- Insurance Planning and Risk Management in .NET framework

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62 - Insurance Planning and Risk Management
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TOPIC 22: ANALYSIS AND EVALUATION OF RISK EXPOSURES
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1 Personal A Death The primary purpose of life insurance is to permit a person s dependents to live in a similar manner that was enjoyed before the person s death Two approaches evaluate the risk of premature death: (1) Human life value This is the present value of that portion of estimated future earnings that is necessary to support dependents For example, assume future income is estimated at $90,000 per year, but the economic value to dependents is only $65,000 The life value at age 35 is measured by an amount, invested at a reasonable rate, yielding an income of $65,000 per year for 30 years (up until retirement age of 65) If the discount rate used is 6 percent, the present value is $894,714 The present value of an individual reduces over time until nally disappearing at retirement age (2) Needs analysis Needs analysis requires determining needs that arise or continue to exist after a person s death and comparing them to sources that already exist, such as employer-provided life insurance and retirement accounts For example, there may be a need to provide a source of funds to support the living expenses of the family or to pay for the college education of children B Disability This is the inability to work because of sickness or accident, resulting in loss of income to the individual or family There is a tendency by individuals to underestimate the frequency and severity of long-term disability C Poor health Individuals often nd themselves in need of protection against nancial consequences of poor health D Unemployment In a volatile economy, unemployment is always a possibility Unemployment can be a signi cant cash drain to a family Emergency funds should be well funded in order to deal with temporary lapses in income E Outliving one s capital The risk of living too long is called superannuation The risk is caused by individuals not saving enough by the time retirement arrives, and the assets that have been accumulated do not last for the rest of the individual s life One product offered by insurance companies to protect against retirement risk is a life-income annuity 2 Property A Real Land and anything attached and af xed to it, and all rights inherent in ownership Real property is subject to loss from many different perils, and insurance policies provide protection B Personal Tangible (other than real estate) and intangible assets that are subject to ownership These include such things as clothes, furniture, china, artwork, vehicles, patents, and copyrights Personal property coverage is also categorized under named perils or open perils C Auto Auto insurance is considered a necessity for individuals who drive There are severe nancial consequences that arise from auto accidents on a daily basis 3 Liability A Torts are divided into two types: intentional or unintentional Intentional torts include such infringements on the rights of others as assault and battery, libel, slander, false arrest or imprisonment, trespass, and invasion of privacy Unintentional torts are those that result from negligence or carelessness
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Topic 22: Analysis and Evaluation of Risk Exposures - 63 (1) Negligence is conduct that is below the standard of care established by law for the protection of others against unreasonable risk of harm within the scope of reasonable expectation (2) Those things that must be proven to establish tort liability for negligence are as follows: (a) A duty owed by the wrongdoer to the plaintiff (b) The wrongdoer failed to conduct him- or herself in accordance with the duty owed (breach of duty) (c) Measurable damage to property or injury to the plaintiff has occurred (d) The breach of the duty is the proximate cause of the damage or injury (3) For obvious reasons, mentally incompetent persons are generally exempted from the de nition of behaving as a reasonable and prudent individual In addition, infants cannot be held negligent if they have not reached the age of reason The age of reason varies among states (4) Normally, the burden of proof for negligence lies with the injured party However, there are also three doctrines that impose liability by statute or shift the burden of proof from the injured party to the defendant (a) Negligence per se, or negligence as a matter of law, may exist when a person violates a statute Consider, for example, the speed limits established by law around schools, put in place to protect children These speed limits amount to the establishment of rules that no reasonable person should violate If the rules are violated, the injured party is relieved of the obligation of proving that the speed was unreasonable (b) Absolute liability (strict liability) arises when a person who commits certain types of torts will be liable for any injury in icted on another, regardless of willful wrongdoing or negligence on his or her part This is sometimes referred to as liability without fault Workers compensation laws impose absolute liability on employers for injuries to employees (c) Res ipsa loquitur is translated as the thing speaks for itself Under this uncommon provision in the law, a defendant is presumed guilty unless he or she can prove innocence In the eyes of the law, the fact that the accident occurred is evidence that the defendant was negligent For example, if a man walks down the street and a safe being lowered by a rope falls on him, he is not required to prove that the person lowering the safe failed to exercise due care (5) When someone is accused of negligence, there are four defenses available that may reduce or eliminate the liability (a) Assumption of the risk occurs when the injured party reasonably should have recognized and understood the danger involved in an activity and voluntarily chose to pursue the activity anyway For example, a plaintiff who took boxing lessons would have learned about all of the dangers of boxing (b) Contributory negligence is the lack of ordinary care on the part of an injured person, which combined with the defendant s negligence and contributed to the injury as a proximate cause Contributory negligence on the part of an injured party will defeat his or her claim, no matter how slight the negligence (c) Comparative negligence means that damages will be diminished in proportion to the amount of negligence attributable to the person injured or to the owner or person in control of the damaged property
