Principles of risk management and insurance george e rejda, michael j mcnamara

PRINCIPLES OF RISK MANAGEMENT AND INSURANCE The Pearson Series in Finance Bekaert/Hodrick International Financial Management Goldsmith Consumer Economics: Issues and Behaviors McDonald Derivatives Markets Berk/DeMarzo Corporate Finance* Haugen The Inefficient Stock Market: What Pays Off and Why McDonald Fundamentals of Derivatives Markets Berk/DeMarzo Corporate Finance: The Core* Mishkin/Eakins Financial Markets and Institutions Berk/DeMarzo/Harford Fundamentals of Corporate Finance* Haugen The New Finance: Overreaction, Complexity, and Uniqueness Brooks Financial Management: Core Concepts* Holden Excel Modeling in Corporate Finance Nofsinger Psychology of Investing Copeland/Weston/Shastri Financial Theory and Corporate Policy Holden Excel Modeling in Investments Ormiston/Fraser Understanding Financial Statements Dorfman/Cather Introduction to Risk Management and Insurance Hughes/MacDonald International Banking: Text and Cases Pennacchi Theory of Asset Pricing Eiteman/Stonehill/Moffett 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Financial Derivatives Fabozzi/Modigliani Capital Markets: Institutions and Instruments Fabozzi/Modigliani/Jones Foundations of Financial Markets and Institutions * denotes MyFinanceLab titles Titman/Keown/Martin Financial Management: Principles and Applications* Titman/Martin Valuation: The Art and Science of Corporate Investment Decisions Weston/Mitchel/Mulherin Takeovers, Restructuring, and Corporate Governance Log onto www.myfinancelab.com to learn more Principles of RISK MANAGEMENT AND INSURANCE George E Rejda Michael J McNamara TWELFTH EDITION Boston Columbus Indianapolis New York San Francisco Upper Saddle River Amsterdam Cape Town Dubai London Madrid Milan Munich Paris Montréal Toronto Delhi Mexico City São Paulo Sydney Hong Kong Seoul Singapore Taipei Tokyo Editor in Chief: Donna Battista Acquisitions Editor: Katie Rowland Editorial Project Manager: Emily Biberger Editorial Assistant: Elissa Senra-Sargent Director of Marketing: Maggie Moylan Leen Director of Production: Erin Gregg Managing Editor: Jeff Holcomb Associate Managing Editor: Karen Carter Senior Operations Supervisor: Evelyn Beaton Senior Operations Specialist: Carol Melville Art Director, Text and Cover Design: Jonathan Boylan Permissions Specialist: Samantha Graham Cover Photo: Shutterstock/Chudakov Media Director: Susan Schoenberg Full-Service Project Management: GEX Publishing Services Printer/Binder: Edwards Brothers Malloy Cover Printer: Lehigh-Phoenix Color/Hagerstown Credits and acknowledgments borrowed from other sources and reproduced, with permission, in this textbook appear on the appropriate page within text Copyright © 2014, 2011, 2008 by Pearson Education, Inc All rights reserved Manufactured in the United States of America This publication is protected by Copyright, and permission should be obtained from the publisher prior to any prohibited reproduction, storage in a retrieval system, or transmission in any form or by any means, electronic, mechanical, photocopying, recording, or likewise To obtain permission(s) to use material from this work, please submit a written request to Pearson Education, Inc., Permissions Department, One Lake Street, Upper Saddle River, New Jersey 07458, or you may fax your request to 201-236-3290 Many of the designations by manufacturers and sellers to distinguish their products are claimed as trademarks Where those designations appear in this book, and the publisher was aware of a trademark claim, the designations have been printed in initial caps or all caps Library of Congress Cataloging-in-Publication Data Rejda, George E Principles of risk management and insurance / George E Rejda, Michael J McNamara Twelfth edition pages cm Includes index ISBN 978-0-13-299291-6 (casebound) Insurance Risk (Insurance) Risk management I McNamara, Mike II Title HG8051.R44 2014 368 dc23 2012049473 10 ISBN 10: 0-13-299291-4 ISBN 13: 978-0-13-299291-6 CONTENTS Preface PART ONE CHAPTER xv BASIC CONCEPTS IN RISK MANAGEMENT AND INSURANCE RISK AND ITS TREATMENT Definitions of Risk Chance of Loss Peril and Hazard Classification of Risk Major Personal Risks and Commercial Risks Burden of Risk on Society 12 Techniques for Managing Risk 12 Summary 15 Questions 17 ■ ■ Key Concepts and Terms 16 ■ Review Questions 16 ■ Application Internet Resources 18 ■ Selected References 18 ■ Notes 18 Case Application 15 INSIGHT 1.1: FINANCIAL IMPACT ON DISABLED INDIVIDUALS CAN BE STAGGERING, SAYS NEW STUDY CHAPTER INSURANCE AND RISK 19 Definition of Insurance 20 Basic Characteristics of Insurance 20 Characteristics of an Ideally Insurable Risk 22 Two Applications: The Risks of Fire and Unemployment Adverse Selection and Insurance 26 Insurance and Gambling Compared 26 Insurance and Hedging Compared 26 Types of Insurance 27 Benefits of Insurance to Society 31 Costs of Insurance to Society 32 24 Summary 35 ■ Key Concepts and Terms 36 ■ Review Questions 36 ■ Application Questions 36 ■ Internet Resources 37 ■ Selected References 37 ■ Notes 37 Case Application 35 INSIGHT 2.1: INSURANCE FRAUD HALL OF SHAME—SHOCKING EXAMPLES OF INSURANCE FRAUD 33 INSIGHT 2.2: DON’T THINK INSURANCE FRAUD IS COMMITTED ONLY BY HARDENED CROOKS 34 Appendix Basic Statistics and the Law of Large Numbers CHAPTER INTRODUCTION TO RISK MANAGEMENT Meaning of Risk Management 44 Objectives of Risk Management 44 Steps in the Risk Management Process 45 39 43 v VI CONTENTS Implement and Monitor the Risk Management Program Benefits of Risk Management 55 Personal Risk Management 55 54 Summary 58 ■ Key Concepts and Terms 59 ■ Review Questions 59 ■ Application Questions 59 ■ Internet Resources 60 ■ Selected References 61 ■ Notes 61 Case Application 57 INSIGHT 3.1: ADVANTAGES OF SELF INSURANCE 50 CHAPTER ADVANCED TOPICS IN RISK MANAGEMENT 62 The Changing Scope of Risk Management 63 Insurance Market Dynamics 68 Loss Forecasting 71 Financial Analysis in Risk Management Decision Making 76 Other Risk Management Tools 78 Summary 81 ■ Key Concepts and Terms Questions 82 ■ Internet Resources 82 ■ 82 ■ Review Questions 82 ■ Application Selected References 83 ■ Notes 84 Case Application 80 INSIGHT 4.1: THE WEATHER DERIVATIVES MARKETS AT CME GROUP: A BRIEF HISTORY 73 PART TWO CHAPTER THE PRIVATE INSURANCE INDUSTRY TYPES OF INSURERS AND MARKETING SYSTEMS 86 Overview of Private Insurance in the Financial Services Industry 87 Types of Private Insurers 88 Agents and Brokers 93 Types of Marketing Systems 95 Group Insurance Marketing 98 Summary 99 ■ Key Concepts and Terms 99 ■ Review Questions 99 ■ Application Questions 100 ■ Internet Resources 100 ■ Selected References 101 ■ Notes 102 Case Application 98 INSIGHT 5.1: SHOW ME THE MONEY—HOW MUCH DO INSURANCE SALES AGENTS EARN? 94 CHAPTER INSURANCE COMPANY OPERATIONS Insurance Company Operations 104 Rating and Ratemaking 104 Underwriting 105 Production 108 Claims Settlement 108 Reinsurance 110 Alternatives to Traditional Reinsurance 115 Investments 116 Other Insurance Company Functions 117 103 CONTENTS VII Summary 119 ■ Key Concepts and Terms 119 ■ Review Questions 119 ■ Application Questions 120 ■ Internet Resources 121 ■ Selected References 121 ■ Notes 122 Case Application 118 INSIGHT 6.1: BE A SAVVY CONSUMER—CHECK THE INSURER’S CLAIMS RECORD BEFORE YOU BUY 111 CHAPTER FINANCIAL OPERATIONS OF INSURERS 123 Property and Casualty Insurers 124 Life Insurance Companies 130 Rate Making in Property and Casualty Insurance 131 Rate Making in Life Insurance 135 Summary 136 ■ Key Concepts and Terms 137 ■ Review Questions 137 ■ Application Questions 138 ■ Internet Resources 138 ■ Selected References 139 ■ Notes 139 Case Application 136 INSIGHT 7.1: HOW PROFITABLE IS THE PROPERTY AND CASUALTY INSURANCE INDUSTRY? 129 CHAPTER GOVERNMENT REGULATION OF INSURANCE Reasons for Insurance Regulation 142 Historical Development of Insurance Regulation 144 Methods for Regulating Insurers 145 What Areas Are Regulated? 146 State Versus Federal Regulation 151 Modernizing Insurance Regulation 156 Insolvency of Insurers 157 Credit-Based Insurance Scores 158 Summary 160 Questions 161 ■ ■ 141 Key Concepts and Terms 160 ■ Review Questions 161 ■ Application Internet Resources 162 ■ Selected References 163 ■ Notes 163 Case Application 159 INSIGHT 8.1: QUALITY OF INFORMATION PROVIDED TO CONSUMERS ON AUTO AND HOMEOWNERS INSURANCE VARIES WIDELY AMONG STATE INSURANCE DEPARTMENTS 143 INSIGHT 8.2: WIDE RATE DISPARITY REVEALS WEAK COMPETITION IN INSURANCE 153 PART THREE CHAPTER LEGAL PRINCIPLES IN RISK AND INSURANCE FUNDAMENTAL LEGAL PRINCIPLES 165 Principle of Indemnity 166 Principle of Insurable Interest 169 Principle of Subrogation 170 Principle of Utmost Good Faith 172 Requirements of an Insurance Contract 174 Distinct Legal Characteristics of Insurance Contracts Law and the Insurance Agent 177 175 VIII CONTENTS Summary 179 Questions 181 ■ ■ Key Concepts and Terms 180 ■ Review Questions 180 ■ Application Internet Resources 182 ■ Selected References 182 ■ Notes 182 Case Application 179 INSIGHT 9.1: CORPORATION LACKING INSURABLE INTEREST AT TIME OF DEATH CAN RECEIVE LIFE INSURANCE PROCEEDS 171 INSIGHT 9.2: AUTO INSURER DENIES COVERAGE BECAUSE OF MATERIAL MISREPRESENTATION 172 INSIGHT 9.3: INSURER VOIDS COVERAGE BECAUSE OF MISREPRESENTATIONS IN PROOF OF LOSS 173 CHAPTER 10 ANALYSIS OF INSURANCE CONTRACTS Basic Parts of an Insurance Contract 185 Definition of “Insured” 187 Endorsements and Riders 189 Deductibles 189 Coinsurance 190 Coinsurance in Health Insurance 192 Other-Insurance Provisions 192 184 Summary 195 ■ Key Concepts and Terms 195 ■ Review Questions 196 ■ Application Questions 196 ■ Internet Resources 197 ■ Selected References 197 ■ Notes 197 Case Application 194 INSIGHT 10.1: WHEN YOU DRIVE YOUR ROOMMATE’S CAR, ARE YOU COVERED UNDER YOUR POLICY? 