风险管理与保险原理

Chapter1 Risk and Its Treatment

Different Definitions of Risk

1. Risk: Uncertainty concerning the occurrence of a loss
2. Loss Exposure: Any situation or circumstance in which a loss is possible, regardless of whether a loss occurs
3. Objective Risk vs. Subjective Risk
   • Objective risk is defined as the relative variation of actual loss from expected loss
   • Subjective risk is defined as uncertainty based on a person’s mental condition or state of mind

Chance of Loss

1. Chance of loss: The probability that an event will occur
2. Objective Probability vs. Subjective Probability
   • Objective probability refers to the long-run relative frequency of an event based on the assumptions of an infinite number of observations and of no change in the underlying conditions
   • Subjective probability is the individual’s personal estimate of the chance of loss
3. Chance of Loss vs. Objective Risk
   • Chance of loss is the probability that an event that causes a loss will occur.
   • Objective risk is defined as the relative variation of actual loss from expected loss
   • The chance of loss may be identical for two different groups, but objective risk may be quite different!

Peril and Hazard

1. A peril is defined as the cause of the loss
   • In an auto accident, the collision is the peril
2. A hazard is a condition that increases the chance of loss
   • A physical hazard is a physical condition that increases the frequency or severity of loss
   • Moral hazard is dishonesty or character
   • Objective risk is the relative variation of actual loss from expected loss in an individual that increase the frequency or severity of loss
   • Attitudinal（心理） Hazard (Morale Hazard) is carelessness or indifference to a loss, which increases the frequency or severity of a loss
   • Legal Hazard refers to characteristics of the legal system or regulatory environment that increase the frequency or severity of loss

Classification of Risk

1. Pure and Speculative Risk
   • A pure risk is a situation in which there are only the possibilities of loss or no loss (earthquake)
   • A speculative risk is a situation in which either profit or loss is possible (gambling)
2. Diversifiable Risk and Nondiversifiable Risk
   • A diversifiable risk affects only individuals or small groups (car theft). It is also called nonsystematic or particular risk.
   • A nondiversifiable risk affects the entire economy or large numbers of persons or groups within the economy (hurricane). It is also called systematic risk or fundamental risk.
   • Government assistance may be necessary to insure nondiversifiable risks.
3. Enterprise risk encompasses all major risks faced by a business firm, which include: pure risk, speculative risk, strategic risk, operational risk, and financial risk
   • Strategic Risk refers to uncertainty regarding the firm’s financial goals and objectives.
   • Operational risk results from the firm’s business operations.
   • Financial Risk refers to the uncertainty of loss because of adverse changes in commodity prices, interest rates, foreign exchange rates, and the value of money.
4. Enterprise Risk Management combines into a single unified treatment program all major risks faced by the firm:
   • Pure risk
   • Speculative risk
   • Strategic risk
   • Operational risk
   • Financial risk
5. As long as all risks are not perfectly correlated, the firm can offset one risk against another, thus reducing the firm’s overall risk.
6. Treatment of financial risks requires the use of complex hedging techniques, financial derivatives, futures contracts and other financial instruments.

Major Personal Risks and Commercial Risks

Major Personal Risks

1. Personal risks are risks that directly affect individual or family. They involve the possibility of a loss or reduction in income, extra expenses or depletion（损耗） of financial assets, due to:
   • Premature（过早的） death of family head
   • Insufficient income during retirement
   • Poor health (catastrophic medical bills and loss of earned income)
   • Involuntary（非自愿的） unemployment
2. Property risks involve the possibility of losses associated with the destruction or theft of property
3. Direct loss vs. indirect loss
   • A direct loss is a financial loss that results from the physical damage, destruction, or theft of the property, such as fire damage to a home
   • An indirect or consequential loss is a financial loss that results indirectly from the occurrence of a direct physical damage or theft loss, e.g., the additional living expenses after a fire
4. Liability（责任） risks involve the possibility of being held legally liable for bodily injury or property damage to someone else
   • There is no maximum upper limit with respect to the amount of the loss
   • A lien（扣押） can be placed on your income and financial assets
   • Legal defense costs can be enormous（巨大的）

Major Commercial Risks

1. Firms face a variety of pure risks that can have serious financial consequences if a loss occurs:
   • Property risks, such as damage to buildings, furniture and office equipment
   • Liability risks, such as suits for defective（有缺陷的） products, pollution, and sexual harassment
   • Loss of business income, when the firm must shut down for some time after a physical damage loss
   • Other risks to firms include crime exposures, human resource exposures, foreign loss exposures, intangible property exposures, and government exposures

Burden（负担） of Risk on Society

The presence of risk results in three major burdens on society:

• In the absence of insurance, individuals and business firms would have to maintain large emergency funds to pay for unexpected losses
• The risk of a liability lawsuit may discourage innovation, depriving（剥夺） society of certain goods and services
• Risk causes worry and fear

Techniques for Managing Risk

1. Risk Control refers to techniques that reduce the frequency or severity of losses:
   • Avoidance
   • Loss prevention refers to activities to reduce the frequency of losses
   • Loss reduction refers to activities to reduce the severity of losses
2. Risk Financing（风险融资） refers to techniques that provide for payment of losses after they occur:
   • Retention（风险自留） means that an individual or business firm retains part or all of the losses that can result from a given risk.
   • Active retention means that an individual is aware of the risk and deliberately plans to retain all or part of it
   • Passive retention means risks may be unknowingly retained because of ignorance, indifference, or laziness
   • Self Insurance is a special form of planned retention by which part or all of a given loss exposure is retained by the firm
3. A Noninsurance transfer transfers a risk to another party.
   • A transfer of risk by contract, such as through a service contract or a hold-harmless clause in a contract
   • Hedging is a technique for transferring the risk of unfavorable price fluctuations to a speculator by purchasing and selling futures contracts on an organized exchange
   • Incorporation of a business firm transfers to the creditors（法人） the risk of having
4. For most people, insurance is the most practical method for handling major risks
   • Risk transfer is used because a pure risk is transferred to the insurer.
   • The pooling technique is used to spread the losses of the few over the entire group
   • The risk may be reduced by application of the law of large numbers

Chapter2 Insurance and Risk

Definition and Basic Characteristics of Insurance

Definition of Insurance

• Insurance is the pooling of fortuitous（偶然的） losses by transfer of such risks to insurers, who agree to indemnify（赔偿） insureds for such losses, to provide other pecuniary（金钱的） benefits on their occurrence, or to render（提供） services connected with the risk

Basic Characteristics of Insurance

1. Pooling of losses
   • Pooling involves spreading losses incurred（遭受） by the few over the entire group
   • Risk reduction is based on the Law of Large Numbers
   • According to the Law of Large Numbers, the greater the number of exposures, the more closely will the actual results approach the probable results that are expected from an infinite number of exposures.
2. Payment of fortuitous losses
   • A fortuitous loss is one that is unforeseen, unexpected, and occur as a result of chance
3. Risk transfer
   • A pure risk is transferred from the insured to the insurer, who typically is in a stronger financial position
4. Indemnification（赔偿）
   • The insured is restored to his or her approximate financial position prior to the occurrence of the loss

Characteristics of An Ideally Insurable Risk

1. Large number of exposure units
   • to predict average loss based on the law of large numbers
2. Accidental and unintentional loss
   • to assure random occurrence of events
3. Determinable and measurable loss
   • to determine how much should be paid
4. No catastrophic loss
   • to allow the pooling technique to work
   • exposures to catastrophic loss can be managed by using reinsurance, dispersing（分散） coverage over a large geographic area, or using financial instruments, such as catastrophe bonds
5. Calculable chance of loss
   • to establish a premium that is sufficient to pay all claims and expenses and yields a profit during the policy period
6. Economically feasible premium
   • so people can afford to purchase the policy
   • For insurance to be an attractive purchase, the premiums paid must be substantially less than the face value, or amount, of the policy
7. Based on these requirements:
   • Most personal, property and liability risks can be insured
   • Market risks, financial risks, production risks and political risks are difficult to insure

Adverse Selection and Insurance

1. Adverse selection is the tendency of persons with a higher-than-average chance of loss to seek insurance at standard rates
2. If not controlled by underwriting, adverse selection results in higher-than-expected loss levels
3. Adverse selection can be controlled by:
   • careful underwriting (selection and classification of applicants for insurance)
   • policy provisions（规定） (e.g., suicide clause in life insurance)

Insurance and Gambling Compared

1. Insurance
   • Insurance is a technique for handing an already existing pure risk
   • Insurance is always socially productive:
     

     both parties have a common interest in the prevention of a loss

2. Gambling
   • Gambling creates a new speculative risk
   • Gambling is not socially productive
     

     The winner’s gain comes at the expense of the loser

Insurance and Hedging Compared

1. Insurance
   • Risk is transferred by a contract
   • Insurance involves the transfer of pure (insurable) risks
   • Insurance can reduce the objective risk of an insurer
     

     through the Law of Large Numbers

2. Hedging
   • Risk is transferred by a contract
   • Hedging involves risks that are typically uninsurable
   • Hedging does not result in reduced risk

Types of Insurance

Types of Private Insurance

1. Life and Health
   • Life insurance pays death benefits to beneficiaries when the insured dies
   • Health insurance covers medical expenses because of sickness or injury
   • Disability plans pay income benefits
2. Property and Liability
   • Property insurance indemnifies property owners against the loss or damage of real or personal property
   • Liability insurance covers the insured’s legal liability arising out of property damage or bodily injury to others
   • Casualty insurance refers to insurance that covers whatever is not covered by fire, marine, and life insurance
3. Private insurance coverages can be grouped into two major categories
   • Personal lines: coverages that insure the real estate and personal property of individuals and families or provide protection against legal liability
   • Commercial lines: coverages for business firms, nonprofit organizations, and government agencies

Types of Government Insurance

1. Social Insurance Programs
   • Financed entirely or in large part by contributions from employers and/or employees
   • Benefits are heavily weighted in favor of low-income groups
   • Eligibility（资格） and benefits are prescribed（规定） by statute（法规）
   • Examples: Social Security, Unemployment, Workers Compensation
2. Other Government Insurance Programs
   • Found at both the federal and state level
   • Examples:Federal flood insurance, state health insurance pools

Benefits and Costs of Insurance to Society

Social Benefits of Insurance

1. Indemnification for Loss
2. Reduction of Worry and Fear
3. Source of Investment Funds
4. Loss Prevention
5. Enhancement of Credit

Social Costs of Insurance

1. Cost of Doing Business
   • An expense loading is the amount needed to pay all expenses, including commissions, general administrative expenses, state premium taxes, acquisition expenses, and an allowance for contingencies and profit
2. Fraudulent（欺诈） Claims
3. Inflated（涨价） Claims
4. Higher premiums to cover additional losses reduce disposable income（可支配收入） and consumption of other goods and services

Chapter3 Introduction to Risk Management

Meaning of Risk Management

1. Risk Management is a process that identifies loss exposures faced by an organization and selects the most appropriate techniques for treating such exposures
2. A loss exposure is any situation or circumstance in which a loss is possible, regardless of whether a loss occurs
   • E.g., a plant that may be damaged by an earthquake, or an automobile that may be damaged in a collision

Objectives of Risk Management

1. Risk management has objectives before and after a loss occurs
2. Pre-loss objectives:
   • Prepare for potential losses in the most economical way
   • Reduce anxiety
   • Meet any legal obligations
3. Post-loss objectives:
   • Survival of the firm
   • Continue operating
   • Stability of earnings
   • Continued growth of the firm
   • Minimize the effects that a loss will have on other persons and on society

Steps in the Risk Management Process

Risk Management Process

1. Identify potential losses
2. Measure and analyze the loss exposures
3. Select the appropriate combination of techniques for treating the loss exposures
4. Implement and monitor the risk management program

Identify Loss Exposures

1. Property loss exposures
2. Liability loss exposures
3. Business income loss exposures
4. Human resources loss exposures
5. Crime loss exposures
6. Employee benefit loss exposures
7. Foreign loss exposures
8. Intangible property loss exposures
9. Failure to comply（遵从） with government rules and regulations
10. Risk Managers have several sources of information to identify loss exposures:
    • Risk analysis questionnaires and checklists（清单）
    • Physical inspection
    • Flowcharts（流程图）
    • Financial statements
    • Historical loss data
11. Industry trends and market changes can create new loss exposures.
    • e.g., exposure to acts of terrorism

