C11 Home Assignment

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Centennial College *

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C11

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Finance

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Jan 9, 2024

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HOME ASSIGNMENT Date: November 20 th , 2023 Chapter 1 a. Provide a simple definition of risk. Where this is a chance of loss. b. Explain why pure risk is insurable but speculative risk is not. Pure risk only has the chance for a loss whereas speculative risk has a chance for a gain and a loss. Some examples are Personal risk, Property risk and Liability risk. c. Explain how losses are caused by perils but also influenced by hazards. Perils are events that may cause a loss, hazards can increase the loss severity. Some examples are Physical Hazards, slippery floors, Moral Hazards, and dishonesty. d. Outline the five main steps in the risk management process. 1. Identifying and analyzing exposures 2. Formulating options 3. Selecting the best techniques 4. Implementing the risk management plan 5. Monitoring results and modifying the plan Chapter 2 a. Describe how insurance works to spread risk.  Funds income through premiums from insureds  The insurance fund is created.  The funds outgo in the form of claim payments b. Describe the five secondary functions of insurance. 1. Aiding security gives peace of mind by substituting premiums for an uncertain loss payment. 2. Aiding credit is impossible to obtain credit without having insurance on an item (financing a car, mortgage) 3. Promoting loss prevention is when an insurer is interested in reducing or preventing losses. 4. Providing capital is when an insurer invests large amounts of money in the economy (stocks, bonds, buildings, and land). 5. Providing employment is when the insurance industry also provides indirect jobs such as Body shops, contractors, lawyers. c. Identify ten types of general insurance. 1. Fire

2. Extended Coverage 3. Business Interruption 4. Surety Bonds 5. Liability 6. Automobile 7. Accident 8. Crime 9. Floater Policies 10. Commercial Property Floaters Chapter 3 a. Explain how federal and provincial and territorial governments exercise controls to safeguard insurer solvency and protect insurance consumers. OFSI is responsible for constant supervision and enforcement of safeguards. This allows inadequately financed insurance companies to not be created and existing ones remain financially stable. The Insurance Companies Act was created as well. The Act covers the establishment of an insurance company, prerequisites to operations, and supervision of operation. Establishment of an insurance company sets out requirements as to the directors, capitalization, meetings, corporate powers, and procedures under the Act. Before a company opens for business, requirements must be met, and the following functions should be met. b. State the purpose of the statutory conditions for accident and sickness, automobile, and fire insurance. The purpose of statutory conditions for accident, sickness, automobile, and fire insurance are that their consistent approach to having their claims settled and bind the insured and insurer. Establishing certain rights and obligations for both parties. They counteract the temptation that insurers may have to create policies with sophisticated wording or "fine print" to avoid paying claims. c. Identify ten statutory conditions that apply to fire insurance policies in Canada. 1. Misrepresentation 2. Property of others 3. Change of interest 4. Material change 5. Termination 6. Requirement after loss 7. Fraud 8. Who may give notice and proof 9. Salvage 10. When loss payable Chapter 4

a. Outline the requirements for forming valid contracts under common law. The requirement for forming valid contracts under common law are as follows:  Agreement  Consideration  Capacity to legally contract  Genuine intentions  Legality of purpose b. Outline the requirements for forming valid contracts under the Civil Code of Québec . The requirement for forming valid contracts under the Civil Code of Quebec are as follows:  Consent  Capacity to contract  Cause of contract  Object of contract c. Explain why insurable interest is important to a contract of property insurance. An insurable interest in a property is shown if a person is financially harmed by a loss or damage or financially benefited by its continued existence . It is subject to the principle of indemnity . Owners, Tenants, Lessees, Custodian, Lienholders and Mortgagees have insurable interest in property. d. Explain the need for utmost good faith on the part of the following participants in insurance: i. applicant/insured. The applicant /insured knows about all the risk they want to insure. If an applicant fails to disclose all material facts, it can make the policy void and leave them with no protection. Applicants must provide all information that would influence the insurance company in deciding if they should accept or reject a risk, the terms of coverage and the premium. ii. Insurer. The insurer must display utmost good faith as it accepts payment in advance for a promise to indemnify for a possible loss in the future. Must be solvent if a loss occurs. Must deal with the client promptly and fairly. Utmost good faith is supported by 1. Materiality, Misrepresentation, Non-disclosure, or concealment Chapter 5 a. Explain three problems that can arise from the use of temporary insurance coverage and especially oral binders. There are three questions that often arise regarding temporary coverage. These include. 1. Was a contract made?  Hard to determine if a contract was made when it is done orally.  Applicants may think that an oral promise was received that coverage would be in effect while an intermediary may have said they would promise to do the best they can to get insurance as soon as possible  This is a problem if a loss occurs.