188 PART FOUR CHAPTER 11 LIFE AND HEALTH RISKS LIFE INSURANCE 198 Premature Death 199 Financial Impact of Premature Death on Different Types of Families Amount of Life Insurance to Own 201 Types of Life Insurance 208 Variations of Whole Life Insurance 213 Other Types of Life Insurance 221 200 Summary 225 ■ Key Concepts and Terms 226 ■ Review Questions 226 ■ Application Questions 227 ■ Internet Resources 228 ■ Selected References 229 ■ Notes 230 Case Application 224 INSIGHT 11.1: WHY DOES THE UNITED STATES LAG BEHIND MANY FOREIGN COUNTRIES IN LIFE EXPECTANCY? 200 INSIGHT 11.2: CASH-VALUE LIFE INSURANCE AS AN INVESTMENT—DON’T IGNORE TWO POINTS 212 INSIGHT 11.3: BE A SAVVY CONSUMER—FOUR LIFE INSURANCE POLICIES TO AVOID CHAPTER 12 LIFE INSURANCE CONTRACTUAL PROVISIONS Life Insurance Contractual Provisions 232 Dividend Options 238 Nonforfeiture Options 239 Settlement Options 241 Additional Life Insurance Benefits 246 231 222 CONTENTS IX Summary 251 ■ Key Concepts and Terms 251 ■ Review Questions 252 ■ Application Questions 252 ■ Internet Resources 253 ■ Selected References 254 ■ Notes 254 Case Application 250 INSIGHT 12.1: IS THIS DEATH A SUICIDE? 234 INSIGHT 12.2: SELECTION OF THE BEST DIVIDEND OPTION IN A PARTICIPATING WHOLE LIFE POLICY 240 INSIGHT 12.3: ACCELERATED DEATH BENEFITS—REAL LIFE EXAMPLE 249 INSIGHT 12.4: WHAT IS A LIFE SETTLEMENT? EXAMPLES OF ACTUAL CASES 249 CHAPTER 13 BUYING LIFE INSURANCE 255 Determining the Cost of Life Insurance 256 Rate of Return on Saving Component 260 Taxation of Life Insurance 262 Shopping for Life Insurance 263 Summary 266 ■ Key Concepts and Terms 266 ■ Review Questions 267 ■ Application Questions 267 ■ Internet Resources 268 ■ Selected References 268 ■ Notes 268 Case Application 266 INSIGHT 13.1: BE CAREFUL IN REPLACING AN EXISTING LIFE INSURANCE POLICY 259 Appendix Calculation of Life Insurance Premiums CHAPTER 14 269 ANNUITIES AND INDIVIDUAL RETIREMENT Individual Annuities 276 Types of Annuities 277 Longevity Insurance 282 Taxation of Individual Annuities 283 Individual Retirement Accounts 284 Adequacy of IRA Funds 288 ACCOUNTS 275 Summary 291 ■ Key Concepts and Terms 292 ■ Review Questions 292 ■ Application Questions 292 ■ Internet Resources 293 ■ Selected References 293 ■ Notes 293 Case application 290 Case application 290 INSIGHT 14.1: ADVANTAGES OF AN IMMEDIATE ANNUITY TO RETIRED WORKERS 278 INSIGHT 14.2: BELLS AND WHISTLES OF VARIABLE ANNUITIES 281 INSIGHT 14.3: TEN QUESTIONS TO ANSWER BEFORE YOU BUY A VARIABLE ANNUITY 284 INSIGHT 14.4: WILL YOU HAVE ENOUGH MONEY AT RETIREMENT? MONTE CARLO SIMULATIONS CAN BE HELPFUL 289 CHAPTER 15 HEALTH-CARE REFORM; INDIVIDUAL HEALTH INSURANCE COVERAGES 295 Health-Care Problems in the United States 296 Health-Care Reform 303 Basic Provisions of the Affordable Care Act 303 Individual Medical Expense Insurance 309 Individual Medical Expense Insurance and Managed Care Plans Health Savings Accounts 312 Long-Term Care Insurance 313 Disability-Income Insurance 316 311 688 INDEX eligible dwellings, 427 endorsements to, 462–465, 467 during financial crisis, 471 fraud and, 447 information quality for, 143 modified coverage form, 428, 430 motor vehicles and, 431–432, 434, 457–458 as multiple-line policy, 28 overview of policies, 427–430 premium variations of, 467–470 schedule for, 433 subrogation and, 447–448 tips for buying, 466–471 unit-owners form, 428, 430 workers compensation and, 460 Home service (industrial) life insurance, 224 Hospice care, 385 Hospital Insurance, in Original Medicare Plan, 384–385, 391 Household appliances, 440 Hovercraft, 434, 458, 461 HRA (health reimbursement account), 340 HSA See Health savings account Hubbard, Kin, 353 Huebner Foundation and Geneva Association, 18 Hull insurance, 567–568, 594 Human life value, 7, 201–202 Human resources department, 11, 46, 54 Hunter, J Robert, 153 Hurricane(s) deductibles, 442 Florida Hurricane Catastrophe Fund for, 31 Katrina, 69, 80, 112, 440, 471, 542 I IBNR (incurred-but-not-reported), 126, 587 Ice damage, 440 Identity theft endorsement, 464–465 IFRI (International Financial Risk Institute), 60 III See Insurance Information Institute ImmediateAnnuities.com site, 293 Immediate annuity, 277, 293 Implied authority, 93, 177 Implied warranties, 568 Imputed negligence, 409–410 “I’m sorry laws,” 419 Income See also Business income; Disability-income insurance; Retirement income combined, 383 floor of, 374, 377 in investment income ratio, 129 IRA limits, 287 joint-and-survivor, 243, 245 in life income settlement option, 243 loss of, 7, 11, 46, 561–562 net, 48 taxes on, 262 Income and expense statement expenses on, 128 life insurance, 131 property and casualty insurance, 127–128 revenues on, 127–128 Incontestable clause, 233 Incorporation, 15 Incurred-but-not-reported (IBNR) reserve, claims, 126, 587 Indemnity actual cash value and, 166–167 auto accidents and, 509 definition of, 22, 166 double, 247–248 exceptions to, 167–169 legal principle of, 166–169 life insurance and, 168–169 for loss, 31 maximum period of, 563 monthly limit of, 563 purposes of, 166 traditional indemnity plans and, 333–334 Independent adjuster, 109 Independent agency system, 97 Independent events, 71–75 Independent Insurance Agents & Brokers of America, 491, 551, 577 Independent Payment Advisory Board, 390 Independent property and casualty agents, 96 Indexed universal life insurance, 219 Indexing method, 282 Indirect loss, 10 Individual 401(k) plans, 362–363 Individual annuities, 276–277, 283–284 Individual driving record, 521 Individual equity, 374 Individual health insurance contractual provisions and, 319–321 disability-income insurance, 316–318 guaranteed issue laws for, 304, 320 health-care problems and, 296–309 HSAs and, 305–306, 312–313 long-term care insurance, 313–316 Individual health insurance contractual provisions on claims, 320 grace period, 320 notice of 10-day right to examine policy, 320 preexisting-conditions exclusions, 320 reinstatement, 320 renewal provisions, 319 time limit on certain defenses, 320–321 Individual medical expense insurance broad range of benefits, 310 calendar-year deductible, 310–311 coinsurance in, 311 contractual provisions and, 319–321 copayments, 311 definition of, 309 exclusions, 311 guaranteed issue laws for, 304, 320 health-care problems and, 296–303 major medical benefits, 309–310 managed care plans and, 311–312 mandate for, 304 out-of-pocket limits, 311 Individual practice association plan (IPA), 336 Individual retirement accounts (IRAs) adequacy of, 288 contribution limits, 285 definition of, 284 eligibility requirements, 285 establishing, 286–287 income limits on, 287 investments, 287 minimum distribution requirements and, 357 nondeductible, 285 retirement needs and, 203 rollover, 287 Roth, 287–288, 293, 357 SEP-IRA and, 365 SIMPLE-IRA and, 365 spousal, 285 taxes and, 285–286 traditional, 285–288 Inductive reasoning, Industrial (home service) life insurance, 224 Inefficiency, in health care, 301–302 Inflated claims, 33–34, 514–515 Inflation guard endorsement, 462–463, 467, 559 Inflation-indexed annuity option, 279 Inflation protection, 314–315 Information systems, 117–118 Inherent vice, 186 Initial reserve, 274 Injury advertising, 585, 587, 596 bodily, 460, 482, 583 as element of negligence, 407–408 expected or intended, 458, 481, 547, 583 personal, 464, 514, 546, 585, 587, 596 PIP for, 513 Inland marine floaters, 535–536 INDEX Inland marine insurance definition of, 29, 567, 569 inland marine floaters insurance, 535–536 ISO forms, 570–571 major classes of, 569–570 Nationwide Marine Definition for, 569 other forms, 571 Inland Marine Underwriters Association, 577 Innocent misrepresentation, 173 Inpatient hospital care, 310, 384 Inside the premises-robbery or burglary of other property, 609 Insolvency of insurers, 142, 157–158 Inspection report, 106–107 Installment refund option, 279 The Institutes, 60, 101, 121 Instrumentalities of transportation and communication, 570–571 Insufficient retirement income risk, 7–8 Insurability premium receipt, 174–175 Insurable interest, 169–170, 442 Insurable risk applications of, 24–25 catastrophic loss and, 23–24 characteristics of, 22–24 Insurance See also specific types of insurance adverse selection and, 26, 106 applications for, 106 availability of, 144, 154 basic characteristics of, 20–22 contracts, 52, 174–177 definition of, 20 excess, 52, 483, 488, 546 gambling v., 26 gap, 496 government regulation of, 141–159 hedging v., 26–27 industry capacity, 69 as investment fund source, 31 in personal risk management, 57 pooling in, 15, 20–22, 115, 517 risk and, 20–34, 147 self-, 14, 50, 333 social costs and benefits of, 31–34 statistics and, 39–40 surety bonds v., 615 terrorism risk and, 67 types of, 27–31 weak competition in, 153–154 Insurance agent bonds, 616 Insurance agents See Agents Insurance brokers basic concepts, 94–95 definition of, 70 Independent Insurance Agents & Brokers of America, 491, 551, 577 licensing of, 150 marketing systems for, 96 surplus lines, 95 Insurance commissioner, 145–146 Insurance Committee for Arson Control, 619 Insurance.com site, 268, 451 Insurance contracts abusive insurer practices, 302–303 analysis of, 184–194 basic parts of, 185–187 coinsurance in, 190–192 deductibles in, 189–190 definition of “insured” in, 187–189 endorsements and riders in, 189 health insurance reforms, 304 insurance agents and, 177–178 legal characteristics of, 175–177 other-insurance