Measure and Analyze Loss Exposures

1. Estimate for each type of loss exposure:
   • Loss frequency refers to the probable number of losses that may occur during some time period
   • Loss severity refers to the probable size of the losses that may occur
2. Rank exposures by importance
3. Loss severity is more important than loss frequency:
   • The maximum possible loss is the worst loss that could happen to the firm during its lifetime
   • The probable maximum loss is the worst loss that is likely to happen

Select the Appropriate Combination of Techniques for Treating the Loss Exposures

1. Risk control refers to techniques that reduce the frequency and severity of losses
2. Methods of risk control include:
   • Avoidance
   • Loss prevention
   • Loss reduction
3. Avoidance means a certain loss exposure is never acquired or undertaken, or an existing loss exposure is abandoned
   • The chance of loss is reduced to zero
   • It is not always possible, or practical, to avoid all losses
4. Loss prevention refers to measures that reduce the frequency of a particular loss
   • e.g., installing safety features on hazardous products
5. Loss reduction refers to measures that reduce the severity of a loss after it occurs
   • e.g., installing an automatic sprinkler system
6. Risk financing refers to techniques that provide for the payment of losses after they occur
7. Methods of risk financing include:
   • Retention
   • Non-insurance Transfers
   • Commercial Insurance

Risk Financing Methods: Retention（保留）

1. Retention means that the firm retains part or all of the losses that can result from a given loss, Retention is effectively used when:
   • No other method of treatment is available
   • The worst possible loss is not serious
   • Losses are highly predictable
2. The retention level is the dollar amount of losses that the firm will retain
3. A captive insurer（自保险公司） is an insurer owned by a parent firm for the purpose of insuring the parent firm’s loss exposures
   • A single-parent captive is owned by only one parent
   • An association or group captive is an insurer owned by several parents
4. Reasons for forming a captive include:
   • The parent firm may have difficulty obtaining insurance
   • To take advantage of a favorable regulatory environment
   • Costs may be lower than purchasing commercial insurance
   • A captive insurer has easier access to a reinsurer
   • A captive insurer can become a source of profit
5. Premiums paid to a single parent (pure) captive are generally not income-tax deductible.
6. They may be tax deductible（可减税的） if:
   • The transaction is a bona fide（善意的） insurance transaction
   • A brother-sister relationship exists
   • The captive insurer writes a substantial（大量） amount of unrelated business
   • The insureds are not the same as the shareholders of the captive
7. Premiums paid to a group captive are usually income-tax deductible.
8. Self-insurance, or self-funding is a special form of planned retention by which part or all of a given loss exposure is retained by the firm
9. A risk retention group (RRG) is a group captive that can write any type of liability coverage except employers’ liability, workers compensation, and personal lines
   • They are exempt（免除） from many state insurance laws
10. Advantages:
    • Save on loss costs
    • Save on expenses
    • Encourage loss prevention
    • Increase cash flow
11. Disadvantages:
    • Possible higher losses
    • Possible higher expenses
    • Possible higher taxes

Risk Financing Methods: Non-insurance Transfers

1. A non-insurance transfer is a method other than insurance by which a pure risk and its potential financial consequences are transferred to another party
   • Examples include: contracts, leases, hold-harmless agreements
2. Advantages
   • Can transfer some losses that are not insurable
   • Less expensive
   • Can transfer loss to someone who is in a better position to control losses
3. Disadvantages
   • Contract language may be ambiguous, so transfer may fail
   • If the other party fails to pay, firm is still responsible for the loss
   • Insurers may not give credit for transfers

Risk Financing Methods: Insurance

1. Insurance is appropriate for low-probability, high-severity loss exposures
   • The risk manager selects the coverages needed, and policy provisions
   • A deductible is a specified amount subtracted from the loss payment otherwise payable to the insured
   • In an excess insurance policy, the insurer pays only if the actual loss exceeds the amount a firm has decided to retain
   • The risk manager selects the insurer, or insurers, to provide the coverages
   • The risk manager negotiates the terms（条款） of the insurance contract
   • A manuscript policy is a policy specially tailored for the firm
   • The parties must agree on the contract provisions, endorsements, forms, and premiums
   • Information concerning insurance coverages must be disseminated（散布） to others in the firm
   • The risk manager must periodically review the insurance program
2. Disadvantages
   • Premiums may be costly
   • Negotiation of contracts takes time and effort
   • The risk manager may become lax（松懈） in exercising loss control
3. Advantages
   • Firm is indemnified for losses
   • Uncertainty is reduced
   • Insurers can provide valuable risk management services
   • Premiums are income-tax deductible

Market Conditions and the Selection of Risk Management Techniques

1. Risk managers may have to modify their choice of techniques depending on market conditions in the insurance markets
2. The insurance market experiences an underwriting cycle
   • In a “hard” market, profitability is declining, underwriting standards are tightened, premiums increase, and insurance is hard to obtain
   • In a “soft” market, profitability is improving, standards are loosened, premiums decline, and insurance become easier to obtain

Implement and Monitor the Risk Management Program

1. Implementation of a risk management program begins with a risk management policy statement that:
   • Outlines the firm’s objectives and policies
   • Educates top-level executives
   • Gives the risk manager greater authority
   • Provides standards for judging the risk manager’s performance
2. A risk management manual may be used to:
   • Describe the risk management program
   • Train new employees
3. A successful risk management program requires active cooperation from other departments in the firm
4. The risk management program should be periodically reviewed and evaluated to determine whether the objectives are being attained
   • The risk manager should compare the costs and benefits of all risk management activities

Benefits of Risk Management

• Enables firm to attain its pre-loss and post-loss objectives more easily
• A risk management program can reduce a firm’s cost of risk
• Reduction in pure loss exposures allows a firm to enact（制定） an enterprise risk management program to treat both pure and speculative loss exposures
• Society benefits because both direct and indirect losses are reduced

Personal Risk Management

• Personal risk management refers to the identification of pure risks faced by an individual or family, and to the selection of the most appropriate technique for treating such risks
• The same principles applied to corporate risk management apply to personal risk management

Chapter6 Insurance Company Operations

Rating and Ratemaking（费率厘定）

1. Ratemaking refers to the pricing of insurance and the calculation of insurance premiums
   • A rate is the price per unit of insurance
   • An exposure unit is the unit of measurement used in insurance pricing
     premium = rate\times exposure units
   • Total premiums charged（收取） must be adequate for paying all claims and expenses during the policy period
   • Rates and premiums are determined by an actuary, using the company’s past loss experience and industry statistics
   • Actuaries（精算师） also determine the adequacy of loss reserves, allocate expenses, and compile（汇集） statistics for company management and state regulatory officials.

Underwriting（核保）

1. Underwriting refers to the process of selecting, classifying, and pricing applicants for insurance
2. A statement of underwriting policy establishes policies that are consistent with the company’s objectives
3. The underwriting policy is stated in an underwriting guide, which specifies:
   • Acceptable, borderline, and prohibited classes of business
   • Amounts of insurance that can be written
   • Territories to be developed
   • Forms and rating plans to be used
   • Business that requires approval by a senior underwriter
4. The basic principles of underwriting include:
   • Attain an underwriting profit
   • Select prospective insureds according to the company’s underwriting standards
     

     Reduce adverse selection against the insurer
     Adverse selection is the tendency of people with a higher-than-average chance of loss to seek insurance at standard rates. If not controlled by underwriting, this will result in higher-than-expected loss levels.

   • Provide equity among the policyholders
     

     One group of policyholders should not unduly（过度的） subsidize another group

Steps in Underwriting

1. Underwriting starts with the agent（代理人）
2. Information for underwriting comes from:
   • The application
   • The agent’s report
   • An inspection report
   • Physical inspection
   • A physical examination and attending physician’s report
   • MIB report
3. After reviewing the information, the underwriter can:
   • Accept the application and recommend that the policy be issued
   • Accept the application subject to restrictions or modifications
   • Reject the application
4. Many insurers now use computerized underwriting for certain personal lines of insurance that can be standardized

Underwriting Considerations

1. Other factors considered in underwriting include:
   • Rate adequacy
   • Availability of reinsurance
   • Whether policy can or should be cancelled or renewed

Production（营销）

1. Production refers to the sales and marketing activities of insurers
   • Agents are often referred to as producers（销售人员）
   • Life insurers have an agency or sales department
   • Property and liability insurers have marketing departments
2. The marketing of insurance has been characterized by a trend toward professionalism
   • An agent should be a competent professional with a high degree of technical knowledge in a particular area of insurance and who also places the needs of his or her clients first

Claims settlement（理赔）

1. The objectives of claims settlement include:
   • Verification of a covered loss
   • Fair and prompt payment of claims
   • Personal assistance to the insured
2. Some laws prohibit unfair claims practices, such as:
   • Refusing to pay claims without conducting a reasonable investigation
   • Not attempting to provide prompt, fair, and equitable settlements
   • Offering lower settlements to compel insureds to institute lawsuits to recover amounts due

Types of Claims Adjustors（理赔员）

1. Major types of claims adjustors include:
   • An insurance agent often has authority to settle small first-party claims up to some limit
   • A company adjustor is usually a salaried employee who will investigate a claim, determine the amount of loss, and arrange for payment.
   • An independent adjustor is an organization or individual that adjusts claims for a fee
   • A public adjustor represents the insured and is paid a fee based on the amount of the claim settlement

Steps in Claim Settlement

1. The claim process begins with a notice of loss, typically immediately or as soon as possible after a loss has occurred.
2. Next, the claim is investigated
   • An adjustor must determine that a covered loss has occurred and determine the amount of the loss
3. The adjustor may require a proof of loss before the claim is paid
4. The adjustor decides if the claim should be paid or denied
   • Policy provisions address how disputes（争论） may be resolved

Reinsurance（再保险）

1. Reinsurance is an arrangement by which the primary insurer that initially writes the insurance transfers to another insurer part or all of the potential losses associated with such insurance
   • The primary insurer is the ceding company（分保公司）
   • The insurer that accepts the insurance from the ceding company is the reinsurer（再保险公司）
   • The retention limit（自留限额） is the amount of insurance retained by the ceding company
   • The amount of insurance ceded to the reinsurer is known as a cession（分保额）
2. Reinsurance is used to:
   • Increase underwriting capacity
   • Stabilize profits
   • Reduce the unearned premium reserve, which represents the unearned portion of gross premiums on all outstanding policies at the time of valuation
   • Provide protection against a catastrophic loss
   • Retire from business or from a line of insurance or territory
   • Obtain underwriting advice on a line for which the insurer has little experience

Types of Reinsurance Agreements

1. There are two principal forms of reinsurance:
   • Facultative reinsurance（临时再保险） is an optional, case-by-case method that is used when the ceding company receives an application for insurance that exceeds its retention limit
     

     Often used when the primary insurer has an application for a large amount of insurance

   • Treaty reinsurance（合约再保险） means the primary insurer has agreed to cede insurance to the reinsurer, and the reinsurer has agreed to accept the business
     

     All business that falls within the scope of the agreement is automatically reinsured according to the terms of the treaty

Methods for Sharing Losses

1. There are two basic methods for sharing losses:
   • Under the Pro rata method（按比例分配）, the ceding company and reinsurer agree to share losses and premiums based on some proportion
   • Under the Excess method（超额损失分担）, the reinsurer pays only when covered losses exceed a certain level
2. Under a quota-share treaty（成数再保险合约）, the ceding insurer and the reinsurer agree to share premiums and losses based on some proportion
   • Example: assume that Apex Fire Insurance and Geneva Re enter into a quota-share arrangement by which losses and premiums are shared 50-50
     If a $100,000 loss occurs, Apex Fire pays $100,000 to the insured but is reimbursed by Geneva Re for $50,000
3. Under a surplus-share treaty（溢额再保险合约）, the reinsurer agrees to accept insurance in excess of the ceding insurer’s retention limit, up to some maximum amount
   • Example: assume that Apex Fire Insurance has a retention limit of $200,000 (called a line) for a single policy, and that four lines, or $800,000, are ceded to Geneva Re. Assume that a $500,000 property insurance policy is issued. Apex Fire takes the first $200,000 of insurance, or two-fifths, and Geneva Re takes the remaining $300,000, or three-fifths.
4. An excess-of-loss treaty（超额损失再保险） is designed for protection against a catastrophic loss
   • A treaty can be written to cover a single exposure, a single occurrence, or excess losses
   • Example: Apex Fire Insurance wants protection for all windstorm losses in excess of $1 million. Assume Apex enters into an excess-of-loss arrangement with Franklin Re to cover single occurrences during a specified time period. Franklin Re agrees to pay all losses exceeding $1 million but only to a maximum of $10 million.If a $5 million hurricane loss occurs, Franklin Re would pay $4 million.
5. A reinsurance pool（再保险集团） is an organization of insurers that underwrites insurance on a joint basis
6. Reinsurance pools work in two ways:
   • Each pool member agrees to pay a certain percentage of every loss.
   • Each pool member pays for his or her share of losses below a certain amount; losses exceeding that amount are then shared by all members in the pool.