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 Courts will determine if there was a contract that existed. 2. Does the intermediary have authority?  Only some intermediaries have authority to bind coverage.  Applicants may not be covered if intermediaries don't have authority to bind coverage.  Applicants can take civil action against intermediaries because of carelessness. 3. What are the provisions of the contract?  A careful agent/broker will always deliver to the insured in writing. b. Describe five sections commonly found in insurance policies. 1. Coverage Summary is known as declarations. It includes the parties to the contract, the commencement date, term and expiry date, the premium and rate, the amounts insured. 2. Insuring agreements states the subject matter of insurance, perils insured against, the exclusions, the circumstances where the insured may receive the proceeds of insurance 3. Statutory Conditions/Quebec General Conditions applicable to auto, fire insurance policies must be printed on all of these policies but not on interim cover notes, binders or endorsements. 4. Policy conditions are referred to separately to draw attention to them. 5. A signature clause is found immediately following the insurance agreements or conditions. Signed under hand or under seal. Usually, the signature of the CEO of the company Required to be countersigned (either by employee or manager). Signed by the insurance company only, insured signature is not required. c. State the difference between pro rata and short-rate cancellation of insurance policies and when each would occur. Pro rata cancellation is a cancellation of a policy where the premium is returned in full for the unexpired term of the policy. This occurs when the insurer cancels the policy if they don't feel comfortable continuing to issue the policy. Short rate cancellation is a cancellation by the insured/client of a policy before the natural expiration. The insurance company pays a return premium that is less than the proportionate remainder that is unearned. This occurs when the insured cancels the policy for any reason. Chapter 6 a. Describe five types of insurance provider. o Stock Companies are iindividuals or other corporations that subscribe and pay in capital to form the legal entity – the corporation. o Mutals are owned by policyholders who are members. o Government Insurers are contract is between insured and the government/Crown corporation. o Capative Insurance Companies are technically an insurer but mostly used as a risk financing mechanism for large corporations wanting to self-fund potential losses.

o Lloyd’s Insurance Market is an insurance market NOT an insurance company. It cconsist of independent businesses that provide capital (members) and underwrite in syndicates. b. Explain how stock insurance companies earn profit for shareholders. Insurance companies earn profit for shareholders by two main sources. Which are underwriting gain and interest on investments. The profit from their investment comes in the form of dividends. c. Describe the function of the following departments of insurance companies: i. Finance, accounting, and investment are responsible for the books of account and producing financial statements. It handles accounts payable, manages cash flow and investments. ii. Actuarial are responsible for analyzing data and performing the calculations that determine the price of the various classes of insurance. They are also responsible for alerting management if reserves do not meet the requirements of the company. iii. Marketing, agencies, or production are responsible for developing methods of promoting the policies established. responsibility to communicate and illustrate the company's philosophy and practices. iv. Underwriting, including technical services, is responsible for examining risk and deciding if it is eligible for insurance. They study market trends and statistics to formulate policies. v. Claims, including special investigation units, have the overall responsibility of investigating, negotiating, and settling claims. A company may have in-house adjusters and or independent adjusters. d. Outline two methods of reinsuring risk and two types of reinsurance. The two methods of reinsuring risks are treaty and facultative. Treaty reinsurance is an agreement between the insurer and the reinsurer that provides automatic reinsurance without the insurer having to submit every risk. The reinsurer agrees to accept all the risks. Facultative reinsurance is placed on an individual case basis. Each case is subject to acceptance or rejection by the insurer. The two types of reinsurance are proportional and non-proportional. Proportional reinsurance is where the company shares loss payments in the same proportion that it shares premium and policy amounts. Non-proportional reinsurance is when the reinsurer's portion of the loss depends on the size of the loss. The insurer will pay all the loss up to an agreed amount and the reinsurer then pays all or part of the loss that exceeds the agreed amount to a limit that is agreed to by both the parties. Chapter 7