provisions, 192–194 requirements of, 174–175 Insurance Information Institute (III) described, 18, 37, 83, 100–101, 121, 139, 197, 451, 475, 503, 529, 551, 577, 604 on fraud, 398 quote attributed to, 86, 103 on underinsurance, 471 Insurance Journal, 37, 101, 139 Insurance Law Communities site, 182 Insurance options, 71 Insurance Regulatory Examiners Society, 162 Insurance Regulatory Information System (IRIS), 158 Insurance Research Council (IRC) on claim payments, 515 described, 37, 503, 529, 577 on uninsured motorists, 485 Insurancesavenow.com site, 475 Insurance scores credit-based, 158–159, 521–522, 527 definition of, 466, 521 Insurance Services Office (ISO) A-PLUS, 466 on BOP, 572 business auto coverage form, 592 CGL policy, 582 claims-made policy, 587–588 commercial crime insurance program, 607–608 commercial liability umbrella coverage form, 595–597 CPP, 555 described, 105, 139, 604 dwelling program, 533–535 employment-related practices liability coverage form, 588–589 on gap insurance, 496 homeowners forms, 427 689 inland marine insurance forms, 570–571 mobile home insurance, 535 personal umbrella policy, 546–548 physicians, surgeons, and dentists professional liability insurance form, 597–598 rating fire department quality, 465 simplified commercial property program, 564 Insure.com site, 101, 229, 253, 268, 293, 451, 475, 529, 551 Insured contract, 583 Insured locations, 456–457, 460 Insured plan, 365 Insurers abusive practices, 302–303 accounting department of, 118 agents and brokers of, 70, 93–95 alien, 146 captive, 49–50, 93 claims record of, 111 claims settlement by, 108–110 commercial, 332–333 competence of, 175 cost variation among, 258–259 domestic, 146 financial operations of, 124–135 financial strength of, 265 foreign, 146 formation and licensing regulation, 146 fraternal, 90 information systems of, 117–118 investments by, 116–117 lawsuits against, 446 legal function of, 118 life insurance, 100, 121, 130–131, 139, 157, 253 liquidation of, 148–149 loss-control services of, 118 marketing systems of, 95–98 moral hazard controlled by, mutual, 88–91 nonadmitted, 95 operations of, 104–118 private, 5, 88–93 production by, 108 property and casualty, 124–130, 131–135 reinsurance and, 110–115 selection of, 52 small, 155 solvency of, 142–143, 146–149, 157–158, 272 specialty, 517 stock, 88, 90–91 taxation of, 49–50, 151 underwriting by, 105–108 690 INDEX Insurers Supervision, Rehabilitation, and Liquidation Model Act, 148 Insuring agreement, 186 InsWeb site, 101, 229, 253, 268, 451, 475, 503, 529, 551 Intangible property exposures, 11, 46 Integrated risk program, 65 Intended injury, 458, 481, 547, 583 Intentional loss, 441 Intentional torts, 406 Interest on cash-value life insurance, 237 insurable, 169–170, 442 settlement option, 242 Interest-adjusted cost method, 257 Interest credit, 359 Interest rate current, 277 guaranteed, 277 risk, 65, 147 for universal life insurance, 214, 218–219 Interest-sensitive whole life insurance, 220–221 Interinsurance exchange, 92 Internal rate of return (IRR), 78 Internal Revenue Service (IRS), 49–50, 283, 354 International Financial Risk Institute (IFRI), 60 International Foundation of Employee Benefit Plans, 351 International Risk Management Institute (IRMI), 37, 60, 82–83, 451, 475, 503, 529–530 Intranets, risk management, 79 In-transit coverage, 614 Investment income ratio, 129 Investment management charge, 280 Investments in general investment account, 116–117 GIC and, 366 by insurers, 116–117 IRA, 287 life insurance, 116–117, 148, 212, 220 in mortgages, 116 property and casualty insurance, 117, 148 regulation of, 148 returns on, 69–70 revenues from, 127 risk-control, 78 separate investment account and, 116–117, 366 Invitees, 410, 581 Involuntary market plans, 30 Ionesco, Eugene, 198 IPA (individual practice association plan), 336 IRAs See Individual retirement accounts IRC See Insurance Research Council IRIS (Insurance Regulatory Information System), 158 IRMI See International Risk Management Institute IRR (internal rate of return), 78 Irrevocable beneficiary, 235 IRS (Internal Revenue Service), 49–50, 283, 354 ISO See Insurance Services Office J James, Richard, 33 Jewelers block coverage form, 570 Joint and several liability rule, 417 Joint-and-survivor annuity option, 279 Joint-and-survivor income, 243, 245 Joint business venture, 409 Joint Economic Committee, 505 Joint underwriting association (JUA), 517 JUA (joint underwriting association), 517 Judgment method, 125 Judgment rating, 133 Judicial bonds, 616 Judicial hellholes, 415–416 Jury awards, 414 K Kaiser Family Foundation, 299–300, 301 Keogh plans, 364 Keyes, Mike, 123 Kickbacks, 544–545 Known loss, 583 L Landlord’s furnishings, 437 Large-loss principle, 189 Last clear chance rule, 409 Law of agency, 177–178 Law of large numbers definition of, 3, 15, 21–22 objective risk reduced by, 26–27 pooling and, 21–22 probability and, 21 pure risk and, random occurrences in, 22–23 sampling distribution and, 40–42 Law of negligence, 410–411 Lawsuits See also Tort liability system class-action, 413 against insurers, 446 liability and, 10–11 against physicians, 418–419 sovereign immunity from, 411 stockholder, 414 uninsured motorists coverage and, 512 Voltaire quote, 405 workers compensation and, 395–396 Lawyers.com, 182 LDW (loss damage waiver), 490–492 Leader location, 563 Legal defense, 589, 592, 595, 596 Legal duty, 407 Legal hazard, Legal Information Institute, 423 Legal liability See Liability Legally competent, 175 Legal obligations, as pre-loss objective, 45 Legal principles, fundamental agents and, 177–178 contract characteristics and, 175–177 contract requirements and, 174–175 indemnity, 166–169 insurable interest, 169–170 of reasonable expectations, 177 subrogation, 170–172 of utmost good faith, 172–174 Legal purpose, 175 Legal reserves, 210–211 Legal wrong, 406 Legislation, regulation by, 145 Liability See also Tort liability system absolute, 407, 412 aircraft, 458, 547 animals and, 412, 455 on balance sheets, 125–126, 130–131 basis of, 406–407 bodily injury, 583 business, 458, 461, 547, 597 children, parents and, 412 completed operations, 582 contingent, 582 contractual, 459, 582 employer, 395–396, 584, 588–589 of government entities, 411 hovercraft, 458 insurable interest and, 169 joint and several liability rule and, 417 lawsuits and, 10–11 limit of, 433, 442, 483, 486, 495–496 liquor, 583–584 loss exposures, 46, 56, 581–582 motor vehicle, 457–458, 472 premises and operations liability, 581–582 products, 28, 582 professional services, 459, 547, 582 property damage, 583 pro rata, 192–193, 446 recreational vehicles, 547 strict, 407 watercraft, 458, 537, 547 without fault, 396, 589 INDEX Liability insurance See also Commercial liability insurance adequate, 522 auto, 472, 479–483, 486, 495–496, 592–594 combined ratio exhibit, 68 commercial lines, 28–29 contribution by equal shares provision, 193 definition of, 27 excess, 546 fire, 585 general, 28, 581–588, 597 in PAP, 479–483, 486, 495–496 personal lines, 27–28, 454–455, 471, 535–536 private, 27–29 products, 28 professional, 29, 597–599 Liability risk basis of, 406–407 commercial, 11 current tort liability problems, 412–420 negligence and, 407–412 personal, 10–11 Liability without fault principle, 396, 589 Liberalization clause, 447 License and permit bonds, 615–616 Licensees, 410 Lieberman, Gerald F., 165 Liens, 10 Life and Health Insurance Foundation for Education (LIFE), 229 Life annuity (no refund), 278 Life annuity with guaranteed payments, 278–279 Life expectancy, 200, 283 Life income settlement option, 243–244 Life insurance actuaries for, 105 additional benefits of, 246–250 agents of, 93–94, 106 amount to own, 201–208, 264 annuities v., 276 balance sheet, 130–131 best type of, 264 buying, 255–265 capital retention approach, 206–207 cash-value, 212, 237, 239, 261–262, 264 contractual provisions, 231–238 cost of, 256–260 definition of, 27 dependency period, 203 as determinable loss, 23 dividend options, 238–239, 264 endowment, 213 exclusions and restrictions of, 236 financial performance of, 131 government programs for, 30 group, 224, 330–332 human life value approach to, 201–202 income and expense statements, 131 indemnity and, 168–169 industrial, 224 insurable interest and, 169–170 insurers, 100, 121, 130–131, 139, 157, 253 investments of, 116–117, 148, 212, 220 Loan provision, 237 low-load, 264 marketing systems for, 95–96 need for, 263–264 needs approach to, 202–206 nonforfeiture options, 239–241 offer and acceptance in, 174–175 opportunity costs of buying, 207–208 optional federal charter for, 157 ordinary, 210–211, 223, 271–272 permanent, 130 policyowners’ surplus in, 147 premature death, 199–201 premiums for, 116, 269–274 private, 27 rate making in, 135 rate of return on saving component, 260–262 rate regulation of, 150 reduced paid-up, 240 replacing policies, 259 SBLI, 93, 222–224 second-to-die, 222 settlement options, 241–246 shopping for, 263–265 subrogation and, 172 suicide clause in, 26, 233–234 taxation of, 262–263 term, 208–210, 223, 239–241, 269–271, 331 top groups by revenues, 89 types of, 208–213, 221–224 underwriting information sources for, 106–107 unfair trade practices in, 109 universal, 214–220, 223 variable, 213–214, 223 variations of whole life insurance, 213–221 whole, 210–221, 223, 240 Life Insurance Policy Illustration Model Regulation, 260 Life Office Management Association (LOMA), 121, 229 Life settlement, 249–250 Lifetime reserve days, 384 Lightening damage, 438, 441 Limited-payment policy, 213 691 LIMRA International, Inc., 101, 121, 207, 229 Line underwriters, 107 Linton, M Albert, 260 Linton