Alternatives to Traditional Reinsurance

1. Some insurers use the capital markets as an alternative to traditional reinsurance
2. Securitization of risk means that an insurable risk is transferred to the capital markets through the creation of a financial instrument, such as a catastrophe bond or futures contract
3. Catastrophe bonds are corporate bonds that permit the issuer of the bond to skip or reduce the interest payments if a catastrophic loss occurs
   • Catastrophe bonds are growing in importance and are now considered by many to be a standard supplement to traditional reinsurance.

Investments（投资）

1. Because premiums are paid in advance, they can be invested until needed to pay claims and expenses
2. Investment income is extremely important in reducing the cost of insurance to policyowners and offsetting unfavorable underwriting experience
3. Life insurance contracts are long-term; thus, safety of principal is a primary consideration
4. In contrast to life insurance, property insurance contracts are short-term in nature, and claim payments can vary widely depending on catastrophic losses, inflation, medical costs, etc

Other Insurance Company Functions

1. Information systems are extremely important in the daily operations of insurers.
   • Computers are widely used in many areas, including policy processing, simulation studies, market analysis, and policyholder services.
2. The accounting department prepares financial statements and develops budgets
3. In the legal department, attorneys（律师） are used in advanced underwriting and estate planning
4. Property and liability insurers also provide many loss control services

Chapter7 Financial Operations of Insurers

Property and Casualty Insurers

Financial Statements（财务报表） of Property and Casualty Insurers

1. A balance sheet is a summary of what a company owns (assets) and what it owes (liabilities), and the difference between total assets and total liabilities (owners’ equity)
   Total\ Assets=Total\ Liabilities+Owners'\ Equity
2. The primary assets for an insurance company are financial assets
3. Insurers’ liabilities include required reserves
4. A loss reserve（损失准备金） is an estimated amount for:
   • Claims reported and adjusted, but not yet paid
   • Claims reported and filed, but not yet adjusted
   • Claims incurred but not yet reported to the company
5. Case reserves（案例准备金） are loss reserves that are established for each individual claim
6. Methods for determining case reserves include:
   • The judgment method: a claim reserve is established for each individual claim
   • The average value method: an average value is assigned to each claim
   • The tabular（表格） method: loss reserves are determined for certain claims for which the amounts paid depend on data derived from mortality, morbidity, and remarriage tables
7. The loss ratio method establishes aggregate loss reserves for a specific coverage line
   • A formula based on the expected loss ratio is used to estimate the loss reserve
8. The incurred-but-not-reported (IBNR) reserve（已发生未报告准备金） is a reserve that must be established for claims that have already occurred but that have not yet been reported
9. The unearned premium reserve（未到期保险准备金） is a liability item that represents the unearned portion of gross premiums on all outstanding policies at the time of valuation
   • Its purpose is to pay for losses that occur during the policy period
   • It is also needed so that refunds can be paid to policyholders that cancel their coverage
   • It also serves as the basis for determining the amount that must be paid to a reinsurer for carrying reinsured polices
   • The annual pro rata method（年比例分配法） is one method of calculating the reserve
10. Policyholders’ surplus（保单持有人盈余） is the difference between an insurance company’s assets and liabilities
    • The stronger a company’s surplus position, the greater is the security for its policyholders
    • The level of surplus is an important determinant of the amount of new business that an insurance company can write
11. The income and expense statement（损益表） summarizes revenues and expenses paid over a specified period of time
    • The two principal sources of revenue for an insurance company are premiums and investment income
    • Earned premiums（已赚保费） are those premiums for which the service for which the premiums were paid (insurance protection) has been rendered
    • Expenses include the cost of adjusting claims, paying the insured losses that occurred, commissions to agents, premium taxes, and general insurance expenses

Measuring Profit or Loss

1. The loss ratio（损失率） is the ratio of incurred losses and loss adjustment expenses to premiums earned
   \text{Loss Ration}=\frac{\text{Incurred Losses}+\text{Loss Adjustment Expenses}}{\text{Premiums Earned}}
2. The expense ratio（费用率） is equal to the company’s underwriting expenses divided by written premiums
   \text{Expense Ration}=\frac{\text{Underwriting Expenses}}{\text{Premiums Written}}
   3.The combined ratio（综合比率） is the sum of the loss ratio and the expense ratio. A positive ratio indicates an underwriting loss
3. The investment income ratio（投资收益率） compares net investment income to earned premiums
   \text{Investment Income Ratio}=\frac{\text{Net Investment Income}}{\text{Earned Premiums}}
4. The overall operating ratio（总体经营比率） is equal to the combined ratio minus the investment income ratio

Life Insurance Companies

Financial Statements of Life Insurers

1. The balance sheet
   • The assets of a life insurer have a longer duration, on average, than those of property and casualty insurers
   • Because many life insurance policies have a savings element, life insurers keep an interest-bearing asset called “contract loans（合同贷款）” or “policy loans（保单贷款）”
   • A life insurance company may have separate accounts for assets backing interest-sensitive products, such as variable annuities
   • Policy reserves are a liability item on the balance sheet that must be offset by assets equal to that amount
   • State laws specify the minimum basis for calculating policy reserves
   • The reserve for amounts held on deposit is a liability that represents funds that are owed to policyholders and to beneficiaries
   • The asset valuation reserve is a statutory account designed to absorb asset value fluctuations not caused by changing interest rates
2. Policyholders’ surplus is less volatile in the life insurance industry than in the property and casualty insurance industry
3. Benefit payments, including death benefits paid to beneficiaries and annuity benefits paid to annuitants, are the life insurer’s major expense
4. A life insurer’s net gain from operations equals total revenues less total expenses, policyowner dividends, and federal income taxes

Measuring the Performance of Life Insurers

1. A number of measures can be used to gauge the performance of life insurers
   • Pre-tax or after-tax net income vs. total assets
   • Rate of return on policyowners’ surplus

Ratemaking in Property and Casualty Insurance

1. State Laws Require:
   • Rates should be adequate for paying all losses and expenses
   • Rates should not be excessive, such that policyholders are paying more than the actual value of their protection
   • Rates must not be unfairly discriminatory; exposures that are similar with respect to losses and expenses should not be charged significantly different rates
2. Business Rate-Making Objectives include:
   • Rates should be easy to understand
   • Rates should be stable over short periods of time
   • Rates should be responsive over time to changing loss exposures and changing economic conditions
   • The rating system should encourage loss control activities
     

     Basic Ratemaking Definitions
     A rate is the price per unit of insurance.
     An exposure unit（风险单位） is the unit of measurement used in insurance pricing, e.g., a car-year
     The pure premium（纯粹保费） is the portion of the rate needed to pay losses and loss adjustment expenses
     Loading（附加保费） is the amount that must be added to the pure premium for other expenses, profit, and a margin for contingencies（发生意外的预留量）
     The gross premium（毛保费） consists of the pure premium and a loading element
     The gross premium paid by the insured consists of the gross rate（毛费率） multiplied by the number of exposure units

3. There are three basic rate making methods in property and casualty insurance
4. Judgment rating（判断费率法） means that each exposure is individually evaluated, and the rate is determined largely by the judgment of the underwriter
5. Class, or manual rating（分类费率法） means that exposures with similar characteristics are placed in the same underwriting class, and each is charged the same rate
6. Class rates are determined using two basic methods:
   • Under the pure premium method（纯粹保费方法）, the pure premium can be determined by dividing the dollar amount of incurred losses and loss-adjustment expenses by the number of exposure units
   • Under the loss ratio method（损失率方法）, the actual loss ratio is compared with the expected loss ratio, and the rate is adjusted accordingly
7. Merit rating（增减费率法） is a rating plan by which class rates are adjusted upward or downward based on individual loss experience
   • Under a schedule rating（表定费率） plan, each exposure is individually rated
   • Under experience rating（经验费率）, the class or manual rate is adjusted upward or downward based on past loss experience
   • Under a retrospective rating（追溯费率） plan, the insured’s loss experience during the current policy period determines the actual premium paid for that period

Ratemaking in Life Insurance

1. Life insurance actuaries use a mortality table or individual company experience to determine the probability of death at each attained age
2. Expected future payments are discounted back to the start of the coverage period and summed to determine the net single premium or level installment premiums
3. The annual expected value of death claims equals the probability of death times the amount the insurer must pay if death occurs

Chapter9 Fundamental Legal Principles

Principle of Indemnity（损失赔偿原则）

The insurer agrees to pay no more than the actual amount of the loss

1. Purpose:
   • To prevent the insured from profiting from a loss
   • To reduce moral hazard
2. In property insurance, indemnification is based on the actual cash value (ACV) of the property at the time of loss
3. There are three main methods to determine actual cash value:
   • Replacement cost less depreciation（重置成本减去折旧）
   • Fair market value（公平市场价值） is the price a willing buyer would pay a willing seller in a free market
   • Broad evidence rule（广泛证据原则） means that the determination of ACV should include all relevant factors an expert would use to determine the value of the property
4. There are some exceptions to the principle of indemnity:
   • A valued policy（定值保单） pays the face amount of insurance if a total loss occurs
   • Some states have a valued policy law（定值保单法） that requires payment of the face amount of insurance to the insured if a total loss to real property occurs from a peril specified in the law
   • Replacement cost insurance（重置成本保险） means there is no deduction（扣除） for depreciation in determining the amount paid for a loss
   • A life insurance contract is a valued policy that pays a stated sum to the beneficiary upon the insured’s death

Principle of Insurable Interest（可保利益原则）

The insured must be in a position to lose financially if a covered loss occurs

1. Purposes:
   • To prevent gambling
   • To reduce moral hazard
   • To measure the amount of the insured’s loss
2. An insurable interest can be supported by:
   • Ownership of property
   • Potential legal liability
   • Serving as a secured creditor（具抵押债权人）
   • Contractual rights（合同权利）
3. The question of insurable interest does not arise when you purchase life insurance on your own life
4. Insurable interest in another person’s life can be shown by close family ties, marriage, or a pecuniary (financial) interest
5. When must insurable interest exist?
   • Property insurance: at the time of the loss
   • Life insurance: only at inception（开始） of the policy

Principle of Subrogation（代位求偿原则）

Substitution of the insurer in place of the insured for the purpose of claiming indemnity from a third party for a loss covered by insurance.