a. Explain how insurers get their products to the consumer through the independent agency and brokerage system, exclusive agency system, and direct writing system. 1. Independent agencies & brokerage are large insurance companies that appoint independent brokers to be their sales force and to bring clients to them. They pay a commission for each policy they issue on behalf of the broker's clients. The client list usually belongs to the broker, not the insurer. 2. Exclusive Agency System market their policies through exclusive agents who represent only one company. Not employees of the insurance company. They are paid by commission and must pay their own expenses. The client list belongs to the insurer. The commission is higher for new business to encourage production. 3. Direct Writing Companies deal directly with the public. Employ a force of producers to sell policies to prospective insureds. Producers are employees who are paid by salary, salary and cash bonus, or salary plus commission based on sales. Commission higher for new business to encourage production. Business belongs to insurance. Companies issues and services the policies and bills and collects the premiums. b. Describe how the principal–agent relationship enables one entity to legally appoint another to act on its behalf.  Under common law agents are employed to secure contracts or act for their employers in contractual matters. Agents may be independent businesspeople or employees.  Under the Civil Code of Quebec, the mandate contract by which a person called the principal commits a lawful business to the management of another called the agent who by accepting the contract is obliged to perform the contract. Places obligations on agents to their principals and obligations on the principals to their agents. Places obligations on each of them toward third parties who enter into negotiations or form contracts with them Intermediaries, through relationships or contracts with insurance companies, may be authorized to do all that the insurers do, including issuing policies and settling claims. They may only have authority to solicit applications and submit these to the insurer for consideration c. Explain the difference between implied and express contracts and provide an example of each. 1. Express Contract is when the terms of the arrangement have been specifically stated and agreed to by both parties either orally or in writing. Written contracts avoid misunderstandings. An example would be Offering to sell a computer for $1,000. 2. Implied Contract are when parties have acted in such a way that it is understood that a principal-agent relationship exists which could result in disputes because of the lack of specific terms. An example would be Dining in at a restaurant. d. State the purpose of a contract between an agent or broker and an insurer being represented. The purpose of a contract between an agent or broker and an insurer is to establish a formal agreement that outlines the responsibilities, expectations, and terms of their working relationship, like a job contract between an employee and an employer. e. Outline the responsibilities of agents or brokers under such contracts.

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 Act within the terms of their contract  Follow instructions as to types of business that may be written (write only class of risk acceptable to insurer and not exceed limits of coverage authorized)  Collect premiums and hold these amounts in trust until remitted to insurer-Remit premiums collected within a specified time limit  Advise insurer of the business written or submit applications promptly.  Advise the insurer promptly of all claims notified to the agent or broker. Chapter 8 a. Outline the key types of information commonly requested on insurance applications.  Named Insured  Policy Term  Subject of Insurance  Loss payees  Loss history  Prior Insurance  Broker's report  Signatures b. Explain the benefits of a written application versus an oral application for insurance.  Written applications.  Invaluable source of evidence  Shows accurate documentation of what was requested as well as indicates the intentions of the parties at the time the application was made  Allows consistency for a broker in how they gather relevant information about a risk to be insured.  They are less likely to overlook important information.  Serves as a checklist to guide them while asking questions and discussing a clients insurance needs  Will prompt clients to consider coverages that are not commonly sold  Reduces the risk of inaccuracies occurring or of information being overlooked.  Oral Applications  Has potential for misunderstandings and is hard to prove if an error arises  Note taking is critical (only record of transaction) c. State what factors must be considered to arrive at the total premium for insurance. Total premium is calculated by adding a loading to the pure premium. The loading can be a number of different costs such as trends in accidents and repair costs, inflation and expenses. Expenses include acquisition cost, overhead and profit.