yield, 260–261 Liquidation period, 277 Liquor liability, 583–584 Livery conveyance, 482, 484, 488, 493 Lloyd’s of London, 91–92, 101 Loading, 132 Location in homeowners insurance, 465 LOMA (Life Office Management Association), 121, 229 Longevity insurance, 282–283 Long-range actuarial deficit, of Social Security, 390–391 Longshore and Harbor Workers Compensation Act, 538, 591 Long tail claims, 587 Long-term care insurance chances of needing, 313 characteristics of, 313–315 choice of benefits, 314 definition of, 313 eligibility, 314 elimination period, 314 exclusions, 315 expensive coverage, 315 guaranteed renewable policies, 315 inflation protection, 314–315 partnership programs, 315–316 taxation of, 315 variations in policies, 314 Long-term-care rider, 248 Long-term disability, financial impact of, 8–9 Long-term group disability-income insurance, 346 Loss See also Catastrophic loss; Loss exposures accidental, 23 of business income, 11, 46, 561–562 chance of, 3–4, 24 clash, 69 collision, 489 concurrent causation, 440 of consortium, 591 determinable, 23 direct, 10, 534, 536, 537, 567 due to governmental action, 442 due to ordinance or law, 440–441 duties after, 442–443, 497–498 excluded in insurance contracts, 186 expected, 21 forecasting, 71–75 fortuitous, 22 frequency of, 47 of goods and services, 12 692 INDEX hazards and, 4–5 income, 7, 11, 46 indemnification for, 31 indirect, 10 intentional, 441 known, 583 large-loss principle, 189 maximum possible, 47 measuring of, 23, 128–129 other-than-collision, 489–490 paying, 48–49, 496 peril and, pooling of, 15, 20–22, 115, 517 prevention of, 13, 31–32, 47–48, 51 probable maximum, 47 proof of, 110, 173, 320, 443 reduction of, 13, 48 severity of, 47 sharing methods, 113–115 sustained during prior insurance, 613 ultimate net, 595 underwriting, 117 unintentional, 23 of use, 435, 535 verification of, 109 Loss-adjustment expenses, 126 Loss assessment, 436–437, 461 Loss control rate making objectives, 132 risk control and, 12–13, 47–48 in risk management, 118 Loss damage waiver (LDW), 490–492 Loss distributions, 75–76 Loss exposures analysis of, 46–47, 56 business income, 46 crime, 11, 46 definition of, 2, 44 employee benefit, 46 foreign, 11, 46 government, 11 human resources, 11, 46 identification of, 46, 55–56 liability, 46, 56, 581–582 measurement of, 46–47 personal, 55–56 property, 11, 46, 56 in risk management matrix, 53–54 techniques for treating, 47–54, 56–57 units of, 22–23, 104 Loss forecasting based on loss distributions, 75–76 probability analysis in, 71–75 regression analysis in, 75 in risk management, 71–75 Loss history reports, 466 Loss ratio, 126, 128, 133–134 Loss reserves, 125 Loss settlement, 443–445, 491 Loss-sustained form, 607, 613 Loss to pair or set, 445 Lost-instrument bond, 616 Low-cost auto insurance, 512 Low-load life insurance, 264 Lump-sum death benefit, 383 M Madoff, Bernard, 420 Mail coverage form, 570 Maintenance, of buildings, 134 Maintenance bonds, 615–616 Major medical insurance benefits, 309–310 coinsurance in, 311 Malicious mischief, 438, 439 Malingering, 346 Malpractice insurance, 29, 418–419, 597–598 Managed care See also Health maintenance organizations; Preferred provider organizations coinsurance in, 335–336 definition of, 334 dental plans in, 345 group insurance and, 333, 334–336 individual medical expense insurance and, 311–312 POS plans, 336 Manual, risk management, 54 Manual rating, 133 Manufacturing location, 563 Manuscript policy, 52 Maps, risk, 79 Marine insurance, 29 See also Inland marine insurance; Ocean marine insurance Marital deduction, 263 Marital status, auto insurance cost influenced by, 518–519 Market conditions, risk management and, 54, 68 Market conduct examinations, 154 Market dynamics capital market risk financing alternatives and, 71 consolidation in, 70–71 risk management and, 68–71 underwriting cycle in, 68–70 Marketing department, 54 Marketing systems life insurance, 95–96 property and casualty, 96–98 Market risks, 24 Maryland Automobile Insurance Fund, 31, 517 Mass merchandising, 98 Master contract, 328 Material fact, 172 Material misrepresentation, 172–173 Maximum cap rate, 282 Maximum possible loss, 47 McCarran-Ferguson Act passage of, 144–145 repeal of, 145, 155 McQuade, Rebecca A., 554 M&E (mortality and expense risk charge), 220, 280 Mean reserve, 274 Means test, 374 Measurable loss, 23 Mediation, 417 Medicaid cost shifting by, 299 eligibility, 301 expansion of, 307 health insurance reforms, 307–309 long-term care partnership program, 315–316 Medical care consumer demand for, 297 uneven quality of, 301 as workers compensation benefit, 397 Medical errors, 418 Medical expense insurance See also Group medical expense insurance; Individual medical expense insurance in boatowners package, 537 BOP and, 597 commercial liability insurance and, 595 Medical Information Bureau, 107 Medical loss ratio, 305 Medical malpractice, 29, 418–419, 597–598 Medical necessity trigger, 314 Medical payments coverage commercial liability insurance, 585–586 PAP, 483–485 payments to others and, 455–457 Medical savings accounts (MSA) plans, 387 Medicare Advantage Plans, 309, 386–387, 390 coinsurance, 388 Cost Plans, 387 cost shifting by, 299 definition of, 30, 384 demonstration and pilot programs, 387 fee-for-service plans, 387 financial crisis of, 391–392 financing of, 396 health insurance reforms, 308–309 HMO, 386 Independent Payment Advisory Board, 390 low-income beneficiaries of, 388 medical savings accounts plans, 387 INDEX Medigap policy for, 389 monthly premiums, 386 Original Plan, 384–386, 390, 391 PACE, 387 Part A, 384–385, 386, 391 Part B, 385–386 Part C, 386 Part D, 388–389, 390 PPO, 387 prescription drug coverage, 388–389 Special Needs Plans, 387 web site for, 402 Medigap policy, 389 Mehr, Robert I., 231 Mental abuse, 459 Mergers, 70, 90 Merit rating, 134–135 MIB Group, Inc., 107 Middle Class Tax Relief and Job Creation Act of 2012, 394 Migrant and Seasonal Agricultural Worker Protection Act, 591 Minimum age and service requirement, 355–356 Minimum coverage requirements, 355 Minimum distribution requirements, 357 Minimum participation requirements, 329 Minimum vesting standards, 356 Minor children, 175, 235 Minorities, credit-based insurance scores and, 158–159 Miscellaneous surety bonds, 616 Miscellaneous-type vehicle endorsement, 499 Misstatement of age or sex clause, 234 Mobile equipment, 584 Mobile home insurance, 535 Modified coverage form (HO-8), 428, 430 Modified life policy, 221 Modified no-fault plan, 513 Modified prior-approval law, 149 Mold, 438 Monetary threshold, 513 Money counterfeit, 436, 573, 612, 614 theft of, 609 time value of, 76–77 Money orders, 573, 612 Money purchase plans, 360 Monoline policy, 555 Monopoly state fund, 396 Monte Carlo simulation, 288–289 Monthly retirement benefits, 377 Mopeds, 499 Morale (attitudinal) hazard, 5, 186–187 Moral hazard definition of, 4–5 disability-income insurance and, 346 indemnity principle and, 166, 168 insurable interest principle and, 169 insurance contracts on, 187 Morgan, Henry, 477 Mortality and expense risk charge (M&E), 220, 280 Mortality charge, 214, 219 Mortgage clause, 446–447 Mortgage redemption fund, 203 Mortgages fraudulent, 614 investment in, 116 Motorcycles, 499 Motor homes, 494 Motor vehicles See also Auto insurance additional, 479 business, 482, 484–485 death from, 22 hit-and-run, 486–487 homeowners insurance and, 431–432, 434, 457–458 liability from, 457–458, 472 newly acquired, 479 nonowned, 483, 485, 490, 495 owned, 483, 485 property damage from, 439, 461 racing, 483, 495, 547 rental cars, 490–492, 495 replacement, 479 temporary substitute, 479 uninsured, 487 MSA (medical savings accounts) plans, 387 MSO (Mutual Service Office), 577 Multicar discount, 521 Multiple distribution systems, 98 Multiple line exclusive agency system, 95–96 Multiple-line policy, 28, 555 Multiple-peril insurance, 28 Mutual holding company, 91 Mutual insurers, 88–91 Mutually exclusive events, 75 Mutual Service Office (MSO), 577 Myers, Robert J., 372 N NAIC See National Association of Insurance Commissioners NALP (net annual level premium), 271–272 Named insured, 188 Named-perils policy, 186 Narrative summary, 260 National Academy of Social Insurance, 402 National Alliance for Insurance Education and Research, 83 National Association of Health Underwriters, 324 693 National Association of Insurance and Financial Advisors, 229 National Association of Insurance Commissioners (NAIC) Consumer Information Source, 111 on coordination of benefits, 344 described, 110, 121, 146, 162, 229, 254, 324, 451, 503, 551 interest-adjusted cost method, 257 Life Insurance Policy Illustration Model, 260 on liquidation of insurers, 148 model laws of, 109, 146, 158 on nationwide marine definition, 569 promotion of uniform laws by, 153 on total adjusted capital, 147 National Association of Mutual Insurance Companies, 37, 101, 121 National Association of Surety Bond Producers, 620 National Commission to Preserve Social Security, 402 National Committee for Quality Assurance (NCQA), 301, 351–352 National Conference of Insurance Guaranty Funds, 157, 162 National Conference of Insurance Legislators, 162 National Council on Compensation Insurance (NCCI), 398–399, 402, 589, 604 National Flood Insurance Program (NFIP) basic concepts in, 30 deductible, 540 definition of, 538 eligibility, 538 emergency program, 538–539 policy forms, 539–540 premiums, 540 problems and issues with, 542 Standard Policy Forms, 539 waiting period, 540 National Insurance Crime Bureau, 398, 620 National Organization of Life & Health Insurance Guaranty Associations (NOLHGA), 162 National Public