1. Purpose:
   • To prevent the insured from collecting twice for the same loss
   • To hold the negligent person responsible for the loss
   • To hold down insurance rates
2. The insurer is entitled（有权） only to the amount it has paid under the policy
3. The insured cannot impair（损害） the insurer’s subrogation rights
4. Subrogation does not apply to life insurance contracts
5. The insurer cannot subrogate against its own insureds

Principle of Utmost Good Faith（最大诚信原则）

A higher degree of honesty is imposed on both parties to an insurance contract than is imposed on parties to other contracts

1. Supported by three legal doctrines（概念）:
   • Representations（告知）
   • Concealment（隐瞒）
   • Warranty（保证）
2. Representations are statements made by the applicant for insurance
   • A contract is voidable if the representation is material（重要事实）, false（虚假事实）, and relied on by the insurer（事实基础）
   • Material means that if the insurer knew the true facts, the policy would not have been issued, or would have been issued on different terms
   • An innocent misrepresentation of a material fact, if relied on by the insurer, makes the contract voidable
3. A concealment is intentional failure of the applicant for insurance to reveal a material fact to the insurer
4. A warranty is a statement that becomes part of the insurance contract and is guaranteed by the maker to be true in all respects
   • Statements made by applicants are considered representations, not warranties

Requirements of an Insurance Contract

1. To be legally enforceable, an insurance contract must meet four requirements:
   • Offer and acceptance（要约与承诺） of the terms of the contract
   • Consideration（对价） – the value that each party gives to the other
   • Competent parties（双方有法定行为能力）, with legal capacity to enter into a binding contract
   • The contract must exist for a legal purpose目的合法

Distinct（明显的） Legal Characteristics of Insurance Contracts

1. An insurance contracts is:
   • Aleatory（射幸合同）: values exchanged are not equal
   • Unilateral（单务合同）: only the insurer makes a legally enforceable promise
   • Conditional（条件合同）: policyowner must comply with all policy provisions to collect for a covered loss
   • Personal（个体合同）: property insurance policy cannot be validly assigned to another party without the insurer's consent
   • A contract of adhesion（定式合同）: the insured must accept the entire contract with all of its terms and conditions
2. Courts have ruled that any ambiguities or uncertainties in the contract are construed against the insurer.
3. The principle of reasonable expectations states that an insured is entitled to coverage under a policy that he or she reasonably expects it to provide, and that to be effective, exclusions or qualifications must be conspicuous, plain, and clear.

Law and the Insurance Agent

1. An agent is someone who has the authority to act on behalf of a principal (the insurer)
2. Several laws govern（规范） the actions of agents and their relationship to insureds
   • There is no presumption（推测） of an agency relationship
   • An agent must be authorized to represent the principal
   • A principal（委托人） is responsible for the acts of agents acting within the scope of their authority
   • Limitations can be placed on the powers of agents
3. An agent’s authority comes from three sources
   • Express authority（明示授权）
   • Implied authority（默示授权）
   • Apparent authorit（表见授权）
4. Knowledge of the agent is presumed to be knowledge of the principal with respect to matters within the scope of the agency relationship
5. Insurers can place limitations on the power of agents by adding a nonwaiver clause（不可弃权条款） to the application or policy
6. Waiver is defined as the voluntary relinquishment of a known legal right
7. Estoppel（禁止反言） occurs when a representation of fact made by one person to another person is reasonably relied on by that person to such an extent that it would be inequitable to allow the first person to deny the truth of the representation

Chapter10 Analysis of Insurance Contracts

Basic parts of an insurance contract

1. Declarations（声明） are statements that provide information about the particular property or activity to be insured
   • Can usually be found on the first page of the policy
   • In property insurance, it contains name of the insured, location of property, period of protection, amount of insurance, premium and deductible information
2. Insurance contracts typically contain a page or section of definitions（定义）
   • For example, the insured is referred to as “you”
3. The insuring agreement（承保协议） summarizes the major promises of the insurer
4. The two basic forms of an insuring agreement in property insurance are:
   • Named perils coverage, where only those perils specifically named in the policy are covered
   • Open-perils, or special coverage, where all losses are covered except those losses specifically excluded
5. Insurance contracts contain three major types of exclusions（除外责任）
   • Excluded perils（除外风险）, e.g., flood, intentional act
   • Excluded losses（除外损失）, e.g., a professional liability loss is excluded in the homeowners policy
   • Excluded property（除外财产）, e.g., pets are not covered as personal property in the homeowners policy
6. Conditions（条件条款） are provisions in the policy that qualify or place limitations on the insurer’s promise to perform
   • If policy conditions are not met, the insurer can refuse to pay the claim
7. Insurance policies contain a variety of miscellaneous provisions（其它条款）
   • e.g., cancellation, subrogation, grace period, misstatement of age

Why are Exclusions Necessary?

1. Some perils are not commercially insurable
   • e.g., catastrophic losses due to war
2. Extraordinary hazards are present
   • e.g., using the automobile for a taxi
3. Coverage is provided by other contracts
   • e.g., use of auto excluded on homeowners policy
4. Moral hazard problems
   • e.g., coverage of money limited to $200 in homeowners policy
5. Attitudinal hazard problems
   • e.g., individuals are forced to bear losses that result from their own carelessness
6. Coverage not needed by typical insureds
   • e.g., homeowners policy does not cover aircraft

Definition of “Insured”

1. An insurance contract must identify the persons or parties who are insured under the policy
   • The named insured（指定被保险人） is the person or persons named in the declarations section of the policy
   • The first named insured（第一被保险人） has certain additional rights and responsibilities that do not apply to other named insureds
   • A policy may cover other parties（其它被保险人） even though they are not specifically named
   • Additional insureds（附加被保险人） may be added using an endorsement

Endorsements and Riders（批单与附加条款）

1. In property and liability insurance, an endorsement is a written provision that adds to, deletes from, or modifies the provisions in the original contract
   • e.g., an earthquake endorsement to a homeowners policy
2. In life and health insurance, a rider is a provision that amends（赔偿） or changes the original policy
   • e.g., a waiver-of-premium rider on a life insurance policy

Deductibles（免赔额）

1. A deductible is a provision by which a specified amount is subtracted from the total loss payment that otherwise would be payable
2. The purpose of a deductible is to:
   • Eliminate small claims that are expensive to handle and process
   • Reduce premiums paid by the insured
   • Reduce moral hazard and attitudinal (morale) hazard
3. With a straight deductible（绝对免赔额）, the insured must bear a certain number of dollars of loss before the insurer is required to make a payment
   • e.g., an auto insurance deductible
4. An aggregate deductible（总免赔额） means that all losses that occur during a specified time period, usually a year, are accumulated to satisfy the deductible amount

Deductibles in Health Insurance

1. A calendar-year deductible（年度免赔额） is a type of aggregate deductible that is found in basic medical expense and major medical insurance contracts
2. An elimination (waiting) period（等后期） is a stated period of time at the beginning of a loss during which no insurance benefits are paid
   • e.g., disability income contracts that replace part of a disabled worker’s earnings typically have elimination periods of 30, 60, or 90 days, or longer periods.

Coinsurance（共同保险）

1. A coinsurance clause（条款） in a property insurance contract encourages the insured to insure the property to a stated percentage of its insurable value
   • If the coinsurance requirement is not met at the time of the loss, the insured must share in the loss as a coinsurer
     \frac{\text { Amount of insurance carried }}{\text { Amount of insurance required }} \times \text { Loss }=\text { Amountof recovery }
2. The fundamental purpose of coinsurance is to achieve equity in rating（费率公平）
   • A property owner wishing to insure for a total loss would pay an inequitable premium if other property owners only insure for partial losses
   • If the coinsurance requirement is met, the insured receives a rate discount, and the policyowner who is underinsured is penalized through application of the coinsurance formula

Coinsurance in Health Insurance

1. Health insurance policies frequently contain a coinsurance clause
   • The clause requires the insured to pay a specified percentage of covered medical expenses in excess of the deductible
   • The purposes of coinsurance in health insurance are to reduce premiums and prevent overutilization of policy benefits

Other-insurance Provisions

1. The purpose of other-insurance provisions is to prevent profiting from insurance and violation of the principle of indemnity
   • Under a pro rata liability（责任比例） provision, each insurer’s share of the loss is based on the proportion that its insurance bears to the total amount of insurance on the property
2. Under a primary and excess insurance（第一和超额保险） provision, the primary insurer pays first, and the excess insurer pays only after the policy limits under the primary policy are exhausted
3. The coordination of benefits provision（给付协调条款） in group health insurance is designed to prevent overinsurance and the duplication of benefits if one person is covered under more than one group health insurance plan

Chapter11 Life Insurance

Financial Impact of Premature Death on Different Types of Families

The need for life insurance varies across family types:

• Single people
• Single-parent families
• Two-income earners with children
• Traditional families
• Blended families
• Sandwiched families

Premature Death

1. Premature death can be defined as the death of a family head with outstanding unfulfilled financial obligation
   • Can cause serious financial problems for the surviving family members
   • The deceased’s future earnings are lost forever
   • Additional expenses are incurred, e.g., funeral expenses and estate settlement costs
   • Some families will experience a reduction in their standard of living
   • Noneconomic costs are incurred, e.g., grief
2. Life expectancy has increased significantly over the past century
   • Thus, the economic problem of premature death has declined
   • Millions of Americans still die annually from heart disease, cancer and stroke
3. The purchase of life insurance is financially justified if the insured has earned income and others are dependent on those earnings for financial support

Amount of Life Insurance to Own

1. Three approaches can be used to estimate the amount of life insurance to own
2. The human life value approach（生命价值法）
   • The amount needed depends on the insured’s human life value, which is the present value of the family’s share of the deceased breadwinner’s future earnings
3. To calculate the amount needed under the human life value approach:
   • Estimate the individual’s average annual earnings over his or her productive lifetime
   • Deduct taxes, insurance premiums and self-maintenance costs
   • Using a reasonable discount rate, determine the present value of the family’s share of earnings for the number of years until retirement
4. Under the needs approach（需求法）, the amount needed depends on the financial needs that must be met if the family head should die
5. The calculation should consider:
   • An estate clearance fund（遗产清理基金）
   • Income needed for a 1-2 year readjustment period（再调整期）
   • Income needed for the dependency period（抚养期）, until the youngest child reaches age 18
   • Life income to the surviving spouse（配偶）, including income during and after the blackout period（无给付期）.
   • Special needs, e.g., funds for college education and emergencies
   • Retirement needs（退休需求）
6. The capital retention approach（资本保留法） preserves the capital needed to provide income to the family
7. To calculate:
   • Prepare a personal balance sheet
   • Determine the amount of income-producing capital（具有获利能力的资产）
   • Determine the amount of additional capital needed to meet the family needs
8. Internet-based life insurance calculators produce widely-varying results, but may be a good starting point
9. Most families own an insufficient amount of life insurance
   • In 2010, only 44 percent of the households in the United States owned any individual life insurance
   • Consumers procrastinate, and have difficulty in making correct decisions about the purchase of life insurance
10. Many families have only a limited amount of discretionary income
    • The purchase of life insurance reduces the amount of discretionary income available for other needs
    • Many families are in debt and have little savings
    • After payment of high priority expenses, such as a mortgage, food and utilities, many families have only a limited amount of income to purchase life insurance

Types of Life Insurance

1. Life insurance policies can be classified in two general categories:
   • Term insurance（定期保险） provide temporary protection
   • Cash-value life insurance（现金价值人寿保险） has a savings component and builds cash values
   • There are many variations of both types available today

Types of Term Life Insurance

1. Under a term insurance policy, protection is temporary; protection expires at the end of the policy period, unless renewed
2. Most term policies are renewable for additional periods
   • Premiums increase at each renewal
   • To minimize adverse selection, many insurers have an age limitation beyond which renewal is not allowed
3. Most term policies are convertible, which means the policy can be exchanged for a cash-value policy without evidence of insurability
   • Under the attained-age method（到达年龄法）, the premium charged for the new policy is based on the insured’s attained age at the time of conversion
   • Under the original-age method（初始年龄法）, the premium charged for the new policy is based on the insured's original age when the term insurance was first purchased
   • A financial adjustment is also required
4. Yearly-renewable term insurance is issued for a one-year period
5. Term insurance for 5 or more years
6. A term to age 65 policy provides protection to age 65, at which time the policy expires
7. Under a decreasing term insurance policy, the face value gradually declines each year
8. Under a reentry term insurance（可重保定期寿险） policy, renewal premiums are based on select (lower) mortality rates if the insured can periodically demonstrate acceptable evidence of insurability (i.e., good health)
9. Return of premiums term insurance is a product that returns the premiums at the end of the term period provided the insurance is still in force.

