Exam 3 Study Sheet FINA 341 Fall 2023

docx

School

University of South Carolina *

*We aren’t endorsed by this school

Course

341

Subject

Finance

Date

Jan 9, 2024

Type

docx

Pages

Uploaded by CorporalChimpanzeeMaster929

STUDY SHEET FOR FINA 341 EXAM 3: Lectures 17-24 Have a calculator handy! 1. Know the characteristics of an ideally insurable risk. (6)  1. There must be a large number of exposure units.  2. The loss must be accidental and unintentional.  3. The loss must be determinable and measurable.  4. The loss should not be catastrophic.  5. The chance of loss must be calculable.  6. The premium must be economically feasible. 2. Understand the basic parts of insurance contracts and why they exist (e.g., deductibles, exclusions, co-payments, coinsurance, policy limits and other insurance provisions)  Deductibles: provision by which a specified amount is subtracted from the total loss payment that would otherwise be paid.  Exclusions: provisions in an insurance contract that list the perils, losses, and property excluded from coverage.  Copayments: flat amount that the insured must pay for certain benefits, such as an office visit or prescription drug.  Coinsurance: common in property insurance contracts (aka insurance-to-value (ITV)), requires insured to maintain insurance on the property at a stated percentage of its actual cash value or its replacement cost or incur a penalty if a loss occurs. In health insurance, it requires the insured to pay a specified percentage of covered medical expenses in excess of the deductible. o Purpose is to achieve equity in rating . o Percentage of costs that the policyholder and the insurer share after the deductible has been paid. o After the deductible is met, the insurer might pay 80% of covered expenses while the insured pays the remaining 20%.  Policy Limits: the maximum amount the insurer will pay for covered losses or expenses within a specific policy period. o Can apply to different aspects of the coverage such as per occurrence, per year, or over the policy lifetime.  Other Provisions: prevent profiting from insurance and violating the principle of indemnity. o Pro-Rata Liability: each insurer pays a portion of the claim based on the proportion of coverage they provide compared to the total coverage available. o Contribution by equal shares: each insurer contributes equally to the loss, up to the limit of their policy.

3. Know how to calculate the amount of recovery in a property insurance policy with a co-insurance clause.  Coinsurance Clause Purpose: encourages the insured to insure their property.  Coinsurance clause recovery amount = (amount of insurance carried / amount of insurance required) * loss  Example: ACV (Actual Cash Value) = $500,000, 80% Coinsurance Clause -> Required Amount of Insurance = 400,000 (0.8($500,000)), Insurance Amount Actually Purchased = $300,000, Loss = $10,000. Calculate the recovery amount. o (300,000 / 400,000) * 10,000 = $7,500 recovery amount. o If the coinsurance requirement is not met at the time of the loss, the insured must share in the loss as a coinsurer. This is a penalty for not insuring to the appropriate property value. 4. Be able to determine the amount recoverable under a policy that pays on an actual cash value (ACV) basis and contains a coinsurance clause. Also understand the purpose of a coinsurance clause  ACV: value of property at the time of its damage or loss, determined by subtracting depreciation of the item from its replacement cost. o ACV = replacement cost – depreciation  Example: Jerry purchased a dining room set for $5000 and insured the furniture on an actual cash value basis. Three years later the entire set was destroyed by fire. At the time of loss, the property had depreciated in value by 50%. The replacement cost of a new dining room set at the time of loss was $6000. Ignoring any deductible, how much will Jerry collect from the insurer? o (6000 - 5000(.5)) = (6000 – 300) = $3,000 ACV o Take depreciation from the current value of the property, not the original price. 5. Understand what is meant by a “valued policy” and be able to give examples of what types of exposures are typically insurance using this type of policy.  Valued Policy: a policy that pays the face amount of insurance if a total loss occurs. Another way to explain this is that the insurer agrees to pay a specified amount (value) in the event of a covered loss, regardless of the actual value or worth of the property at the time. o Used mainly for antiques, fine arts, rare paintings, and family heirlooms. 6. Understand “other insurance” provisions in insurance policies and how to calculate losses paid based on methodologies such as pro rata and equal shares.  Pro-Rata: each insurer pays a portion of the claim based on the proportion of coverage they provide compared to the total coverage available. o Example: Suppose Bob owns a building valued at $500K. Insurance Company A agrees to write $300K of coverage, B writes 100K and C writes $100K. How much is paid by each company if a $100K loss occurs?  $60,000 from company A, $20,000 each from B and C.