Radio, 301 National Safety Council, 21–22, 604 National Transportation Safety Board (NTSB), 494–495 National Underwriter Company, 229, 254 Nationwide marine definition, 569 NCCI (National Council on Compensation Insurance), 398–399, 402, 589, 604 NCQA (National Committee for Quality Assurance), 301, 351–352 Needs approach to life insurance, 202–206 Neglect, loss due to, 441 694 INDEX Negligence comparative, 408–409 contributory, 395, 408 defenses against, 408–409 definition of, 407 dog bites and, 456 elements of, 407–408 imputed, 409–410 law regarding, 407–409 liability risk and, 407–412 res ipsa loquitur and, 410 specific applications of law of, 410–412 Net amount at risk, 210–211 Net annual level premium (NALP), 271–272 Net gain from operations, 131 Net income, 48 Net payment cost index, 257–258 Net present value (NPV), 78 Net retention, 111 Net single premium (NSP), 135, 269–271 Network model HMO, 336 Network providers, in POS plans, 336 Never events, 419 Newly acquired auto, 479 New York State Insurance Department, 197 NFIP See National Flood Insurance Program Nicholls, Timothy, 33 No-fault auto insurance arguments for and against, 514–515 characteristics of, 513–514 compensation from, 512–516 definition of, 512–513 evaluation of, 515–516 inflated claims, fraud and, 514–515 No filing required, 149 No-lapse guarantees, 214 Nolo.com site, 423 Nonadmitted assets, 146 Nonadmitted insurer, 95 Noncancellable policy, 319 Noncontributory plan, 329 Nondeductible IRA, 285 Nondiversifiable risk, Noneconomic damages, 417, 513–515 Nonelective contribution option, 365 Nonforfeiture provision, 239–241, 315, 363 Noninsurance transfers, 14–15, 51, 57 Nonoccupational disability, 346 Nonowned detached trailers, 559 Nonowned vehicles, 483, 485, 490, 495 Nonparticipating policy, 238 Nonprofit organizations, 393 Nonprofit Risk Management Center, 60, 83 Nonqualified annuity, 283 Nonrenewable policy, 319–320 Nonsystematic risk, Nontransferable provision, 363 Nonwaiver clause, 178 “No pay, no play” laws, 512 Normal retirement age, 355 Notice of claim provision, 320 NPV (net present value), 78 NSP (net single premium), 135, 269–271 NTSB (National Transportation Safety Board), 494–495 Nuclear energy, 460, 482 Nuclear hazard, 441 Nuclear weapon, 485 Numeric summary, 260 Nursing homes, 313, 384–385 O OASDI See Social Security Obama Administration, 155, 303 Objective probability, 3–4 Objective risk, 3, 4, 26–27 Obligee, 614 Obligor, 614 Occupancy, 134 Occurrence, 454, 583 Ocean marine insurance basic concepts in, 568–569 definition of, 29, 567 utmost good faith principle and, 172 OECD (Organisation for Economic Co-operation and Development), 298 OEM (original equipment manufacturer), 496, 511 Offer and acceptance, 174–175 Office of the Chief Actuary, 402 Office of Thrift Supervision (OTS), 88 Oklahoma City attack (1995), 67 Old-Age, Survivors, and Disability Insurance (OASDI) See Social Security On premises coverage, 614 “Open-perils” basis dwelling property and, 534 insuring agreement, 186 personal articles floater and, 536 yacht insurance and, 537 Operational risk, Operations liability, 581–582 Operation Watch, 610 Opportunity costs of buying life insurance, 207–208 Optional deductibles, 514 Optional federal charter, 157 Optional no-fault benefits, 514 Ordinance or law commercial property coverages, 566 increased costs from, 437 loss due to, 440–441 Ordinary life insurance calculating premiums, 271–272 comparison of, 223 definition of, 210 limitations of, 211 uses of, 211 Organisation for Economic Co-operation and Development (OECD), 298 Original-age method, 208 Original equipment manufacturer (OEM), 496, 511 Other-insurance provisions contribution by equal shares, 193 definition of, 192 primary and excess insurance, 194 pro rata liability, 192–193, 446 Other insureds provision, 188 Other property provision, 609 Other-states insurance, 591 Other-than-collision loss, 489–490 OTS (Office of Thrift Supervision), 88 Out-of-pocket limits, 305–306, 311, 337 Out-of-state coverage, 483 Outpatient hospital services, 310, 385–386 Outpatient prescription drugs, 310 Outside the premises, 609–610 Overall operating ratio, 129 Overdue premiums, 233, 237–238 Owned vehicles, 483, 485 Ownership clause, 232 P PACE, 387 Package policy, 555 PAF (personal articles floater), 536 Paid-up additions option, 238 Paid-up contract, 238 Pair, loss to set or, 445 PAP See Personal Auto Policy Part A, Medicare, 384–385, 386, 391 Part B, Medicare, 385–386 Part C, Medicare, 386 Part D, Medicare, 388–389, 390 Partial disability, 317 Participating policy, 238 Participation rate, 282 Particular average, 568 Particular risk, Passenger hazard exclusion, 499 Passive retention, 14 Past-service credits, 358 Patio, damage to, 438 Paul v Virginia, 144 Pavement, damage to, 438 Pay credit, 359 Payment bonds, 615–616 Payout period, 277 PBGC (Pension Benefit Guaranty Corporation), 30, 358–359, 371 INDEX PCI (Property Casualty Insurers Association of America), 509, 577 Peak season endorsement, 561 Pecuniary interest, 170 PEDs (portable electronic devices), 494–495 Pension accrual benefit, 346 Pension Benefit Guaranty Corporation (PBGC), 30, 358–359, 371 Pension Protection Act of 2006, 354 Per diem policies, 314 Performance bonds, 615–616 Perils excluded in insurance contracts, 186 in multiple-peril insurance, 28 named-perils policy, 186 open-perils basis, 186, 534, 536, 537 risks v., of the sea, 568 Section I, 437–440 Permitted disparity rules, 357 Personal articles floater (PAF), 536 Personal Auto Policy (PAP) cancellation of, 498 damage to your auto, 489–497 duties after accident or loss, 497–498 eligible vehicles, 478 exclusions in, 481–483, 484–485, 487–488, 493–495 general provisions of, 498–499 insured persons in, 480–481, 484, 487 insuring agreement in, 480, 483–484, 486–487, 489–491 liability coverage, 479–483, 486, 495–496 medical payments coverage in, 483–485 miscellaneous-type vehicle endorsement for, 499 termination of, 498–499 underinsured motorists coverage, 488–489 uninsured motorists coverage, 485–489, 497 uninsured vehicles in, 487 your covered auto, 478–479 Personal contract, 176 Personal injury commercial liability insurance and, 585, 587, 596 definition of, 464, 546 endorsements for, 464 exclusions for, 547 PIP for, 513 Personal injury protection (PIP), 513 Personal liability insurance dwelling program endorsement, 535 in homeowners insurance, 27 inland marine floaters, 535–536 purchasing, 471 Section II coverage, 454–455 Personal lines, 27–28 Personal loss exposures, 55–56 Personal-producing general agent (PPGA), 96 Personal property building and personal property coverage form, 557–559 business, 557–558, 564, 572 loss settlement, 443 replacement cost endorsement, 463, 467 scheduled, 464, 467, 536 special form and, 432–435, 438–440 Personal risk definition of, insufficient retirement income, 7–8 liability, 10–11 managing, 55–57 poor health, premature death, property, 10 unemployment, 7, 10, 24–25 Personal selling distribution systems, 95–96 Personal umbrella liability insurance definition of, 471, 545 exclusions, 547–548 ISO, 546–548 PFFS (private fee-for-services) plans, 387 Physical abuse, 459 Physical hazard, Physical inspection, 46, 107 Physicians, surgeons, and dentists professional liability insurance, 597–598 Physicians and surgeons equipment coverage form, 570–571 Physician services, 310, 385–386 PIA (primary insurance amount), 377 P&I (protection and indemnity) insurance, 568 PIP (personal injury protection), 513 Plaintiff, 406 Point-of-service (POS) plan, 336 Policies See also specific types of policies additional insured in, 189 assignment of, 447 convertible, 208 first named insured in, 188 mature as an endowment, 239 named insured in, 188 no-lapse guarantees, 214 nonparticipating, 238 nonrenewal of, 447, 498 other insureds in, 188 participating, 238 reinstating, 233–234 695 renewable, 208 10-day right to examine, 320 valued, 167–168 Policy forms, regulation of, 150 Policy loan provision, 237 Policyowners’ surplus, 126–127, 131, 146–147 Policy reserves, 130, 272–274 Political risk, 24 Pollutant cleanup and removal, 558, 573 Pooling of losses definition of, 15, 20–21 law of large numbers and, 21–22 reinsurance pool, 115, 517 Poor health risk, 8–9 Portable electronic devices (PEDs), 494–495 Portable term insurance, 331 POS (point-of-service) plan, 336 Post-loss risk management objectives, 45 Power failure, 441 PPOs See Preferred provider organizations Predetermination-of-benefits provision, 345 Preexisting Condition Insurance Plan (PCIP), 307 Preexisting conditions abusive insurer practices and, 302–303 definition of, 102, 343 group medical expense contractual provisions, 343–344 health insurance reforms, 26, 102, 304, 307, 320, 338 individual health insurance contractual provisions, 320 Preferred provider organizations (PPOs) Blue Cross and Blue Shield, 92, 333 cost of, 341 definition of, 312, 336 dental, 345 HMOs v., 336 market control for, 332 Medicare, 387 Preferred risks, 221–222 Pre-loss risk management objectives, 45 Premature death costs of, 199 declining problem of, 199 definition of, 7, 199 economic justification for life insurance, 200 financial impact of, 200–201 Premises and operations liability, 581–582 Premium conversion plans, 347 Premiums auto insurance, variations in, 523–526 automatic premium loan provision and, 237–238 bond, 481 calculation of, 269–274 696 INDEX conditional premium receipt and, 174–175 CPP, 557 dividends reducing, 238 earned, 127–128 economically feasible, 24 FAIR plan, 542–543 flexible, 277 gross, 132, 272 health insurance reforms, 306–307 homeowners insurance, variations in, 467–470 