance, 82 Servicemen’s Group Life Insurance (SGLI), 246 Sexual molestation or abuse exclusion (CPL), 519 Shared markets automobile, 89 defined, 88 subsidies and, 120 Short-term disability insurance, 362–363 Silverware, 489 SIMPLE plans, 334, 338 Simplified employee pension (SEP) plans, 333–334, 336 Single-payer plan, 398 Single-premium annuities, 320, 357 Single-premium deferred annuities (SPDA), 323 Single-premium life, 294 Sinkhole collapse (HO Section I), 475 Skilled nursing facility care (Medicare), 407 Small Business Job Protection Act of 1996 (SBJPA), 334 Smoke peril, 469 SUBJECT INDEX Snowmobile endorsement CPL, 526 PAP, 569 Snowmobile Policy, 567 Social insurance, 48–51 defined, 48–49 disability insurance coordination with, 369–370 history of, 48 Medicare, 50 Old-Age, Survivors, Disability, and Health Insurance Program (OASDHI), 50, 210–223 programs, 209–228 railroad retirement, disability, and unemployment programs, 50 state compulsory temporary disability funds, 50–51 substitute rider, 370 supplement rider, 370 unemployment, 50 in U.S., 49 workers compensation, 49, 223–228 Social rating, 121 Social Security bailout plan, 219 Bush Commission to Strengthen, 222 funding problem, 219 future, 645 privatizing, 220–221, 223 program See Old-Age, Survivors, Disability, and Health Insurance Program (OASDHI) in retirement planning, 347 system, 645 Social Security Act, 50 Solvency regulation, 106–109 South-Eastern Underwriters Association (SEUA) case, 104 Special agents, 135 Special damages, 501 Special life insurance forms, 289–297 Special Multi-Peril (SMP) Program, 601 Specialized annuities, 323–326 Specified Low-Income Medicare Beneficiary (SLMB), 414, 415 Speculative risk defined, gain/profit possibility, pure risk versus, Spendthrift clause, 283 Split-dollar plan, 442–443 Spoilage damage, 589 Spousal impoverishment provisions, Medicaid, 422–423 Spouse’s benefit, OASDHI, 213 Standard deviation, 39, 40 Standard Nonforfeiture Law, 274 Standard Property Policy, 584 Standard risks, 136 Standard terminations, 438 Standard Voluntary Compensation and Employers Liability Coverage Endorsement, 608 State Children’s Health Insurance Program (SCHIP), 384, 646 State health insurance plans, 89–90 State insurer insolvency funds, 53 State regulatory authority erosion, 658–659 State-versus-federal regulation, 161 Static risks, Statutory accounting admitted/nonadmitted assets, 147 defined, 146 GAAP versus, 147–148 matching of revenue and expenses, 148 requirements, 146–148 valuation of assets, 147–148 Stop-loss insurance, 430 Stranger-owned life insurance (STOLI) See also owned life insurance Strategic risk, 15 Street reinsurance, 155 Strike, Riot, and Civil Commotion (SR & CC) clause, 591 Subrogation clause, 174, 461 Subsidies, 120–125 cross-subsidies, 126–127 government insurance programs, 121 income redistribution effects, 124–125 mandated underwriting losses, 120–121 redefining, 122–123 shared markets, 120 social pricing, 121–122 Substandard risks, 136 Suicide clause, 266 Suit against insurer, homeowners Section I, 459 Superannuation accumulation need estimation, 202–203 defined, 201 outliving retirement accumulation, 202 risks, 201–203 Supplemental Extended Reporting Period Coverage (CGL), 617 Supplemental medical insurance (SMI), 405 Supplementary contract reserves, 153 Supplementary payments, PAP, 556–557 Supply contract bond, 635 Surety bonds, 47–48, 634–638 See also Bonds categories, 635 contract bonds, 635 defined, 47 insurance versus, 634–635 judicial bonds, 635–637 license and permit, 637 lost instrument bonds, 638 public official bonds, 637–638 SBA program, 81–82 workers compensation bonds, 638 Surplus drain, in life insurance, 154–155 SUBJECT INDEX Surplus notes, 78 Surplus treaty, 156 Surrender cost index, 306–307 Survivor income benefit insurance (SIBI), 429 Survivors’ benefits, OASDHI, 210, 213–214 children’s benefit, 213 lump-sum death benefit, 213 mother’s or father’s benefit, 213 parents’ benefit, 214 required insured status, 214 widow’s or widower’s benefit, 213–214 Survivorship annuities, 324 Survivorship whole life, 290 Suspension, boiler and machinery insurance, 590 Sustained coverage, dishonesty insurance, 596 Syndicates, 86 System for Electronic Rate and Form Filing (SERFF), 118 Systems safety, 14 Tail coverage, 617 Tax Equity and Fiscal Responsibility Act (TEFRA), 432 Tax Reform Act of 1986 (TRA-86), 162 Tax treatment annuities, 321–323 captive insurance companies, 69–70 disability income benefits, 375 IRAs, 341–342 life insurance, 235–236 qualified retirement plans, 328 Taxable estate, 197, 199 Taxation of