Uses and Limitations of Term Life Insurance

1. Term insurance is appropriate when:
   • The amount of income that can be spent on life insurance is limited
   • The need for protection is temporary
   • The insured wants to guarantee future insurability
2. However
   • Term insurance premiums increase with age at an increasing rate and eventually reach prohibitive levels
   • Term insurance is inappropriate if you wish to save money for a specific need

Types of Whole Life Insurance

1. Whole life insurance is a cash-value policy that provides lifetime protection
   • A stated amount is paid to a designated beneficiary when the insured dies, regardless of when the death occurs
   • Types include
     Ordinary life（普通人寿保险）
     Limited-payment life（限期缴费人寿保险）
     Endowment insurance（两全保险）
     Variable life（变额人寿保险）
     Universal life（万能人寿保险）
     Variable universal life（变额万能人寿保险）
     Current assumption whole life（当期假定终身人寿保险）
     Indeterminate-premium whole life（保险）
2. Ordinary life insurance is a level-premium policy that provides lifetime protection
   • Premiums are level throughout the premium-paying period
   • The excess premiums paid during the early years are used to supplement the inadequate premiums paid during the later years of the policy.
   • The insurer’s legal reserve（法定准备金） is a liability that must be offset by sufficient financial assets
   • The net amount at risk（风险净额） is the difference between the legal reserve and the face amount of coverage
3. Another characteristic of ordinary life insurance policies is the accumulation of cash surrender values（退保现金价值）
   • A policyholder overpays for insurance protection during the early years, resulting in a legal reserve and the accumulation of cash values
   • The policyowner has the right to borrow the cash value or exercise a cash surrender options
4. An ordinary life policy is appropriate when lifetime protection is needed
   • A major limitation is that some people are still underinsured after the policy is purchased
5. Under a limited-payment life insurance policy（限期缴费人寿保险）, the insured has lifetime protection, and premiums are level, but they are paid only for a certain period
   • The most common limited-payment policies are for 10, 20, 25, or 30 years
6. A paid-up policy at age 65 or 70 is another form of limited-payment life insurance
7. A single-premium whole lifepolicy（趸缴保费终身人寿保险） provides lifetime protection with a single premium
8. Endowment insurance pays the face amount of insurance if the insured dies within a specified period. If the insured is still alive at the end of the period, the face amount is paid to the policyholder
9. Endowment insurance accounts for less than one percent of the life insurance in force

Variations of Whole Life Insurance

1. Variable life insurance is a fixed-premium policy in which the death benefit and cash values vary according to the investment experience of a separate account maintained by the insurer
   • The premium is level
   • The entire reserve is held in a separate account and is invested in common stocks or other investments
   • Cash-surrender values are not guaranteed and there are no minimum guaranteed cash values
2. Universal life insurance is a flexible premium policy that provides lifetime protection
   • After the first premium, the policyholder decides the amount and frequency of payments
   • Most policies have a target premium, but the policyowner is not obligated to pay it
   • The protection and savings components are unbundled
3. There are two forms of universal life insurance:
   • Option A pays a level death benefit during the early years, and the death benefit increases in later years to meet the corridor test required by the Internal Revenue Code
   • Option B provides for an increasing death benefit which is equal to a constant net amount at risk plus the accumulated cash value
4. Universal life provides considerable flexibility
   • Cash withdrawals are permitted
   • Policies receive favorable tax treatment
5. Limitations include:
   • Insurers advertise misleading rates of return
   • Cash-value and premium-payment projections can be misleading and invalid
   • Insurers can increase the mortality charge
   • A policy may lapse（失效） because some policyowners do not have a firm commitment to pay premiums
6. Indexed universal life insurance is a variation of universal life insurance with certain key characteristics:
   • There is a minimum interest rate guarantee
   • Additional interest may be credited to the policy based on investment gains of a specific stock market index
   • The amount credited is based on a formula which is usually capped
7. Variable universal life insurance is an important variation of whole life insurance
   • Most are sold as investments or tax shelters（避税）
   • The policy owner decides how the premiums are invested
   • The policy does not guarantee a minimum interest rate or minimum cash value
   • These policies have relatively high expense charges, including front-end loads for sales commissions, back-end surrender charges, and investment management fees
8. Current assumption whole life insurance is a nonparticipating（不分红的） whole life policy in which the cash values are based on the insurer’s current mortality, investment, and expense experience
   • An accumulation account reflects the cash value under the policy
   • If the policy is surrendered, a surrender charge is deducted from the accumulation account
   • A guaranteed interest rate and current interest rate are used to determine cash values
   • A fixed death benefit and maximum premium level at the time of issue are stated in the policy
9. There are two forms of current assumption whole life products:
   • Low-premium products, with a low initial premium and a redetermination provision that allows the insurer to recalculate the premium after the initial guaranteed period expires
   • High-premium products, with a provision that allows the policyholder to discontinue paying premiums after a certain time period.

Other Types of Life Insurance

1. A modified life policy（修正人寿保险） is a whole life policy in which premiums are lower for the first three to five years and higher thereafter
2. Preferred risk（优良标准体） policies are sold at lower rates to individuals whose mortality experience is expected to be lower than average (e.g., a non-smoker)
3. Second-to-Die life insurance（后亡人人寿保险） insures two or more lives and pays the death benefit upon the death of the second or last insured
4. Savings Bank Life Insurance (储蓄银行人寿保险 SBLI) is a type of life insurance that is sold by savings banks
5. Industrial life insurance（简易人寿保险） is a type of insurance in which the policies are sold in small amounts and an agent of the company collected the premiums at the insured’s home
6. Group life insurance（团体人寿保险） provides life insurance on a group of people in a single master contract

Chapter12 Life Insurance Contractual Provisions（合同条款）

Life Insurance Contractual Provisions

1. Under the ownership clause（所有权条款）, the policyowner possesses all contractual rights in the policy while the insured is living
   • Rights include naming beneficiaries（指定受益人） and surrendering the policy（退保） for its cash value
   • The policyholder can designate（任命） a new owner by filing an appropriate form
2. The entire-contract clause（完全合同条款） states that the life insurance policy and attached application constitute the entire contract between the parties
   • Prevents the insurer from making amendments without the policyholder’s knowledge
3. The incontestable clause（不可抗辩条款） states that the insurer cannot contest the policy after it has been in force two years during the insured’s lifetime
   • Protects the beneficiary if the insurer tries to deny payment of the claim years after the policy was first issued
   • The insurer has two years to detect fraud
   • The insurer can contest a claim after the incontestable period in limited circumstances（受益人蓄意谋杀被保险以取得保险金、投保时让其他人代替被保险人体检、可保利益一开始就不存在）
4. The suicide clause（自杀条款） states that if the insured commits suicide within two years after the policy is issued, the face amount of insurance will not be paid; there is only a refund of the premiums paid（自杀举证责任在保险公司）
5. A life insurance policy contains a grace period（宽限期） during which the policyholder has a period of 31 days to pay an overdue premium(如果被保险人在宽限期内死亡，欠缴保费从保单收益中扣除)
6. The reinstatement provision（复效条款） permits the owner to reinstate a lapsed policy
7. To reinstate a lapsed policy, the following requirements must be met:
   • Evidence of insurability is required
   • All overdue（逾期） premiums plus interest are paid
   • Any policy loans are repaid or reinstated
   • The policy was not surrendered for its cash value
   • The policy must be reinstated within a certain period
   • Although it may require a large outlay of cash, it may be cheaper to reinstate a lapsed policy than to purchase a new policy
8. Under the misstatement of age or sex clause（年龄或性别误告条款）, if the insured’s age or sex is misstated, the amount payable is the amount that the premiums paid would have purchased at the correct age and sex
9. The beneficiary（受益人） is the party named in the policy to receive the policy proceeds
   • The primary beneficiary（第一受益人） is the first entitled to receive the policy proceeds on the insured’s death
   • A revocable beneficiary（可撤销受益人） means that the policyowner reserves the right to change the beneficiary designation without the beneficiary’s consent
   • An irrevocable beneficiary（不可撤销受益人） is one that cannot be changed without the beneficiary’s consent
   • A specific beneficiary（特定受益人） is specifically identified
   • A class beneficiary（团体受益人） is a member of a group, e.g., children of the insured（指定必须谨慎）
10. A change-of-plan provision（变更保险计划条款） allows policyowners to exchange their present policies for different contracts
11. Life insurance contracts do not contain many exclusions
    • Suicide excluded for two years
    • Insurers might insert a war clause（战争条款） to exclude payment if the insured dies as a direct result of war
    • Some policies contain aviation exclusions（航空除外责任条款）
12. Premiums can be paid annually, semiannually, quarterly, or monthly（不是年缴，保费会相对较贵）
13. A life insurance policy is freely assignable to another party
    • Under an absolute assignment（无条件转让）, all ownership rights in the policy are transferred to a new owner（捐赠）
    • Under a collateral assignment（担保转让）, the policyowner temporarily assigns a life insurance policy to a creditor as collateral for a loan, but only certain rights are transferred to the creditor（保单作为抵押品转让）
14. A policy loan provision（保单贷款条款） allows the policyowner to borrow the cash value
    • The policyowner must pay interest on the loan to offset the loss of interest to the insurer
    • A policy could lapse if the policyowner does not repay a loan and the total indebtedness exceeds the available cash value
15. Under the automatic premium loan provision（保费自动垫付条款）, an overdue premium is automatically borrowed from the cash value after the grace period expires

Dividend Options（红利选择权）

1. If a policy pays dividends it is a participating policy（分红型保单）
   • Otherwise it is a nonparticipating policy
2. Dividends come from three main sources:
   • The difference between expected and actual mortality experience
   • Excess interest earnings
   • The difference between expected and actual operating expenses
3. Policyowners have several ways to take dividends:
   • Take the cash
   • Reduce the next premium coming due
   • Let the dividends accumulate at interest and withdraw later
   • Apply toward the purchase of paid-up whole life insurance under the paid-up additions option（赠额缴清保险）
   • Apply toward the purchase of term insurance
   • Convert the policy to a paid-up contract

Nonforfeiture（不丧失价值条款） Options

1. The payment to a withdrawing policyowner is known as a nonforfeiture value （不丧失价值）or cash surrender value（退保现金价值）
   • A policyowner has a right to the policy’s accumulated cash value; all states have standard nonforfeiture laws
2. Policyowners have three nonforfeiture options:
   • Cash value
   • Reduced paid-up insurance（减额缴清保险）
   • Extended term insurance

Settlement Options（给付方式）

1. The policyowner can choose among several options for paying the policy proceeds
   • Or, the beneficiary may be granted the choice
2. The most common options include:
   • Cash
   • Interest option
   • Fixed-period option
   • Fixed-amount option
   • Life income option
3. Under the life income option（终身收入选择权）, installment payments are paid only while the beneficiary is alive and cease on the beneficiary’s death
4. Life income options include:
   • Life income with guaranteed period
   • Life income with guaranteed total amount
   • Joint-and-survivor income
5. Settlement options allow for periodic payments to the family, restoring their financial security
6. Disadvantages include:
   • Interest rates offered by insurers may be lower than rates offered elsewhere
   • The settlement agreement may be inflexible and restrictive
7. Life insurance policy proceeds can also be paid to a trustee, such as the trust department of a commercial bank
8. The use of a trust may be desirable if:
   • the amount of insurance is substantial
   • Flexibility and discretion in the amount and timing of payments are needed
   • The beneficiaries are minor children or mentally or physically challenged adults who cannot manage their own financial affairs

Additional Life Insurance Benefits

1. Other benefits can be added to a life insurance policy for an additional premium
2. Under a waiver-of-premium provision（免缴保费条款）, if the insured becomes totally disabled, all premiums coming due during the period of disability are waived
3. The guaranteed purchase option（保证增保选择权） permits the policyowner to purchase additional amounts of life insurance at specified times in the future without evidence of insurability
4. The accidental death benefit rider（意外事故保单特约条款/双倍赔偿特约条款） doubles the face amount of life insurance if death occurs as a result of an accident（意外人身伤害/事故发生90天内/年龄）
5. The cost-of-living rider（生活消费指数批单） allows the policyowner to purchase one-year term insurance equal to the percentage change in the consumer price index with no evidence of insurability
6. The accelerated death benefits rider（提前给付死亡保险金） allows insureds who are terminally ill to collect part or all of their life insurance benefits before they die
7. A viatical settlement（临终结算） is the sale of a life insurance policy by a terminally ill insured to another party, typically to investors or investor groups, who hope to profit by the insured’s early death
8. A life settlement（寿险贴现） is a financial transaction by which a policyowner who no longer wants to keep a life insurance policy sells the policy to a third party for more than its cash value
9. These options create a moral hazard problem, and may not be adequately regulated by the states