insurability premium receipt and, 174–175 life insurance, 116, 269–274 Medicare, 386 NALP, 271–272 NFIP, 540 NSP, 269–271 overdue, 233, 237–238 payment of, 236 pure, 132–134 return of, 315 revenues from, 127 single, 277 subsidies, 303 tax on, 151 unearned reserve and, 112, 126 for universal life insurance, 214, 219 waived, 246, 318 Prescription drug coverage catastrophic, 388 drug card program and, 310 increased spending and, 299 Medicare, 388–389, 390 of outpatient prescription drugs, 310 tiered pricing for, 342–343 Presumptive disability, 317 Prevention and Public Health Fund, 308 Primary and excess insurance, 194 Primary beneficiary, 235 Primary insurance amount (PIA), 377 Principal, 614 Principal sum, 332 Principles See Legal principles, fundamental Prior-approval law, 149 Private fee-for-services (PFFS) plans, 387 Private firm, 393 Private insurance aircraft, 29 auto, 27, 143 basic characteristics of, 20–22 casualty, 27–29 commercial multiple-peril, 28 credit, 29 crime, 29 equipment breakdown, 28–29 financial guaranty, 29 in financial services industry, 87–88 fire, 24–25, 28 health, 27 homeowners, 27–28, 143 liability, 27–29 life, 27 marine, 29 medical malpractice, 29, 418–419, 597–598 personal umbrella liability, 28, 471, 545–548 PMI, 29 property, 27–29 pure risk and, unemployment and, 24–25 workers compensation, 28 Private insurers Blue Cross and Blue Shield, 92 HMOs, 93 Lloyd’s of London, 91–92, 101 mutual, 88–91 pure risk and, reciprocal exchange, 92 stock, 88, 90–91 types of, 88–93 Private mortgage insurance (PMI), 29 Probability insurance and, 39–42 law of large numbers and, 21 in loss forecasting, 71–75 objective, 3–4 a priori, subjective, Probable maximum loss, 47 Probationary period, 330 Problem physicians, 419 Production, definition of, 108 Production department, 54 Production risk, 24 Product recalls, 585 Products-completed operations aggregate limit, 587 Products-completed operations hazard, 582, 584 Products liability, 28, 582 Professionalism, in selling, 108 Professional liability insurance commercial, 29 errors and omissions, 599 physicians, surgeons, and dentists, 597–598 Professional services liability, 459, 547, 582 Profits measuring, 128–129 stabilized, 111–112 Profit-sharing plans, 363–364 Progressive Casualty Insurance Company, 503, 530 Progressive indexing, 391 Prohibited use, 435 Proof of loss, 110, 173, 320, 443 Property abandonment of, 446 commercial risks, 11 excluded in insurance contracts, 186–187 inherent vice and, 187 loss exposures, 11, 46, 56 removal of, 436 Property and casualty insurance actuaries for, 105 agents of, 93–94, 96, 106 balance sheet of, 124–127 commercial lines of, 28–29 contract characteristics of, 176 definition of, 27 income and expense statement, 127–128 insurable interest and, 169 insurers, 124–130, 131–135 investments of, 117, 148 marketing systems, 96–98 offer and acceptance in, 174 other-insurance provisions, 192 personal lines of, 27–28 policyowners’ surplus in, 147 profitability of, 129 rate making in, 131–135 title insurance, 543–545 top groups by revenues, 89 underwriting cycle in, 54 underwriting information sources for, 107 Property Casualty Insurers Association of America (PCI), 509, 577 Property damage auto insurance and, 514 commercial liability insurance, 583–585 Section I coverage, 438–440 Section II coverage, 461 Property insurance See also Commercial property insurance; Property and casualty insurance combined ratio exhibit, 68 deductibles in, 190 definition of, 27 government, 538–543 inland marine floaters, 535–536 inland marine insurance, 29 ISO dwelling program, 533–535 lines of coverage for, 27–29 mobile home insurance, 535 private, 27–29 pro rata liability, 192–193, 446 INDEX top groups by revenues, 89 watercraft insurance, 536–538 Property owners, law of negligence and, 410 Proprietary function, 411 Pro rata liability, 192–193, 446 Pro rata loss sharing methods, 113 Prospective reserve, 273 Protection, 134 Protection and indemnity (P&I) insurance, 568 Proximate cause, 408, 438 Public adjuster, 109 Publications, regulation of, 151 Public conveyance, 482, 484, 488, 493 Public official bonds, 616 Public Risk Management Association, 60, 83 Punitive damages, 408, 417, 488 Pure captive, 49 Pure no-fault plan, 513 Pure premium, 132–134 Pure risk definition of, managing, 65 noninsurance transfers and, 57 types of, 10–11 Pure (comparative negligence) rule, 409 Q Qualified plans defined-benefits, 358–359 defined-contribution, 360–365 definition of, 354–355, 357 Keogh plans, 364 profit-sharing plans, 363–364 SIMPLE plans, 365 simplified employee pension plans, 365 Quarter of coverage, 375 QuickQuote site, 268 Quota-share treaty, 113–114 R Racing vehicle, 485, 495, 547 Radar detection equipment, 495 Radiation, 485 Radioactive contamination, 493 Railroad Retirement Act, 30 Railroad Unemployment Insurance Act, 30 RAND Institute for Civil Justice, 423, 503, 529, 604 Ratchet method, 282 Rate making definition of, 104–105 definitions for, 132–133 exposure units in, 104, 132 in life insurance, 135 methods, 133–135 objectives of, 131–135 in property and casualty insurance, 131–135 Rate of return internal, 78 on saving component, 260–262 universal life insurance and, 218 Rates adequacy of, 107, 131–132, 150 definition of, 104–105, 132 discriminatory, 131–132 disparity in, 153–154 excessive, 131–132 gross, 132 guaranteed, 277 reasonable, 143–144 regulation of, 149–150 state-made, 149 subrogation and, 171 Rating, equity in, 191–192 Rating agencies, 265 Ratio percentage test, 355 RBC (risk-based capital), 147–148, 157 Readjustment period, 202 Real Estate Settlement Procedures Act, 545 Real estate value, 472 Reasonable and customary charges, 333, 345 Reasonable belief of permission, 481–482, 484, 488, 547 Reasonable expectations, principle of, 177 Reasonable repairs, 436 Rebating, 150–151, 305 Rebuilding, cost of, 472 Recall of products, 585 Recent work test, 375 Recipient location, 563 Reciprocal exchange, 92 Recreational vehicles liability, 547 Redetermination provision, 221 Reduced paid-up insurance, 240 Reentry term, 209 Reform See also Health insurance reforms Social Security, 391 of tort liability system, 417–418, 515 Regression analysis, 75 Regular NFIP program, 539 Regulation consumer protection and, 158–159 by courts, 145 federal, 151–155 financial crisis and, 156–157 historical development of, 144–145 insolvency and, 157–158 of insurer formation and licensing, 146 of insurer taxation, 151 of investments, 148 by legislation, 145 697 methods, 145–146 modernizing, 156–157 of policy forms, 150 of rates, 149–150 RBC, 147–148 reasons for, 142–144 of reserves, 146 of sales practices, 158–159 solvency, 146–149 state, 145–146, 149, 151–155 surplus, 146–147 of taxes, 151 Regulatory objectives, of rate making, 131–132 Rehabilitation provision, 318 Rehabilitation services, 397 Reimbursement policies, 314 Reinstatement provision, 233–234, 320 Reinsurance alternatives to, 115 catastrophic loss and, 111–112 definition of, 23–24, 110 early retirement program, 307 facultative, 113 insurers and, 110–115 loss sharing methods and, 113–115 pool, 115 reasons for, 111–113 SPRV and, 115 treaty, 113 underwriting and, 108 unearned premium and, 126 Reinsurance facility, 517 Released bill of lading, 569 Renewable policies, 208 Renewal provisions, 319–320 Renewal underwriting, 108 Rental cars, 490–492, 495, 511 Renters insurance, 430–431, 472 Replacement cost CPP and, 559 definition of, 444 dwelling property, 534 endorsements for, 445, 462–463, 467 guaranteed, 445 indemnity principle on, 167 Replacement cost insurance, 168 Replacement vehicle, 479 Reporting forms, 192, 560–561, 564 Reports and examinations, 148, 154, 158 Representations, 172–173 Reserves for amounts held on deposit, 130 AVR, 130–131 case, 125–126 definition of, 272–273 funded and unfunded, 48–49 IBNR, 126 698 INDEX initial, 274 legal, 210–211 loss, 125 mean, 274 policy, 130, 272–274 prospective, 273 regulation of, 146 retrospective, 273 terminal, 274 unearned premium, 112, 126 Residential Condominium Building Association Form, NFIP, 539 Resident relatives, 431 Residual disability, 317–318 Residual market, 30, 516 Res ipsa loquitur, 410 Respondeat superior doctrine, 411–412 Restricted application, 382 Retained limit, 595–596 Retaliatory tax laws, 151 Retention See Risk retention Retention limit, 111 Retirement income See also Social Security; Individual retirement accounts calculator for, 289 Civil Service Retirement System for, 30 delayed, 377–380 ERISA and, 145, 333, 354, 596, 600 Federal Employees Retirement System for, 30 insufficient, 7–8 monthly, 377 PBGC and, 30 Retirement plans ages for, 355–356, 376–380 defined-benefit plans, 358–359 defined-contribution plans, 360–363 fundamentals of, 354–357 funding agency and instruments for, 365–366 matching contributions to, 284, 361, 365 problems and issues in, 366–367 profit-sharing plans, 363–364 qualified, 354, 358–365 for self-employed, 364 SIMPLE, 365 simplified employee pension, 365 Social Security integrated with, 357 tax treatment of, 354–356, 362, 364, 366–367 top-heavy, 357 types of, 357 Retirement test, 380 Retroactive date, 588, 612–613 Retrocession, 111 Retrocessionaire, 111 Retrospective rating, 135 Retrospective reserve, 273 Return of premium benefits, 315 Return of premium term insurance, 209 Return on equity (ROE), 131 Revenues, 127–128 Reverse competition, 544 Revocable beneficiary, 235 Riders in insurance contracts See Endorsements RIMS (Risk and Insurance Management Society), 61, 66, 83, 577, 604 Riots, 439 Rising-floor death benefit, 280 Risk See also Liability risk asset, 147 assigned risk plan for, 516–517 