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64 - Insurance Planning and Risk Management (d) Last clear chance means that the contributory negligence of an injured party will not bar his or her recovery if the defendant immediately prior to the accident had a last clear chance to prevent the accident but did not act on that opportunity (6) The collateral source rule is further protection against a negligent act (a) Under the collateral source rule, an injured person may receive the full compensation awarded by the court in a negligence suit and still obtain the bene ts of any personal insurance available to him or her (b) The collateral source rule prevents the defendant from escaping the penalty merely because the injured party provided his or her own insurance coverage (7) Vicarious liability can result from negligence (a) This type of liability is ascribed to one person or entity because of the acts of another It is based on the common law principle of repondeat superior, Let the master answer (b) A principal has vicarious liability because of the tortuous conduct or negligence of his or her agent Parents are generally liable for the acts of their children (8) Survival of tort actions extends beyond the death of the plaintiff and defendant The estate or heirs have a right to sue for loss B Libel is an intentional tort Libel is writing untrue information about someone that defames him or her C Slander is also an intentional tort Slander is verbal or spoken information about someone that defames him or her D Malpractice is alleged professional misconduct or lack of ordinary skills in the performance of a professional act A practitioner is liable for damages or injuries caused by malpractice 4 Business-related risk A Workers compensation laws impose absolute liability on employers for injuries to employees B Death or disability of a partner or proprietor may cause serious problems for the existence of a business 5 Calculation of bene ts A Property and casualty insurance calculation (1) The coverage on the dwelling and other structures under homeowners forms is on a replacement cost basis If the amount of insurance covering the building is at least 80 percent, the loss will be paid on a replacement basis (without deduction for depreciation) rather than on an actual cash basis (replacement cost less depreciation) (2) If the amount of insurance is less than 80 percent replacement cost, the company will pay the larger of the following two amounts: (a) The actual cash value (ACV) (b) The proportion of the replacement cost of the loss that the amount of insurance bears to 80 percent of the replacement cost value of the building (3) Example: John s house would cost $150,000 to rebuild; 80 percent of that amount is $120,000 John has only $100,000 of coverage If he has a kitchen re that does $30,000 worth of damage, how much will the insurance company pay (4) Solution: Because the house is 30 years old, depreciation on the damaged part of the house is 50 percent So the ACV coverage would be $15,000 Alternatively, John has
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Topic 23: Legal Aspects of Insurance - 65 $100,000 of the required $120,000 of coverage That is 83 percent of the required amount Take 8333 percent of the $30,000 loss, which is $25,000 If John has a $500 deductible, the insurance company will pay $24,500 B Health insurance calculation (1) The deductible is the retained risk When covered expenses are incurred, the rst part of the expenses is applied to the deductible, which is paid by the insured (2) After the deductible is paid, the next provision is coinsurance Coinsurance, also known as co-payment, is a split between the insured and the insurance company The most common is 80/20 If an insured has a $1,500 medical bill, a $300 deductible, and 80/20 coinsurance, the insured pays the rst $300 and 20 percent of the next $1,200 The insurance company pays 80 percent of that $1,200 (3) Next is the stop-loss limit, sometimes called the maximum out-of-pocket expense Its use becomes vital in cases of catastrophic medical expenses where the coinsurance provision may result in an individual s paying a large sum of cash For example, a plan may have a $200 deductible and an 80 percent coinsurance provision that applies to the next $5,000 In this case, the most the individual pays out of pocket is $1,200 ($200 + $1,000) C Life insurance calculation (1) There are three primary factors used to calculate the premiums of a life insurance policy (a) Mortality The probability of dying or living at a certain age An actuary determines the rate of death at each age and lists an arbitrary number of lives at each age (b) Interest Insurance companies do not need to collect the full amount of future losses from the members of the group, because they earn interest on the funds that are collected The allowance for interest is made by discounting the future claims to obtain their present value (c) Loading The portion of the premium that is designed to cover the expenses, pro t, and margin for contingencies (2) Mortality and interest are used to calculate the net premium of insurance, excluding operating expenses The gross premium adds net premium and operating expenses and is the amount that the insured pays for the policy (3) Under level premium plans, the insured pays more than the cost of protection in the early years of the policy The difference between what the insured pays and the cost of protection is the policy reserves The reserves represent the cash value of the policy Reserves equal present value of future bene ts minus present value of future premiums
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