disability income, 375 on distributions, 338–339 insurance companies, 161–162 life insurance proceeds, 269–271 of OASDHI benefits, 216–218 Taxes federal income, 161 generation-skipping transfer, 198 gift, 198 health care costs and, 396 Hospital Insurance, 211 Old-Age, Survivors’, and Disability, 211–212 in premium, 91 regulator imposition of, 100 state premium, 161 Tax-free exchanges, 313–314 Tax-free rollovers, 314 Tax-qualified long-term care insurance (TQ-LTCI), 420 Teachers Insurance and Annuity Association of America (TIAA), 324 Technical and Miscellaneous Revenue Act of 1988, 294 Telephone Consumer Protection Act (TCPA), 614 Temporary life annuity, 319 Term insurance, 233, 237–238 See also Life insurance advantages/disadvantages, 238 buying, and investing difference, 300–302 convertible, 237–238 defined, 233 extended, 275–276 group, 428 renewable, 237 renewal and conversion privileges, 238 reserves, 255 as temporary protection, 301 yearly renewable, 233 Terrorism, 654–655 Terrorism Risk Insurance Act (TRIA), 654, 655 Terrorism Risk Insurance Extension Act (TRIEA), 82, 654 Terrorism Risk Insurance Revision And Extension Act (TRIREA), 655 Testamentary trust, 200 Theft coverage (HO-5), 472 employee, 598–599 exclusions (HO-3), 469–470 inside the premises, 599 nonemployee, 599 off-premises exclusions (HO-3), 470 peril (HO-3), 469 Theft Coverage Endorsement (DP 04 72), 481–482 Third-party administrator (TPA), 430 Third-party coverage, 513 Time clause, 282–283 Time value of money, 187 Title insurance, 494–495 defined, 47 Torrens system and, 494–495 Title VII of Civil Rights Act of 1964, 433 Tontine policy, 103 Top-heavy plans, 434 Torrens system, 494–495 Tort feasor, 498 Tort reform, 508–509 automobile insurance and, 538–543 class action, 509 state level, 508 Torts actions, survival of, 507 assumption of risk, 505–506 defined, 498 system changes, 655–656 unintentional, 498 Total permanent disability, workers compensation, 227 Total temporary disability, workers compensation, 227 Trade credit insurance, 638–640 collection service, 640 domestic credit insurance, 638 I-23 export credit insurance, 638 proportional versus excess-of-loss coverage, 639–640 in securitization of accounts receivable, 640 specific-account versus whole-turnover coverage, 639 Trade profit, 152 Traditional IRAs, 340–342 See also Individual retirement accounts (IRAs) eligibility, 340 nondeductible contributions, 341 tax treatment, 341–342 Trailer interchange coverage, 625 Transportation coverages, 590–595 inland marine insurance, 592–595 ocean marine insurance, 590–591 Transportation expense, Personal Automobile Policy, 564 Transportation forms, 592, 593 Transportation/Moving Endorsement (MH 04 03), 483 Travelers Insurance Company, 75 Trees, shrubs, plants, and lawn, 456 Trespassers, property owner liability, 504 TripSensors, 546 Truckers Coverage Form, 623–625 bobtailing, 624–625 deadheading, 624–625 defined, 624 trailer interchange, 625 truck leasing, 624 Trust fund plans, 436–438 Trusts defined, 200 irrevocable life insurance (ILIT), 201 living, 201 testamentary, 200 Twisting, 109 Two-tier annuities, 323 Uberrimae fidei, 176 Umbrella liability policies, 527–528 commercial, 629–630 cost, 528 coverage under, 630 defense coverage, 629–630 defined, 527, 628 exclusions, 528, 630 functions, 528, 629 qualification, 527–528 underlying requirements, 629 Unallocated funding instruments, 436–438 Uncertainty, risk relationship, 3, Uncontrolled forms, 593 Underground Storage Tank (UST) Liability Policy (CGL), 619 Underinsured motorist coverage, 560 Underwriters, 667 defined, 75 desk, 136 field, 136 I-24 Underwriting, 135–139 agent role in, 136 cash-flow, 93–94 credit scoring, 138–139 defined, 135 disability income, 363–364 goal, 135 importance, 135 information sources, 137 mandated losses, 120–121 policy, 136 postselection, 138 process of, 136–137 syndicates, 86 Unearned premium reserve, 149 Unemployment insurance, 50 benefits, 206 eligibility of benefits, 205–206 retention and reduction, 206–207 state programs, 205–206 Unemployment risk, 205–207 Unfair practices, regulation, 109 Unified estate-gift tax, 198 Uniform Accident and Sickness Policy Provision Law (UPPL), 371 Uniform Producer Licensing Model Act, 118 Unilateral contracts, 175 Unimportant risks, 29 Uninsurables, 136 Uninsured drivers, 535–536 Uninsured motorist coverage, 532, 558–560 See also Personal Automobile Policy BAC, 622 basis for settlement, 560 defined, 558 exclusions, 559 insuring agreement, 558–560 limitations on payment, 559–560 persons injured, 559 purchasing, 571 Uninsured premises exclusion (CPL), 518–519 Unintentional lapses, long-term care insurance, 419 Unintentional risk retention, 19 Unintentional torts, 498 United States Aircraft Insurance Group (USAIG), 86 U.S Longshoremen’s and Harbor Workers Compensation Act (LHWCA), 608 Unit-owner’s building items (HO-6), 473 Universal life insurance, 232, 239–240 See also Life insurance benchmarks, 312–313 changes in amount, 284 cost factors, 311–312 death benefit provision, 284–286 defined, 239 disability income rider, 280 group, 429 index, 286 interest, 311 SUBJECT INDEX introduction, 239 loading, 312 market share, 240 mortality, 312 premium and cost of insurance provision, 284 premiums, 239 provisions, 284–286 with secondary guarantees, 286 shopping for, 311–313 Unpaid claims reserves, 153 Unrated bonds, 304 Unsatisfied judgment funds, 53 Unwritten law, 180 Urgency deficit, 349 Usual, customary, and reasonable (UCR) charges, 391 Utility interruption, boiler and machinery insurance, 589 Utility theory, 56 Utmost good faith concealment, 178–179 contracts of, 176–180 defined, 176 misrepresentation, 176–178 parol evidence rule, 180 waiver and estoppel, 179 warranties, 178 Valuable papers insurance, 594–595 Value maximization objectives, 25 Valued policy, 171–172 laws, 172 principle, 172 Vandalism and malicious mischief peril, 469 Variable annuities, 320 See also Annuities accumulation units, 325, 326 defined, 324 with guaranteed benefits, 325–326 history, 324–325 operation of, 325 in retirement planning, 356–357 Variable Annuity Life Insurance Company (VALIC), 324–325 Variable life insurance, 232, 240 benchmarks, 312–313 cost factors, 311–312 interest, 311 loading, 312 mortality, 312 shopping for, 311–313 universal, 232, 240 Variance, 38 Vehicles peril, 469 Vested-in-the-public-interest rationale, 101 Vesting, qualified retirement plans, 334–335 Veterans’ Group Life Insurance (VGLI), 246 Veterans’ life insurance, 246 Viatical settlement, 310 Viatication, 421–422 Vicarious liability, 503, 533 Void contracts, 168 Voidable contracts, 168 Volcanic eruption peril, 471 Volcanic eruption period, homeowners Section I, 460 Voluntary compensation insurance, 608 Voluntary risk retention, 19 Waiting period, 364 Waiver or change-of-policy provisions, 460 defined, 179 of premium, 369 of premium and accidental death benefit provision, 281–282 War clause, 267 War exclusion CGL, 613 CPL, 519 HO-3, 466 Warehouse-to-warehouse clause, 591 Warranties, 178 Water back up and sump overflow (HO Section I), 475 Water damage exclusion (HO-3), 465 Water or steam peril, 470 Watercraft endorsement (CPL), 526 Watercraft insurance, 490–492 Boatowners Policy, 491 medical payments coverage, 491–492 Watercraft liability exclusion (CPL), 516 Weight of ice, snow, or sleet peril, 470 Whole-life insurance, 232, 235, 238–239 See also Life insurance continuous-premium, 239 graded-premium, 293–294 limited-pay, 239 modified, 293 reserves, 255, 256 straight, 238–239 survivorship, 290 Widower’s benefit, OASDHI, 213 Widow’s benefit, OASDHI, 213 Windstorm peril, 468–469 Wisconsin State Life Insurance Fund, 245 Workers Compensation and Employers Liability Policy, 606–608 Workers compensation bonds, 638 Workers compensation exclusion CGL, 613 CPL, 520, 522 Workers compensation insurance, 223–228 See also Social insurance assigned-risk pools, 89 assumption-of-risk doctrine and, 224 benefits, 226–228 casual employees and, 226 contributory negligence and, 224 cost of, 225 death benefit, 228 defined, 46–47, 223 employers liability and, 606–608 I-25 SUBJECT INDEX historical background, 223–224 indemnity, 225 injuries covered, 226 liability determination, 225 medical expense benefits, 227 occupational disease, 226 partial permanent disability, 227–228 partial temporary disability, 227 periodic payments, 225 persons covered, 226 principles, 224–226 rationale, 224 rehabilitation benefits, 228 requirement, 225–226 second-injury funds, 228 as social insurance, 49 total permanent disability, 227 total temporary disability, 227 ... Implementation of the Decision 30 Evaluation and Review 30 The Concept of Risk Current Definitions of Risk Our Definition of Risk Uncertainty and Its Relationship to Risk The Degree of Risk Risk Distinguished... the insurance product and the use of insurance within the risk management framework The traditional fields of life insurance, health insurance, property and liability insurance, and social insurance. .. SECTION ONE RISK, INSURANCE, AND RISK MANAGEMENT Chapter The Problem of Risk Identifying Risk Exposures 26 Evaluating Risks 28 Consideration of Alternatives and Selection of the Risk Treatment