burdens of, 12 business, 147 classification of, 5–7 clean, 517 commercial, 7, 11 commodity price, 63–64 cost of, 55 currency exchange rate, 65 definition of, 2–3, 15–16 diversifiable, emerging, 67 enterprise, 6–7 financial, 6, 24 fire, 24–25 fundamental, hazard v., 4–5 insurable, 22–25 insurance and, 20–34, 147 interest rate, 65, 147 and its treatment, 2–18 market, 24 net amount at, 210–211 nondiversifiable, objective, 3–4, 26–27 operational, peril v., personal, 7–10, 24–25, 55–57 political, 24 preferred, 221–222 production, 24 property, 11 pure, 5, 10–11, 57, 65 securitization of, 71, 115 in society, 2–18 speculative, 5–6, 65 strategic, subjective, systematic, systemic, 152 tolerance for, 284 underwriting, 42, 67 Risk analysis questionnaires and checklists, 46 Risk and Insurance Management Society (RIMS), 61, 66, 83, 577, 604 Risk-based capital (RBC), 147–148, 157 Risk control avoidance and, 12–13, 47, 56 definition of, 12, 47 investment decisions based on, 78 loss prevention and, 13, 47–48 loss reduction and, 13, 48 in personal risk management, 56 techniques for, 12–13 terrorism and, 67 Risk financing capital market alternatives, 71 with commercial insurance, 51–53 definition of, 12, 48 with noninsurance transfers, 14–15, 51 with retention, 13–14, 48–51 techniques for, 13–15, 48–51 Risk management advanced topics in, 63–81 benefits of, 55 catastrophe modeling for, 80–81 changing scope of, 63–67 commercial, decision making, 76–78 definition of, 44 enterprise, 6, 66–67 financial, 63–66 financial analysis in, 76–78 implementation of, 54–55, 57 insurance market dynamics and, 68–71 intranets, 79 IRMI and, 37 loss forecasting in, 71–75 manual for, 54 maps for, 79 matrix, 53–54 medical malpractice and, 419 monitoring of, 54–55, 57 objectives, 44–45 personal, 55–57 policy statement for, 54 RMIS for, 79 steps of, 45–57 techniques for, 12–15, 53–54 VAR analysis for, 79–80 Risk management information system (RMIS), 79 Risk managers, 46, 54–55 Risk maps, 79 Risk retention advantages of, 51 captive insurers and, 49 definition of, 13–14, 48 determining levels, 48 disadvantages of, 51 insurance market dynamics and, 68 INDEX paying losses and, 48–49 in personal risk management, 56–57 retention limit, 111 risk financing and, 13–14 RRGs, 50–51 self-insurance and, 50, 596 tax treatment of captives, 49–50 Risk retention groups (RRGs), 50–51 Risk Theory Society, 18 Risk transfer by contracts, 14 definition of, 22 insurance market dynamics and, 68 noninsurance, 14–15, 51, 57 purpose of, 15 RMIS (risk management information system), 79 Robbery, 608, 609, 611 ROE (return on equity), 131 Roomers, property of, 435 Rosenbloom, Jerry S., 327 Roth 401(k) plans, 362, 371 Roth 403(b) plans, 363 Roth IRAs, 287–288, 293, 357 Running down clause, 568–569 Rutterschmidt, Olga, 33 S Safe burglary, 608, 609 Safe driver plans, 521 Safety glazing material, 437 SAIP (Special Auto Insurance Policy), 512 Sales practices, regulation of, 158–159 Sampling distribution, 40–42 SAP (statutory accounting principles), 146 Sarbanes-Oxley Act, 420 Saving component, rate of return on, 260–262 Savings Bank Life Insurance (SBLI), 93, 222–224 Savings Incentive Match Plan for Employees (SIMPLE), 365 SBLI (Savings Bank Life Insurance), 93, 222–224 Schedule, for homeowners insurance, 433 Schedule approach, to employee theft, 609 Scheduled personal property endorsement, 464, 467, 536 Schedule rating, 134 SCHIP (state children’s health insurance programs), 30 SD (standard deviation), 21 Second-to-die life insurance, 222 Section 401(k) plans ADP test and, 362 common mistakes with, 361 as defined-contribution plans, 360–363 definition of, 360 distribution limits for, 362 elective deferrals and, 361–362 individual, 362–363 Pension Protection Act of 2006 and, 354 Roth, 362, 371 Section 403(b) plans, 363 Section I, special form conditions, 442–448 coverages, 432–437 exclusions, 437–438, 439–442 perils insured against, 437–440 Section II, special form conditions, 447–448, 462 coverages, 429, 454–457, 460–461 exclusions, 457–460 Secured creditors, 169 Securities and Exchange Commission, 145, 419 Securities coverage, 614 Securities Exchange Act of 1934, 600 Securities theft, 609 Securitization of risk, 71, 115 Select Quote site, 268 Self-employed plans, 364 Self-funding, 333 Self-insurance, 14, 50, 333 Self-Insurance Institute of America, 61, 83 Self-insured retention (SIR), 546, 596 Selling, professionalism in, 108 SEP (simplified employee pension), 365 Separate investment account, 116–117, 366 SEP-IRA, 365 September 11, 2001 attacks clash loss and, 69 loss of goods and services, 12 reinsurance and, 112 terrorism risk and, 67 Service benefits, 333 Set, loss to pair or, 445 Settlement options advantages of, 243–244 for annuities, 278–279 cash, 242, 278 definition of, 241 disadvantages of, 244–245 fixed-amount, 242–243 fixed-period, 242 interest, 242 life income, 243 life insurance, 241–246 trusts, 245–246 SEUA (South-Eastern Underwriters Association), 144 Seven-year graded vesting, 356 Severe cognitive impairment, 314 Sex, misstatement of, 235 Sexual molestation, 459, 547 Shakespeare, William, 184 699 Shared market, 30, 516 Shortened benefit period, 315 Short-term group disability-income insurance, 346 Short-term involuntary unemployment, 392 Sight, loss of, 318, 376 Signs coverage form, 571 SIMPLE (Savings Incentive Match Plan for Employees), 365 SIMPLE-IRA, 365 Simplified commercial property program, 564 Simplified employee pension (SEP), 365 Single limit, 480 Single parent captive, 49 Single-parent families, 200 Single-premium deferred annuity, 277 Single premium immediate annuities (SPIAs), 278 Single-premium whole life insurance, 213 SIR (self-insured retention), 546, 596 Skilled nursing facility care, 384–385 Sleet, weight of, 440 Small business owners, 609–610 Smoke damage, 439 Snow, weight of, 440 Social adequacy, 374, 377 Social insurance See also Medicare; Social Security basic characteristics of, 373–375 benefit types of, 376–384 compulsory temporary disability, 30 financially self-supporting, 375 as government insurance, 29–30 impact of Affordable Care Act on Medicare, 389–390 nondiversifiable risks and, Railroad Retirement Act and, 30 reasons for, 373 unemployment, 6, 29–30, 392–395 workers compensation, 30, 395–399 Social responsibility, 45 Social Security See also Medicare Advisory Board, 402 children receiving, 377, 382 cost-of-living adjustment to, 380 credits, 375–376 definition of, 30, 375 disability benefits, 319, 383 financing, 384 financing of, 391 full funding unnecessary for, 374–375 insured status determined for, 375–376 long-range actuarial deficit of, 390–391 occupations covered by, 375 reducing long-range deficit, 391 retirement benefits of, 376–380 retirement plans integrated with, 357 700 INDEX right time to draw, 381–382 survivor benefits, 380–383 taxation of, 383–384 website for, 402 Social Security Act of 1935, 375, 392 Society auto insurance and, 506–527 burdens on, 12 costs and benefits of insurance to, 31–34 risk in, 2–18 Society for Risk Analysis (SRA), 18 Society of Actuaries, 105, 139 Society of Financial Service Professionals, 229 Soft market conditions, 54, 68 Solvency, 142–143, 146–149, 157–158, 272 South-Eastern Underwriters Association (SEUA), 144 Sovereign immunity, 411 Special agents, 108 Special Auto Insurance Policy (SAIP), 512 Special coverage policy, 186 Special damages, 408 Special form (causes-of-loss), 560 Special form (Dwelling Property 3), 534 Special form (HO-3) deductible, 442 described, 428–429 dwelling covered by, 432, 437–438 fire coverage, 438 loss of use covered by, 435 other structures covered by, 432 personal property and, 432–435, 438–440 persons insured, 431–432 property not covered by, 433–435 Section I conditions, 442–448 Section I coverages, 432–437 Section I exclusions, 437–438, 439–442 Section I perils insured against, 437–440 Section II conditions, 447–448, 462 Section II coverages, 429, 454–457, 460–461 Section II exclusions, 457–460 Special Needs Plans, Medicare, 387 Special purpose reinsurance vehicle (SPRV), 115 Specialty insurers, 517 Specific beneficiary, 235 Speculative risk, 5–6, 65 SPIAs (single premium immediate annuities), 278 Split-funded combination plan, 365 Split limit, 480 Spoilage damage, 565 Spousal IRA, 285 Sprinkel, Elizabeth, 485 SPRV (special purpose reinsurance vehicle), 115 SRA (Society for Risk Analysis), 18 Staff model HMO, 335 Standard coverage, of prescription drugs, 388 Standard deviation (SD), 21, 40 Standard error of sampling distribution, 41 Standard Policy Forms, NFIP, 539 Stanford, Allen, 420 State automobile insurance plan, 516–517 State children’s health insurance programs (SCHIP), 30 State insurance programs, 30–31 State-of-the-art defense, 417 State regulations federal v., 151–155 state insurance departments and, 145–146 state-made rates and, 149 state-mandated benefits, 297–299 for unemployment insurance, 393–394 Statistics, insurance and, 39–40 Statutory accounting principles (SAP), 146 Steam damage, 435, 440 Stenroos, Jeff, 33 Stepped-up benefit, 280 Stock brokers, 96 Stockholder lawsuits, 414 Stock insurers, 88, 90–91 Stop-loss limit, 50, 311 Straight deductible, 190 Strategic risk, Strict liability, 407 Students full-time, away from home, 431, 439, 526 good student discount for, 520–521, 526 Subjective probability, Subjective risk, Subrogation definition of, 170 homeowners insurance and, 447–448 importance of, 171–172 life insurance and, 172 principle of, 170–172 purposes of, 171 Suicide clause, 26, 233–234 Supplemental term insurance, 331 Supplementary payments, 481 Surety bonds definition of, 29, 614 insurance contracts v., 615 