IMch06 - CHAPTER 6 Insurance as a Risk Management...

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CHAPTER 6 Insurance as a Risk Management Technique: Principles THE NATURE OF INSURANCE PRINCIPLE OF INDEMNITY PRINCIPLE OF INSURABLE INTEREST What Constitutes Insurable Interest When the Insurable Interest Must Exist PRINCIPLE OF SUBROGATION Reasons for Subrogation Exceptions to the Principle of Subrogation PRINCIPLE OF UTMOST GOOD FAITH Representations Warranties Concealments Mistakes REQUISITES OF INSURABLE RISKS Large Number of Similar Objects Accidental and Unintentional Loss Determinable and Measurable Loss Loss Not Subject to Catastrophic Hazard Large Loss Probability of Loss Must Not Be Too High REQUIREMENTS OF AN INSURANCE CONTRACT Requirements of All Valid Contracts DISTINGUISHING CHARACTERISTICS OF INSURANCE CONTRACTS Aleatory Contract Conditional Contract Contract of Adhesion Unilateral Contract ROLE OF AGENTS AND BROKERS Authority of Agents and Brokers PRINCIPLES OF SOCIAL INSURANCE Compulsion Set Level of Benefits Floor of Protection Subsidy Unpredictability of Loss Conditional Benefits Contributions Required Attachment to Labor Force Minimal Advance Funding SOCIAL AND ECONOMIC VALUES AND COSTS OF INSURANCE Social and Economic Values Reduced Reserve Requirements Capital Freed for Investment Reduced Cost of Capital 1
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Reduced Credit Risk Loss Control Activities Business and Social Stability Social Costs of Insurance Operating the Insurance Business Losses That Are Intentionally Caused Losses That Are Exaggerated KEY TERMS AND CONCEPTS Adverse selection Floor-of-protection concept Ratification Affirmative warranty General agent Reasonable expectations Agency agreement Implied warranties Reinsurance Aleatory contract Indemnify Representation Asymmetric information Insurable interest Requisites of insurable risks Beneficiary Insurance Risk reduction Binds Insured Social insurance Broker Insurer Special agent Concealment Large-loss principle Subrogation Conditional contract Material Underwriting Conditional receipt Policies Unilateral contract Consideration Pooling Utmost good faith Contract Premium Valued policy laws Contract of adhesion Principle of indemnity Waiver Estoppel Promissory warranty Warranty Express warranties ANSWERS TO QUESTIONS FOR REVIEW AND DISCUSSION 1. If an honest mistake is made in a written insurance contract, it may be reformed if there is proof of mutual mistake or a mistake on one side that is known to be a mistake by the other party. 2. The beneficiary must prove insurable interest if evidence suggests that the policy was issued in violation of anti-gambling laws. A beneficiary might have paid the insured to name him or her beneficiary of a policy obtained for speculative purposes. Evidence may suggest that the only thing giving rise to the speculation was the desire to make money at the expense of the insurer. 3.
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This note was uploaded on 07/04/2010 for the course FIN 319 taught by Professor Briar during the Spring '10 term at Citadel.

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IMch06 - CHAPTER 6 Insurance as a Risk Management...

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