 Equal Shares: each insurer contributes equally to the loss, up to the limit of their policy. o Suppose Bob owns a building valued at $500K. Insurance Company A agrees to write $100K of coverage, B writes 200K and C writes $300K. How much is paid by each company if a $150K loss occurs?  $50,000 is paid by each company since they equally share the loss. 7. Know and understand the basic principles that exist in all insurance contracts: Indemnity, Insurable Interest, Subrogation and Utmost Good Faith  Indemnity:  Insurable Interest:  Subrogation:  Utmost Good Faith: 8. Know and understand the various concepts of negligence and liability as well as the various types of damage awards. Also be able to distinguish between the 50 Percent, 51 Percent and Pure Rules.  Negligence:  Liability:  50% Rule:  51% Rule:  Pure Comparative Fault: 9. Know the basic elements found in contracts, especially insurance contracts.  4 Requirements of Insurance Contract: o 1. Must be an offer and acceptance of its terms. o 2. Exchange of consideration : the value that each party gives to the other. o 3. Each party must be legally competent (legal capacity to enter into a binding contract). o 4. Contract must be for a legal purpose .  Basic parts of an insurance contract: o Declarations: statements that provide info about property/activity being insured. o Definitions: key words or phrases and their definitions for clarity. o Insuring agreement: summarizes major promises of the insurer. o Exclusions: excluded perils, losses, and property. o Conditions: provisions of policy that qualify or place limits on the insurers promises. o Miscellaneous provisions: cancellation, subrogation, requirements if loss ocurrs. 10. Understand the major coverages in a personal auto policy (PAP) and be able to answer questions similar to the application found in slides 305-335 in the slide deck.

Your preview ends here

Eager to read complete document? Join bartleby learn and gain access to the full version

Access to all documents
Unlimited textbook solutions
24/7 expert homework help

 PAP Coverage: o 1. Liability coverage o 2. Medical payments o 3. Uninsured/underinsured motorist coverage o 4. Coverage for damage to you auto 11. Understand the concept of “no-fault” insurance, especially in the context of auto insurance.  No-Fault Insurance: 12. Understand the major coverages available in a homeowners insurance policy. Given scenarios related to losses on a homeowners policy, be able to determine the amount of recovery by the policyholder.  13. Understand how “surety bonds” operate.  Surety Bonds:  Example: USC wants to build a new dormitory. It puts a contract out to bid but wants a guarantee the work will be completed. To bid, all contractors but be "bonded" meaning they've secured a surety bond from an insurer guaranteeing their performance. o Principal = winning contractor, obliged = USC, Surety = Provides the guarantee (insurer) 14. Know what coverage in a commercial general liability (CGL) is typically policy.  15. Be able to explain the major categories of life insurance as well as disability insurance, long-term care, and workers compensation.  Term-life Insurance:  Cash Value:  Whole Life Insurance:  Universal Life Insurance:  Variable Life Insurance:  Disability Income Insurance:  Long-Term Care Insurance:  Workers Compensation: 16. Know and understand the difference between mortality, morbidity, and longevity risk.

 Mortality Risk:  Morbidity Risk:  Longevity Risk: 17. Know and understand the major defects in the US healthcare system.  1. Rising healthcare costs.  2. Large number of uninsured people.  3. Waste and inefficiency. 18. Know and understand the major provisions of the ACA as well as the underlying cost drivers in healthcare today and how some of those major provisions are changing today.  Provisions: o Lifetime and annual limits on coverage prohibited. o Preexisting condition exclusions prohibited. o Recession of insurance policies prohibited. o Retention of coverage until age 26.  Underlying cost drivers: o CUMULATIVE QUESTIONS: Review the questions from Exams 1 and 2. Several MC questions will be drawn from each exam. I will likely change the questions (and choice of answers) slightly, but the concepts tested will remain the same.