miscellaneous, 616 types of, 615 Surety & Fidelity Association of America, 620 Surety Information Office, 620 Surgeons equipment coverage form, 570–571 professional liability insurance, 597–598 Surgery, wrong-site, 418 Surplus, 69 Surplus lines broker, 95 Surplus-share treaty, 114 Surrender charge, 264, 280 Surrender cost index, 257 Survivor benefits, 346, 380–383, 514 Swimming pools, damage to, 438 Systematic risk, Systemic risk, 152 T T Rowe Price, 289 Tabular value method, 126 Target premium, 214 Taxable estate, 263 Taxes on capital gains, 284 deductibles for, 49–50 deferring, 276–277, 355 on distributions, 286 dividend accumulations and, 238 estate, 262–263 flexible spending accounts and, 347 on group insurance, 297 health insurance reforms, 306–307, 338 on HSAs, 312–313 immediate annuity and, 278 income, 262 individual annuities and, 283–284 of insurers, 49–50, 151 IRAs and, 285–286 life insurance and, 262–263 on long-term care insurance, 315 as penalties, 356, 362, 364 premium, 151 premium tax credits, 306 regulation of, 151 retaliatory laws influencing, 151 retention and, 49–50 on retirement plans, 354–356, 362, 364 on Social Security, 383–384 unemployment, 394 universal life insurance and, 216 Tax-sheltered annuities (TSAs), 363 TDI (Texas Department of Insurance), 197 Technological advances, 297 Telemarketing, 96 Telephone Consumer Protection Act, 585 Temporary life annuity due, 271 Temporary residence, 439 Temporary substitute vehicle, 479 10-day right to examine policy, 320 Term4Sale site, 268 Terminal reserve, 274 Terminated illness rider, 248 Termination as to any employee, 613 PAP, 498–499 INDEX Term insurance calculating premiums for, 269–272 comparison of, 223 definition of, 208 extended, 240–241 group, 331 limitations of, 210 types of, 208–209 uses of, 209 Territory, auto insurance cost influenced by, 518 Terrorism catastrophic loss and, 81, 112 as emerging risk, 67 loss of goods and services and, 12 Terrorism Risk Insurance Act (TRIA), 67, 112 Terrorism Risk Insurance Program Reauthorization Act (TRIPRA), 67, 112 Texas Department of Insurance (TDI), 197 Theatrical property coverage form, 571 Theft burglary, 608, 609, 610–611 definition of, 608 dwelling program endorsements, 534–535 employee, 607–609 homeowners insurance coverage, 439–440 identity, 464–465 of money and securities, 609 robbery, 608, 609, 611 Third-party administrator (TPA), 79 Third-party claims, 510–511 Third-party cost sharing, 329–330 Third-party-over cases, 591 TIAA-CREF site, 293, 371 Time limit on certain defenses provision, 320 Time value of money, 76–77 Title insurance, 543–545 Top-heavy plans, 357 Tortfeasor, 406 Tort liability system corporate governance and, 419–420 defective, 412–418 delays in settling and, 414 high jury awards in, 414 inefficient compensation from, 414 medical malpractice and, 418–419 reform of, 417–418, 515 rising costs of, 412–414 uncertain legal outcomes of, 414 uninsured motorists coverage and, 512 Torts, intentional, 406 Total adjusted capital, 147 Total disability, 246, 316–317 Towers Watson, 101, 121, 139 Towing costs, 493, 593 TPA (third-party administrator), 79 Traditional defined-benefit plans, 358 Traditional indemnity plans, 333–334 Traditional IRAs, 285–288 Traditional net cost method, 256–257 Trailers, 440, 479, 494, 559 Transportation expenses, 491–493 Transportation insurance, 567–571 Treaty reinsurance, 113 Trees, shrubs, and other plants, 436 Trespassers, 410 TRIA (Terrorism Risk Insurance Act), 67, 112 Trucious, Thomas, 33 Trustees, 235, 245–246 Trust-fund plan, 366 Trusts, 245–246 TSAs (tax-sheltered annuities), 363 Twisting, 150 U Ultimate net loss, 595 Umbrella policies commercial liability insurance, 595–597 personal liability insurance, 28, 471, 545–548 Underinsurance, 207, 471 Underinsured motorists coverage, 488–489 Underwriting by agents, 106 capacity, increased, 111 credit-based insurance scores in, 158–159 cycle in, 54, 68–70 decision making in, 107 definition of, 26, 105 field, 106 of group insurance, 329–330 guide for, 105 information sources for, 106–107 by insurance companies, 105–108 insurance industry capacity and, 69 line, 107 losses, 117 policy statement for, 105 principles, 105–106 rate adequacy and, 107 recent results of, 129–130 reinsurance and, 108 renewal, 108 risks in, 42, 67 steps in, 106 Unearned premium reserve, 112, 126 Unemployment categories of benefits, 393–394 compensation, eligibility requirements and, 393 EUC program for, 394 financing for, 394 701 personal risk of, 7, 10, 24–25 private insurance and, 24–25 Railroad Unemployment Insurance Act for, 30 short-term involuntary, 392 social insurance for, 6, 29–30, 392–395 tax, 394 Unfair claims practices, 109 Unfair trade practices, 150 Unfunded reserve, 48 Unified credit, 262 Unilateral contract, 176 Uninsured boaters coverage, 537 Uninsured locations, 459 Uninsured motorists coverage auto accident victims compensation from, 509–512 duties and, 497 exclusions, 487–488 financial crisis and, 485 insured persons in, 487 PAP, 485–489, 497 tort liability lawsuits and, 512 uninsured vehicles, 487 workers compensation and, 488 Uninsured persons, 299–301, 339 Unintentional loss, 23 Unit-benefit formula, 358 United States See Health-care problems, in U.S United States Aircraft Insurance Group (USAIG), 594 Unit-owners form (HO-6), 428, 430 Universal life insurance cash withdrawals from, 216 comparison of, 223 definition of, 214 flexibility in, 216 forms of, 215–216 group, 332 illustration of, 216–218 indexed, 219 limitations of, 218–219 tax treatment of, 216 unbundling component parts, 214–215 variable, 219–220 Unsatisfied judgment funds, 509 Urban Property and Reinsurance Act of 1968, 542 U.S See Health-care problems, in U.S U.S v South-Eastern Underwriters Association, 144 USAA bonds, 71 USAA Life Insurance, 264 USAIG (United States Aircraft Insurance Group), 594 Use-and-file law, 149 Utility interruption, 565 702 INDEX Utmost good faith concealment and, 173 principle of, 172–174 representations and, 172–173 warranty and, 173–174 V Valuable papers and records coverage, 558, 571 Value at risk (VAR) analysis, 79–80 Value-Based Purchasing (VBP) program, 390 Valued policy, 167–168 Valued policy law, 168 Value reporting form, 560–561 Vandalism, 438, 611 Vanguard Group, 293, 371 VAR (value at risk) analysis, 79–80 Variable annuity buying, 284 characteristics of, 279–280 fees and expenses, 280–281 guaranteed death benefit of, 280 Variable life insurance comparison of, 223 described, 213–214 universal, 219–220 Variance, 40 VBP (Value-Based Purchasing) program, 390 Verbal threshold, 513 Vesting provisions, 356 Viatical and Life Settlement Association of America, 254 Viatical settlement, 249 Vicarious liability law, 409 Volcanic eruption, 440 Voltaire, 405 W Wachter, Robert, 33 Waiting periods for disability-income insurance, 190, 318 health insurance reforms, 305 for long-term care insurance, 314 NFIP, 540 for unemployment insurance, 393 Waiver collision damage, 490–492 doctrine of, 178 nonwaiver clause and, 178 written approval of, 447 Waiver-of-premium provision, 246, 318 War auto insurance exclusions, 493 commercial liability insurance exclusions, 584 life insurance provisions and, 236 PAP exclusion for, 485 property damage from, 441 Section II special form, 459 Warranty, 173–174, 568 Waste, health care, 301–302 Watercraft endorsements, 464 Watercraft provisions in commercial liability insurance, 584 in insurance policies, 536–538 involving property damage, 461 in personal umbrella policies, 547 Section II exclusion, 458 in special form, 440 Water damage, 435, 440–441, 573 Weather conditions, 442 Weather options, 71 Whitehouse.gov site, 295 Whole life annuity due, 271 Whole life insurance current assumption, 220–221, 223 definition of, 210 dividend options, 240 indexed universal life insurance, 219 interest-sensitive, 220–221 limited-payment policy, 213 ordinary life insurance, 210–211 single-premium, 213 universal life insurance, 214–219, 223 variable universal life insurance, 219–220 Windstorm damage, 438–439, 440–441 Wisconsin State Life Insurance Fund, 31 Wisconsion Office of the Commissioner of Insurance, 197 Workers compensation insurance aging workforce and, 398–399 basic facts about, 30, 589 benefits, 397–398 claims, 75–76 commercial liability insurance and, 584 cost considerations, 398–399 covered occupations, 396–397 death and, 397 development of, 395–396 eligibility requirements for, 397 and employers liability insurance policy, 589–591 fraud and abuse, 398 homeowners insurance and, 460 laws for, 395–396 litigation and, 395–396 Longshore and Harbor Workers Compensation Act for, 538, 591 objectives of, 396 private insurance for, 28 social insurance for, 30, 395–399 state, 30 uninsured motorists coverage and, 488 Workers Compensation Research Institute, 402–403 Workman, Millicent, 62 Worksite marketing programs, 96, 332 Work tests, 375–376 Wrongful act, 589 Wrong-site surgery, 418 Y Yacht insurance, 537 Yearly rate-of-return method, 261–262 Yearly renewable term insurance, 208, 270, 331 ... Since the last edition of Principles of Risk Management and Insurance appeared, several unprecedented events have occurred that clearly demonstrate the destructive presence of risk in our society... the premier professional association of risk management and insurance educators and professionals ARIA is the publisher of The Journal of Risk and Insurance and Risk Management and Insurance Review... Library of Congress Cataloging-in-Publication Data Rejda, George E Principles of risk management and insurance / George E Rejda, Michael J McNamara Twelfth edition pages cm Includes index ISBN