Chapter14 Annuities and Individual Retirement Accounts

Individual Annuities

1. An annuity is a periodic payment that continues for a fixed period or for the duration of a designated life or lives
   • The person who receives the payments is the annuitant
2. An annuity provides protection against the risk of excessive longevity
3. The fundamental purpose of an annuity is to provide a lifetime income that cannot be outlived
4. The major types of annuities sold today include:
   • Fixed annuity
   • Variable annuity
   • Equity-indexed annuity

Types of Annuities

1. A fixed annuity（定额年金） pays periodic income payments that are guaranteed and fixed in amount
   • During the accumulation period（积累期） prior to retirement, premiums are credited with interest
   • The guaranteed rate（保证最低利率） is the minimum interest rate that will be credited to the fixed annuity
   • The current rate（当前利率） is based on current market conditions, and is guaranteed only for a limited period
   • A bonus annuity（奖金年金） pays a higher interest rate initially
   • The liquidation period（清算期/支付期） is the period in which funds are paid out, or annuitized
2. Fixed annuity income payments can be paid immediately, or at a future date:
   • An immediate annuity（即付年金） is one where the first payment is due one payment interval from the date of purchase
   • A deferred annuity（递延年金） provides income payments at some future date
   • A deferred annuity purchase with a lump sum is called a single-premium deferred annuity（趸缴递延年金）
   • A flexible-premium annuity（弹性保费年金） allows the owner to vary the premium payments
3. The fixed annuity owner has a choice of annuity settlement offers
   • Most annuities are not annuitized
   • Under the cash option, the funds can be withdrawn in a lump sum（一次） or in installments
   • A life annuity (no refund) option（终身年金（不偿付本金）） provides a life income to the annuitant only while the annuitant remains alive
   • A life annuity with guaranteed payments （保证支付的终身年金）pays a life income to the annuitant with a certain number of guaranteed payments
   • An installment refund option（偿还本金的分期付款方式） pays a life income to the annuitant; after the annuitant’s death, payments continue to a beneficiary until they equal the purchase price
   • A cash refund option（本金现金偿还） is similar, but pays the beneficiary a lump sum
   • A joint-and-survivor annuity（联合生存年金） pays benefits based on the lives of two or more annuitants. The annuity income is paid until the last annuitant dies
   • An inflation-indexed annuity option（通货膨胀指数年金给付方式） provides periodic payments that are adjusted for inflation
4. A variable annuity（变额年金） pays a lifetime income, but the income payments vary depending on common stock prices
   • The purpose is to provide an inflation hedge by maintaining the real purchasing power of the payments
   • Premiums are used to purchase accumulation units（积累单位） during the period prior to retirement
   • At retirement, the accumulation units are converted into annuity units（年金单位）
5. An equity-indexed annuity（股票指数年金） is a fixed, deferred annuity that allows the owner to participate in the growth of the stock market and provides downside protection against the loss of principal and prior interest earnings if the annuity is held to term
6. The participation rate is the percent of increase in the stock index that is credited to the contract
7. Insurers use different indexing methods to credit excess interest to the annuity
8. Some have a guaranteed minimum value at the end of the index period

Longevity Insurance

1. Longevity insurance（长寿保险） is a generic name for a single-premium deferred annuity that begins paying benefits only at an advanced age, typically age 85
2. They are low-cost annuities because there are no cash values or death benefits in the policy
3. Once purchased, the funds cannot be accessed（存取）

Chapter 15 Health-Care Reform; Individual Health Insurance Coverages

Individual Health Insurance Coverages

1. Individual medical expense insurance（个人医疗费用保险） protects an individual or family for covered medical expenses because of sickness or injury
   • Plans are purchased by people who are not employed, retired workers, and students
2. Most policies sold today have:
   • Major medical benefits（重大疾病保险）
   • A broad range of benefits（宽泛的保险金给付范围）
   • A calendar-year deductible, coinsurance, copayments, and annual out-of-pocket limits（年度自付限额）
3. Major medical insurance（重大疾病保险） is designed to pay a high percentage of covered medical expenses incurred by an insured who has a catastrophic illness or injury
4. Most individual expense plans provide a broad range of benefits, including
   • Inpatient hospital benefits（住院保险金）
   • Outpatient benefits（门诊病人保险金）
   • Physician benefits（医生保险金）
   • Preventive services（预防性服务）
   • Outpatient prescription drugs（门诊处方药）
5. Medical expense policies contain a deductible provision
   • The purpose of the deductible is to eliminate small claims and the high administrative cost of processing them
   • A calendar-year deductible is an aggregate deductible that has to be satisfied only once during the calendar year
6. A coinsurance provision（共同保险条款） states a percentage of the bill in excess of the deductible, which the insured must pay out-of-pocket up to some maximum annual dollar limit（最高年度限额）
   • Purpose is to reduce premiums and prevent overutilization of plan benefits
7. A copayment （共同支付）is a flat amount（固定数额） the insured must pay for certain benefits, such as an office visit or generic drug
8. The insured’s total out-of-pocket spending is limited by an annual out-of-pocket limit (年度自付限额，also called a stop-loss limit), after which the insurer pays 100% of eligible expenses
9. Common exclusions to a major medical policy include cosmetic surgery and expenses covered by workers compensation

Individual Medical Expense Insurance and Managed Care Plans

1. Most individual medical expense plans sold today are managed care plans（管理式医疗计划）
   • A managed care plan provides covered medical services to the members in a cost effective manner, with heavy emphasis on cost control
2. The most popular plan today is a preferred provider organization (优先提供者组织，PPO)
   • A PPO contracts with physicians, hospitals, and other health-care providers to provide covered medical services to policyholders at discounted fees

Long-term Care Insurance

1. Long-term care insurance （长期护理保险）pays a daily or monthly benefit for medical or custodial care received in a nursing facility, in a hospital, or at home
   • People who reach age 65 will likely have a 40% chance of entering a nursing home, and about 10% of them will stay there five years or more
2. LTC Plans come in three main forms:
   • A facility-only policy （专业护理保单）
   • A home health care policy（家庭健康护理保单）
   • A comprehensive policy （综合护理保单）
3. Common features of LTC policies include:
   • Daily benefits range from $50 - $300 or more
   • Most policies are reimbursement policies（偿还式保单）, which reimburse for actual charges up to a daily limit
   • Some policies reimburse on a per diem basis（补贴式）
   • An elimination period（等候期） is a waiting period during which time benefits are not paid
4. In a qualified LTC plan, a benefit trigger must be met to receive benefits. Either,
   • The insured is unable to perform a certain number of activities of daily living (ADLs), or
   • The insured needs substantial supervision to be protected against threats to health and safety because of a severe cognitive impairment
5. Some plans offer automatic benefit increases to keep up with inflation（通货膨胀保障）
6. Policies are guaranteed renewable（保证续保）
7. Coverage is expensive, especially at older ages

Disability-Income Insurance

1. The financial impact of total disability on present savings, assets, and ability to earn an income can be devastating
2. Disability-income insurance（残疾收入保险） provides income payments when the insured is unable to work because of sickness or injury
   • Income payments are typically limited to 60-80% of gross earnings
3. The most common definitions of total disability（完全残疾） are:
   • Inability to perform the material and substantial duties of your regular occupation
   • Inability to perform the material and substantial duties of your occupation, and are not engaged in any other occupation
   • Inability to perform the duties of any occupation for which you are reasonably fitted by education, training, and experience
   • Inability to perform the duties of any gainful occupation
   • Loss-of-income test, i.e., your income is reduced as a result of sickness or accident
4. Partial disability （部分残疾）means that you can perform some but not all of the duties of your occupation
5. Some policies offer partial disability benefits
   • Usually, partial disability benefits must follow total disability
   • The partial disability benefits are paid at a reduced rate for a shorter period
6. Residual disability（遗留残疾） applies when you are gainfully employed and not totally disabled but, solely because of sickness or injury, our loss of income is at least 15 percent of your prior income
   • a pro rata disability benefit is paid to an insured whose earned income is reduced because of an accident or sickness
7. The benefit period（给付期） is the length of time that disability payments are payable after the elimination period is met
8. Individual policies normally contain an elimination period (waiting period), during which time benefits are not paid
9. Most policies automatically include a waiver-of-premium provision（免缴保费）
   • If the insured is totally disabled for 90 days, future premiums will be waived as long as the insured remains disabled
10. Policies typically include a rehabilitation provision（康复条款）
11. Some policies pay accidental death, dismemberment and loss-of-sight benefits（意外死亡、肢残、失明保险金）
12. Optional benefits include:
    • Under a cost-of-living rider（生活费用附加）, the insurer periodically adjust benefits for increases in the cost of living
    • Some insurers provide an option to purchase additional insurance（附加残疾收入险） in the future
    • A Social Security rider（社会保障附加条款） pays an additional amount if the policyholder is turned down for SS disability benefits
    • A return of premiums rider （保费返还）refunds part or all of the premiums if the policyholder’s claim experience is favorable

Individual Health Insurance Contractual Provisions

1. A guaranteed renewable policy（保证续保保单） is one in which the insurer guarantees to renew the policy at each anniversary date
   • Premiums can be increased for the underwriting class
2. Under a noncancellable policy（不可撤销保单）, the insurer cannot change, cancel, or refuse to renew the policy as long as premiums are paid on time
   • The insurer cannot change the premiums or the rate structure specified in the policy
3. Under a conditionally renewable policy（有条件续保保单）, the policyholder can renew the policy until a specified age
   • The insurer has the right to decline renewal under conditions specified in the contract
4. Some policies are nonrenewable（不可续保） and expire at the end of the protection period
   • The policyholder does not have the contractual right to renew the policy
5. The Affordable Care Act prohibits the use of preexisting conditions（既存状况条款） to deny or limit coverage for claims
   • Health insurers will no longer be able to deny coverage to applicants because of their medical history
6. Policyholders have 10 days to examine a policy
   • The policyholder may return the policy; the policy will be void and the entire premium will be refunded
7. Some contractual provisions address claims:
   • Under a notice of claim provision, the insured must give written notice to the insurer within 20 days after a covered loss occurs
   • Under a claim forms provision, the insurer is required to send the insured a claim form within 15 days after notice is received
   • Under the proof-of-loss provision, the insured must send written proof of loss to the insurer within 90 days after a covered loss occurs
8. The grace period（宽限期） is a 31-day period after the premium due date to pay an overdue premium
9. The reinstatement provision（复效） permits the insured to reinstate a lapsed policy
10. The time limit on certain defenses（特别保护时间限制） states that after the policy has been in force for two years, the insurer cannot void the policy or deny a claim on the basis of misstatements in the application, except for fraudulent misstatements

Chapter19 The Liability Risk

Basis of Legal Liability

1. A legal wrong （法律过失）is a violation of a person’s legal rights, or a failure to perform a legal duty owed to a certain person or to society as a whole
2. Legal wrongs include:
   • Crime
   • Breach of contract
   • Tort（民事侵权）
3. A tort is a legal wrong for which the court allows a remedy in the form of money damages
4. The person who is injured (原告/起诉人plaintiff) by the action of another (被告/侵权人tortfeasor) can sue for damages
5. Torts fall into three categories:
   • Intentional（故意侵权）, e.g., fraud, assault
   • Strict liability （严格责任）means that liability is imposed regardless of negligence or fault
   • Negligence（过失）

Law of Negligence

1. Negligence is the failure to exercise the standard of care required by law to protect others from an unreasonable risk of harm
   • The standard of care is not the same for each wrongful act. It is based on the care required of a reasonably prudent person
2. Elements Negligence
   • Existence of a legal duty to use reasonable care
   • Failure to perform that duty
   • Damage or injury to the claimant
   • A proximate cause（直接因果关系） relationship between the negligent act and the infliction of damages, which requires an unbroken chain of events
3. Compensatory damages（补偿性赔偿） compensate the victim for losses actually incurred.
   • Special damages provide compensation for medical expenses
   • General damages provide compensation for pain and suffering
4. Punitive damages（惩罚性赔偿） are designed to punish people and organizations so that others are deterred from committing the same wrongful act
5. The ability to collect damages for negligence depends on state law
6. Under a contributory negligence law（共有过失法）, the injured person cannot collect damages if his or her care falls below the standard of care required for his or her protection
   • Under strict application of common law, the injured cannot collect damages if his or her conduct contributed in any way to the injury
7. Under a comparative negligence law（比较过失法）, the financial burden of the injury is shared by both parties according to their respective degrees of fault
   • Under the pure rule（完全原则）, you can collect damages even if you are negligent, but your reward is reduced in proportion to your fault
   • Under the 50 percent rule, you cannot recover if you are 50 percent or more at fault
   • Under the 51 percent rule, you cannot recover if you are 51 percent or more at fault
8. Some legal defenses can defeat a claim for damages:
   • The last clear chance rule（最后机会原则） states that a plaintiff who is endangered by his or her own negligence can still recover damages from the defendant if the defendant has a last clear chance to avoid the accident but fails to do so
   • Under the assumption of risk doctrine（风险自担）, a person who understands and recognizes the danger inherent in a particular activity cannot recover damages in the event of an injury