Chapter 9 a. State the difference between direct and indirect losses and give an example of each. Direct loss is those involving damage to or destruction of the property insured. Example: Cost of replacing a stolen stereo . Indirect loss is loss resulting from the damage of the direct loss. Example: Marlen rents a suite in the basement of his house and his house burns down (loss of rental income from his tenant) b. Describe what salvage is and provide an example of how salvage could affect an insurance claim. Salvage is the leftover value of a property after it is severely damaged by a fire or other devastating perils. The insurance company can sell the property and keep the proceeds as salvage. The total loss is reduced by the salvage value, an example would be Marlen has a fire in his kitchen. The smoke from the fire leads to damage to the contents in the living room. The smoke damages his expensive shoes. Marlen’s policy covers contents and replacement costs, and he chooses to take a cash settlement for the shoes that have been damaged so he can buy a new pair. The insurer takes possession of the old, damaged shoes and has them checked and cleaned where they sell the shoes to get back some of the money, they paid Marlen for his new pair. c. Describe what subrogation is and provide an example of how subrogation could affect an insurance claim. Subrogation is when an insurance company pays a claim on behalf of the insured and then seeks reimbursement from the responsible party. An example that would be ensured is living in a townhouse where it is broken into. The insurance company pays the claim for the theft as he has insurance. The two legally liable thieves are then caught by the police and the insurance company goes after them legally to recover the amount of the claim. D. Outline the key functions and steps in the claims process.  Insured would report the loss: Can be either directly to the broker, through the broker's online reporting tool, an agent, the insurer's online reporting tool or insurance company call center.  The claims handler will record opening information and gather details of the incident such as the location of the loss.  Next, the claims handler will do an initial check of the policy coverage It will determine things such as Which policy applies to the incident, who the named insured is, if the policy period is covered when the loss occurred.  The claims handler will then advise the insured party if the loss is not covered or covered by the policy  If the loss is covered, a loss adjuster will proceed with these steps:  Verifying the policy coverage  Investigating the loss  Evaluating and assessing the damages  Negotiating or denying a claim  Arriving at a settlement

 Recommending payment  Reviewing for salvage, subrogation, and contribution e. Describe the role of insurance adjusters, including the various types of adjusters that may work on a claim. An adjuster is a person who investigates insurance claims. They make recommendations in regard to the payment of benefits from policies and negotiate payments/settlements. Adjusters will do the following:  Check their authority in handling the claim.  Check policy coverage to gather relevant information.  Supply the insurance company with relevant documentation.  Investigate people who might have information about a loss  Keep the insurance company up to date with all developments and follow their instructions. There are several types of adjuster which are:  Staff adjusters are salaried employees of an insurance company. They Investigate, negotiate, and settle claims for employers. They require a license in Quebec and New Brunswick but not every other province  Independent adjusters work for independent adjusting firms. They are not a part of the insurer and the whole company specializes in handling claims. They are required to obtain licenses issued by the government with respect to the province or territory they work in.  Telephone adjusters handle smaller claims and are straightforward about losses that don't need an adjuster to physically see the damage. All contact with the insured is by phone or via mail. They handle large volumes of claims that don't need a face-to-face interaction with an insured.  Public adjusters are employed by the insured and represent the insured’s interests during the claim. They are used for large property claims if the insured and the insurer are having disputes and the insured wants a better settlement. They are paid by the insured usually as a percentage of the claim. They are Only allowed in some jurisdictions.

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