Imputed Negligence

1. Under certain conditions, the negligence of one person can be attributed to another
2. Under a vicarious liability law（替代责任法）, a motorist’s negligence is imputed to the vehicle’s owner
3. Under the family purpose doctrine（家庭用途原则）, the owner of an auto can be held liable for negligent acts committed by family members
4. Under a dram shop law（酒店法令）, a business that sells liquor can be held liable for damages that may result from the sale of liquor

Res Ipsa Loquitur

1. Under this doctrine, the very fact that the injury or damage occurs establishes a presumption of negligence
2. Three requirements must be met for res ipsa loquitur to apply:
   • The event is one that normally does not occur in the absence of negligence
   • The defendant has exclusive control over the instrumentality causing the accident
   • The injured party has not contributed to the accident in any way

Specific Applications of the Law of Negligence

1. The standard of care owed to others depends upon the situation
2. A trespasser（非法侵入者） is a person who enters or remains on the owner’s property without the owner’s consent
   • The duty to refrain from injuring a trespasser is sometimes referred to as the duty of slight care（轻微谨慎责任）
3. A licensee（被许可者） is a person who enters the premises with the occupant’s expressed or implied permission
   • The property owner must warn the licensee of unsafe conditions which are apparent
4. An invitee is a person who is invited onto the premises for the benefit of the occupant
   • The occupant has an obligation to inspect the premises and eliminate any dangerous conditions
5. An attractive nuisance（诱致性伤害） is a hazardous condition that can attract and injure children
   • The occupants of land are liable for the injuries of children who may be attracted by some dangerous condition, feature or article
   • e.g., a building contractor leaves the keys in a tractor, and a child is injured while driving it
6. Owners and operators of automobiles who drive in a careless manner can be held liable for property damage or bodily injury sustained by another person
   • An owner who is not the operator can be held liable for the acts of operators if an agency relationship exists
7. Charitable institutions are no longer immune from lawsuits, especially with respect to commercial activities
8. Governmental entities can be sued in almost every aspect of governmental activity
   • The doctrine of sovereign immunity（君主免责） has been modified over time
   • A governmental unit can be held liable if it is negligent in the performance of a proprietary function（专有职能）, e.g., the operation of water plants
   • Immunity from lawsuits for governmental functions（政府职责）, such as the planning of a sewer system, has eroded over time
9. Under the doctrine of respondeat superior（雇主责任）, an employer can be held liable for the negligent acts of employees while they are acting on the employer’s behalf
   • The worker must be an employee
   • The employee must be acting within the scope of employment when the negligent act occurred
10. Parents can be held liable for the actions of a child if:
    • The child uses a dangerous weapon to injure someone
    • The child is acting as an agent for the parents
    • A minor child is operating a family car
11. Most states have laws that hold parents liable for willful and malicious acts of children that result in property damage to others
12. Owners of wild animals are held strictly liable for injuries to others
13. Strict liability may also be imposed on the owners of ordinary pets, such as dogs

Chapter20 Homeowners Insurance

Homeowners Insurance Basics

1. Homeowners insurance forms, drafted by the Insurance Services Office (ISO) are widely used in the US
   • They are designed for the owner-occupants of family dwellings
   • A policy can be used to cover the dwelling, other structures, personal property, additional living expenses, personal liability claims, and medical payments to others
   • Six forms are available

Current Homeowners Policies

1. HO-2 (broad form扩展险): covers the dwelling, other structures, and personal property on a named perils basis（列明风险事故）
2. HO-3 (special form特殊险): covers the dwelling and other structures on a risk-of-direct-physical loss basis（直接物理损失风险）
   • All direct physical losses are covered except those losses specifically excluded
   • Personal property is covered on a named perils basis
3. HO-4 (contents broad form承租险): covers a tenant’s personal property on a named perils basis
4. HO-5 (comprehensive form综合险): provides open perils coverage (“all-risks coverage”) on the dwelling, other structures and personal property
   • All direct physical losses are covered except those losses specifically excluded
5. HO-6 (unit owners form业主险): covers personal property on a named perils basis
   • A minimum of $5,000 of insurance is also provided on the condominium unit that covers improvements and additions
6. HO-8 (modified coverage form改进险): designed for older homes
   • Dwelling and other structures are based on the amount required to repair or replace using common construction materials and methods

Analysis of Homeowners 3 Policy

1. Section I: Property Coverages
   • Coverage A: Dwelling
   • Coverage B: Other Structures
   • Coverage C: Personal Property
   • Coverage D: Loss of Use
   • Additional Coverages
2. The following persons are considered “insureds” under the policy:
   • Named insured and spouse
   • Resident relatives
   • Other persons under age 21（记名被保险人监护下的21岁以下的人）
   • Full-time student away from home
3. Section II coverage also includes:
   • Any person legally responsible for covered animals or watercraft
   • With respect to a motor vehicle covered by the policy (e.g., a riding mower), persons employed by the named insured

Section I Coverages

1. Coverage A covers the dwelling on the residence premises and any structure attached to the dwelling
   • Materials intended for construction are included
   • The coverage specifically excludes land
2. Coverage B insures other structures on the residence premises（与房屋明显分离的其他建筑物）
   • Includes a detached garage, tool shed, etc
   • Structures that are rented out or used for a business are excluded
   • The amount of coverage is based on the amount of insurance in Coverage A
3. Coverage C insures personal property owned or used by an insured
   • Personal property is covered anywhere in the world, both on and off the premises
   • The amount of coverage is 50% of Coverage A, but can be increased if desired
   • Coverage for personal property at another residence, such as a vacation home, is limited to 10% of Coverage C or $1000, whichever is greater
   • Certain types of personal property have maximum dollar limits on the amount paid for any loss（道德风险和损失调整以及保险公司减少其责任的愿望）
4. An insured can use a schedule to insure certain personal property for a specific amount（定值保单）
5. Coverage C also excludes certain types of property, for example:
   • Animals, birds, and fish
   • Motor vehicles
   • Aircraft and parts
   • Hovercraft and parts
   • Property of roomers, boarders, and other tenants
   • Property in a regularly rented apartment
6. Coverage D （使用损失）provides protection when the residence premises cannot be used because of a covered loss
   • Coverage is 30% of Coverage A
   • Additional living expense（额外生活费用） is the increase in living expenses actually incurred by the insured to maintain the family’s standard of living
   • The policy pays the fair rental value（公平租赁市场价值） for that part of the residence that is rented to others, but is not fit to live in
   • Coverage applies if the home is not damaged, but a civil authority prohibits the insured from using the premises（禁止使用）

Section I Coverages: Additional Coverages

1. Additional coverages in Section I include:
   • Removal of debris following an insured peril（残骸清理）
   • Reasonable repairs to protect the property from further damage（合理的修复费用）
   • Trees, shrubs, and plants, for a limited set of perils
   • Fire department service charge（消防费用）
   • Removal of property that is endangered by an insured peril（财产搬运费）
   • Unauthorized use of credit card, electronic funds transfer card or access device; forgery and counterfeit money（信用卡失窃、丢失或者被冒用等）
2. Additional Coverages, continued
   • Loss assessment charged against the named insured by a corporation or association of property owners because of the direct loss of property collectively owned by all members.
   • Collapse of a building, for certain perils（倒塌）
   • Breakage of glass or safety glazing material（玻璃破损）
   • Landlord’s furnishings（房东的家具）
   • Increased costs of construction or repair because of a law
   • Grave markers

Section I Perils Insured Against

1. The dwelling and other structures are insured for all direct physical losses unless specifically excluded
2. Personal property is insured for a direct physical loss if it is caused by one of the perils listed in the policy
   • Named perils include fire, windstorm or hail, explosion, riot or civil commotion, aircraft, vehicles, smoke, vandalism, theft, etc.
   • The peril must be the proximate cause of the loss

Section I Exclusions

1. The policy excludes:
   • Concurrent causation losses（并发原因损失）
   • Any loss due to an ordinance or law, except as described in the Additional Coverages
   • Losses due to earth movement
   • Certain water losses
   • Losses due to neglect, power failure, or faulty design
   • Losses which are intentional
   • Losses due to war, government action, failure to act, or nuclear hazard
   • Losses due to certain weather conditions

Section I Conditions

1. The insurer’s liability for a loss is limited to the insured’s insurable interest at the time of loss
2. A deductible of $250 applies to any loss covered（每一承保风险） by Section 1 coverages
   • Premiums can be reduced by increasing the deductible
3. The insured must perform certain duties after a loss occurs:
   • Give prompt notice to insurer
   • Protect the property from further damage
   • Prepare an inventory of damaged personal property
   • Exhibit damaged personal property
   • File a proof of loss with 60 days after the insurer’s request
4. Losses to personal property are paid on the basis of actual cash value
   • If the insured purchases a replacement cost endorsement, there is no deduction for depreciation
5. After giving notice to the insured, the insurer has the right to repair or replace any part of damaged property with like property
6. Losses to the dwelling and other structures are paid on the basis of replacement cost with no deduction for depreciation
   • If the dwelling is insured for at least 80% of replacement cost at the time of loss, partial losses are paid in full
   • Replacement cost is the amount necessary to repair or replace the dwelling with material of like kind and quality at current prices
7. If the dwelling is insured for less than 80% of the replacement cost, the insured receives the larger of:
   • the actual cash value of that part of the building damaged, or
     \frac{\text{Amount of insurance carried}}{80\%\times\text{Replacement cost}}\times\text{Loss}
8. Some insurers offer an extended replacement cost endorsement（扩展重置成本批单）, which pays 20% or more above the policy limits
9. Under a guaranteed replacement cost policy（担保重置成本保单）, the insurer agrees to replace the home exactly as it was before the loss even if the replacement cost exceeds the amount of insurance stated in the policy（恢复房屋原貌的完全重置成本赔付）
10. In the event of a loss to a pair or set, the insurer can elect either repair or replace any part of the pair or set or to pay the difference between the actual cash value of the property before and after the loss
11. The appraisal clause（评估条款） is used when the insured and insurer agree that the loss is covered, but the amount of loss is in dispute
12. If other insurance covers a Section I loss, the insurer will only pay the proportion of the loss that is limit of liability bears to the total amount of insurance covering the loss
13. No legal action can be brought against the insurer unless all policy provisions have been met
    • Legal action must be started within two years
14. The insurer has the right to repair or replace any part of the damaged property with like property
15. The insurer is generally required to make a loss payment directly to the named insured
16. The mortgage clause（抵押条款） is designed to protect the mortgagee’s insurable interest（受押人在自己可保利益范围内获得保险公司的损失赔偿）
17. Only losses that occur during the policy period are covered
18. Concealment or misrepresentation of any material facts, fraudulent conduct, and false statement relating to the insurance will void insurance coverage
19. Conditions that apply to both Section I and Section II include:
    • A liberalization clause to address issues with broadening coverage（自动生效条款）
    • A waiver or change of policy provisions（保单条款的放弃和修改）
    • Terms and conditions for cancellation（退保）
    • Terms for nonrenewal of the policy（不可续保保单）
    • Assignment of the policy to another party（保单的转让）
    • A subrogation clause to address recoveries from third parties
    • Extension of policy terms to a legal representative upon the death of the named insured or spouse（记名被保险人或配偶死亡）

Chapter21 Homeowners Insurance, Section II

Personal liability insurance

1. Personal liability insurance protects the named insured and family members against legal liability arising out of their personal acts
   • The insurer pays amount for which the insured is found legally liable, up to the policy limits
   • The insurer also pays defense costs
   • The coverage is found in Section II of the Homeowners policy

Section II Coverages

1. Coverage E（个人责任） protects the insured when a claim or suit for damages is brought because of bodily injury or property damage allegedly caused by an insured’s negligence
   • The coverage is broad and based on legal liability
   • The policy contains a per-occurrence limit（每次索赔事件原则）
   • An occurrence is defined as an accident which results in bodily injury or property damage during the policy period
   • The insurer provides a legal defense, even if the suit is frivolous or fraudulent
2. Coverage F is a mini-accident policy
   • Medical payments to others（对第三方的医疗赔付） pays the reasonable medical expenses of another person who is accidentally injured while on an insured location（被保险人的属地）, or by the activities of an insured, resident employee, or animal owned by or in the care of an insured
   • The insured is not required to be legally liable
   • Coverage does not apply to the insured or regular residents of the household, other than a residence employee
   • Coverage applies even if the injury occurs away from an insured location

Section II Exclusions

1. Some exclusions apply to both Coverage E and Coverage F, including:
   • Liability arising out of the use of a motor vehicle, with some exceptions
   • Liability arising out of the use of an aircraft, hovercraft, or certain watercraft
   • Expected or intentional injury
   • Business activities, with some exceptions
   • Professional services
2. Several exclusions apply only to Coverage E:
   • Contractual liability
   • Property owned by the insured
   • Property in the care of the insured, with some exceptions
   • Workers compensation
   • Liability for a nuclear incident
   • Bodily injury to an insured
3. Other exclusions apply only to Coverage F:
   • Injury to a resident employee off an insured location
   • Workers compensation
   • Injuries that result from nuclear energy
   • Persons regularly residing on the insured location
4. Duties after a loss include:
   • Written notice of the event must be provided to the insurer, including the time, place, circumstances, and names of any claimants and witnesses
   • The injured person (or his/her representative) must provide written proof of claim and authorize the insurer to obtain copies of medical records
5. An insured may not sue the insurer unless the insured has complied with the conditions required in Section II
6. No coverage is provided to an insured who concealed or misrepresented any circumstance or material fact or engaged in fraudulent conduct

Section II Additional Coverages

1. The homeowners policy automatically includes several additional coverages:
   • Claims expenses（抗辩费用） (e.g., court costs, attorney fees) are covered in addition to the policy limits for liability damages
   • The insurer pays any first-aid expenses（急救费用） incurred for bodily injury covered under the policy
   • Damage to property of others（对他人财产的损害） pays up to $1000 per occurrence for property damage caused by an insured

Endorsements to a Homeowners Policy

1. Property owners with special needs can purchase a variety of endorsements:
   • An inflation-guard endorsement（通货膨胀保护批单） provides for an annual pro rata increase in the limits of insurance in the Section I coverages
   • An earthquake coverage endorsement（地震批单） covers earthquakes, landslides, volcanic eruption, and earth movement
   • When a personal property replacement cost loss settlement endorsement（个人财产损失重置成本批单） is added to the policy, claims are paid on the basis of replacement cost with no deduction for depreciation
2. The scheduled personal property endorsement (with agreed value loss settlement)（预定个人财产批单（对损失议定价值达成一致）） provides additional coverage for nine classes of property (jewelry, furs, cameras, musical instruments, silverware, golfer’s equipment, fine arts, postage stamps, and rare and current coins) and the insurer agrees to pay the stated amount for a scheduled item if a total loss occurs
3. A personal injury endorsement（人身伤害批单） is used to extend liability coverage to legal liability arising out of personal injury, e.g., false arrest, slander
   • A watercraft endorsement （船只批单）provides liability and medical payments coverage on any inboard or inboard-outdrive powered watercraft; sailing vessels 26 feet or more in length; and watercraft powered by one or more outboard motors exceeding 25 total horsepower
   • A home business insurance coverage endorsement （家庭商务保险保障批单）covers both business property and legal liability arising out of a home-based business
   • An identity theft endorsement（身份失窃批单） reimburses crime victims for the cost of restoring their identity and cleaning up their credit report

Chapter 22 Auto Insurance

Personal Auto Policy

Personal Auto Policy Basics

1. The 2005 Personal Auto Policy (PAP) is widely used throughout the US
2. Eligible vehicles include:
   • A four-wheeled motor vehicle owned or leased by the insured for at least six consecutive months
   • A pick-up or van with a gross vehicle weight rating of 10,000 pounds or less
3. Autos covered by the policy include:
   • Any auto shown in the declarations
   • A newly acquired auto
   • A trailer owned by the named insured
   • A temporary substitute vehicle（临时替代性车辆）, which is a nonowned auto or trailer used temporarily because of mechanical breakdown, repair, servicing, loss, or destruction of a covered vehicle

Part A: Liability Coverage

1. Liability coverage (Part A) is the most important part of the PAP
   • It protects a covered person against a suit or claim arising out of the ownership or operation of a covered vehicle
   • The coverage is usually written in split limits（分离限额）, where the amounts of insurance for bodily injury liability and property damage liability are stated separately
   • Split limits of 250/500/100（每个人的身体伤害责任限额/每起事故最高身体伤害保障/财产损失赔偿限额）mean that you have bodily injury coverage of $250,000 for each person, a maximum of $500,000 of bodily injury coverage per accident, and a maximum of $100,000 for property damage liability
2. Liability coverage applies to:
   • The named insured and any resident family member
   • Any person using the named insured’s covered auto
   • Any person or organization legally responsible for any insured’s use of a covered auto on behalf of that person or organization
   • Any person or organization legally responsible for the named insured’s or family members’ use of any auto or trailer (other than a covered auto or one owned by the person or organization)
3. The insurer also agrees to provide defense and pay all legal defense costs for claims covered by the policy（保险人没有责任为保单保障范围之外的时间承担辩护义务）
4. The policy also allows for certain supplementary payments（补充赔偿） including:
   • The cost of a bail bond
   • Premiums on appeals bonds
   • Interest accruing after a judgment
   • Loss of earnings ($200/day)
   • Other reasonable expenses
5. Exclusions to the coverage include:
   • Intentional injury or damage
   • Property owned or transported
   • Property rented, used, or in the insured’s care
   • Bodily injury to an employee
   • Use as a public livery or conveyance
   • Vehicles used in the auto business
   • Vehicles with fewer than four wheels
   • Vehicle furnished for the insured’s regular use
6. If an accident occurs in another state, and the financial responsibility law in that state has higher liability limits than shown in the declarations, the PAP automatically provides the higher limits
7. If more than one liability policy covers a loss:
   • The insurer pays its pro rata share of the loss for an owned vehicle
   • The insurance coverage is excess over any other insurance for a nonowned vehicle

Part B: Medical Payments

1. Medical payments coverage covers all reasonable medical and funeral expenses incurred by an insured in an accident
2. The named insured and family members are covered:
   • While occupying any motor vehicle, or
   • As pedestrians when struck by a motor vehicle
3. Other persons occupying a covered auto are covered
   • But not covered in a nonowned vehicle
4. Covers medical services rendered within three years from the date of the accident
   Coverage is not based on fault
5. If more than one auto policy covers a loss:
   • The insurer pays its pro rata share of the loss for an owned vehicle
   • The insurance coverage is excess over any other insurance for a nonowned vehicle

Part C: Uninsured Motorists Coverage

1. Uninsured motorists coverage（未投保机动车驾驶员保障） pays for the bodily injury caused by an uninsured motorist, by a hit-and-run driver, or by a negligent driver whose insurance company is insolvent
   • The uninsured motorist must be legally liable
2. The coverage applies to:
   • The named insured and family members
   • Another person while occupying a covered auto
   • Any person legally entitled to recover damages
3. Coverage does not apply when:
   • An insured is injured in, or by, a vehicle owned by the named insured, but not insured under the policy
   • There is primary coverage under another policy
   • The vehicle is used as a public livery or conveyance
   • When workers compensation benefits are applicable
4. Underinsured motorists（未足额投保机动车驾驶员保障） coverage can be added to the PAP to provide more complete protection
   • In general, the maximum amount paid is the underinsured motorist’s coverage limit stated in the policy less the amount paid by the negligent driver’s insurer
   • Coverage is typically added as an endorsement

Part D: Coverage for Damage to Your Auto

1. Under the coverage for damage to your auto（汽车损失保障）, the insurer agrees to pay for any direct and accidental loss to a covered auto or any nonowned auto
2. A collision（碰撞） is defined as the upset of your covered auto or nonowned auto or its impact with another vehicle or object
3. Collision losses are paid regardless of fault
4. An other-than-collision loss（非碰撞损失） is a loss due to the following perils:
   • Missiles or falling objects
   • Hail, water, flood, fire, windstorm
   • Riot or civil commotion
   • Malicious mischief or vandalism
   • Contact with a bird or animal
   • Theft
   • Glass breakage
   • Explosion or earthquake
5. A nonowned auto is also covered under the Part D coverages
   • A nonowned auto is a private passenger auto, pickup, van, or trailer not owned by or furnished or made available for regular use of the named insured or family member, while it is in the custody of or being operated by the named insured or family member
   • The coverage also applies to a temporary substitute vehicle
6. A collision damage waiver (CDW) may be unnecessary on a rental car if you carry collision and comprehensive coverage on your own car
7. Part D also pays for temporary transportation expenses, e.g., for train, bus, taxi expenses
   • The expense must be the result of a covered loss
   • Coverage is subject to a daily and total limit
   • Includes charges from a rental car company for loss of daily rental
   • Coverage for towing and labor costs can be added by an endorsement
8. Exclusions to the coverage include:
   • Use as a public livery or conveyance
   • Damage from wear and tear, freezing, and mechanical or electrical breakdown
   • Radioactive contamination or war
   • Certain electronic equipment
   • Tapes, records, and disks
   • Government destruction or confiscation
   • Trailer, camper body, or motor home
   • Racing vehicle
9. For a total loss, the policy pays the actual cash value less the deductible
10. For a partial loss, the policy pays only the amount necessary to repair or replace the damaged property of like kind and quality
11. Insurers can add a clarifying endorsement to exclude coverage for diminution in value（价值下降） from a direct and accidental physical damage loss
    • The insured can also purchase gap insurance（缺口保险）
12. If more than one auto policy covers a physical damage loss:
    • The insurer pays its pro rata share of the loss for an owned vehicle
    • The insurance coverage is excess over any other insurance for a nonowned vehicle
13. The policy includes an appraisal provision for handling disputes over the amount of physical damage loss
    • Either party can demand an appraisal of the loss

Part E: Duties After an Accident or Loss

1. After an accident, the insured is required to perform certain duties, such as:
   • Promptly notify the insurance company or agent
   • Cooperate with the insurer in the investigation
   • Send the insurer copies of any legal notices received in connection with an accident
   • Take a physical exam, if required
2. The police must be notified if a hit-and-run driver is involved
3. The insurer is allowed to inspect your vehicle if you are seeking coverage under Part D
4. The insurer can deny coverage only if failure to comply is prejudicial to the insurer

Part F: General Provisions

1. All states restrict the insurer’s right to cancel or nonrenew coverage
2. Cancellation（撤销） provision: The named insured can cancel at any time by returning the policy to the insurer or providing written notice. If a policy has been in force for more than 60 days, the insurer can cancel only if:
   • The premium has not been paid
   • The driver’s license of any insured has been suspended, or
   • The policy was obtained through material misrepresentation
3. Nonrenewal（停止续保）: if an insurer decides to discontinue coverage, the insured must be given notice at least 20 days before the end of the policy period
4. Automatic termination（自动终止）: a policy is automatically terminated if the insured decline’s the insurer’s offer to renew
5. The PAP provides coverage in the US, US territories, Puerto Rico, and Canada

Insuring Motorcycles and Other Vehicles

1. A miscellaneous-type vehicle endorsement（多类型车辆批单） can be added to the PAP to insure motorcycles, mopeds, motorscooters, golf carts, motor homes, dune buggies, etc.
   • Does not cover snowmobiles
   • The liability coverage does not apply to a nonowned vehicle
   • A passenger hazard exclusion can be elected, which excludes liability for bodily injury to any passenger on a motorcycle