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Contents Preface xvi Part One Basic Concepts in Risk Management and Insurance 1 chapter 1 Risk in Our Society 2 Meaning of Risk 3 Chance of Loss 4 Peril and Hazard 5 Basic Categories of Risk 6 Types of Pure Risk 8 Burden of Risk on Society 11 Methods of Handling Risk 12 Summary 15 n Key Concepts and Terms 15 n Review Questions 16 Application Questions 16 n Internet Resources 17 n Selected References 17 Notes 17 Case Application 14 Insight 1.1: At a Glance; The Economic Problem of Poor Health 10 chapter 2 Insurance and Risk 18 Definition of Insurance 19 Basic Characteristics of Insurance 19 Requirements of an Insurable Risk 21 Two Applications: The Risks of Fire and Unemployment 23 Adverse Selection and Insurance 24 Insurance and Gambling Compared 24 Insurance and Hedging Compared 25 Types of Insurance 25 Benefits of Insurance to Society 28 Costs of Insurance to Society 29 Summary 33 n Key Concepts and Terms 34 n Review Questions 34 Application Questions 34 n Internet Resources 35 n Selected References 36 Notes 36 Case Application 33 Insight 2.1: Insurance Fraud Hall of Shame; Sampling of Outrageous Cases 31 Insight 2.2: Don't Think Insurance Fraud is Committed Only by Hardened Crooks 32 Appendix Basic Statistics and the Law of Large Numbers 38 chapter 3 Introduction to Risk Management 41 Meaning of Risk Management 42 Objectives of Risk Management 42 Steps in the Risk Management Process 43 Identifying Loss Exposures 44 Analyze the Loss Exposures 44 Select the Appropriate Techniques for Treating the Loss Exposures 45 Implement and Monitor the Risk Management Program 52 Benefits of Risk Management 53 Personal Risk Management 53 Summary 56 n Key Concepts and Terms 57 n Review Questions 57 Application Questions 58 n Internet Resources 59 n Selected References 59 Notes 59 Case Application 56 Insight 3.1: Why Do Firms Self-Insure Their Group Health Insurance Plans? 49 Insight 3.2: Show Me the Money; Risk Manager Salaries Rise 54 Chapter 4 Advanced Topics in Risk Management 61 The Changing Scope of Risk Management 62 Insurance Market Dynamics 65 Loss Forecasting 69 Financial Analysis in Risk Management Decision Making 72 Other Risk Management Tools 75 Summary 77 n Key Concepts and Terms 78 n Review Questions 78 Application Questions 78 n Internet Resources 79 n Selected References 80 Notes 80 Case Application 77 Insight 4.1: The Weather (Derivatives) Report 70 Appendix Risk Management Application Problems 82 Part Two The Private Insurance Industry 87 Chapter 5 Types of Insurers and Marketing Systems 88 Overview of Private Insurance in the Financial Services Industry 89 Types of Private Insurers 92 Agents and Brokers 98 Types of Marketing Systems 99 Group Insurance Marketing 102 Summary 103 n Key Concepts and Terms 103 n Review Questions 103 Application Questions 104 n Internet Resources 104 n Selected References 105 Notes 106 Case Application 102 Insight 5.1: Holding Company Schemes: The Feeling Isn't Mutual 96 Insight 5.2: How Much Do Insurance Agents Earn? 99 Chapter 6 Insurance Company Operations 107 Insurance Company Operations 108 Rate Making 108 Underwriting 109 Production 112 Claims Settlement 113 Reinsurance 115 Alternatives to Traditional Reinsurance 120 Investments 121 Other Insurance Company Functions 124 Summary 125 n Key Concepts and Terms 126 n Review Questions 126 Application Questions 126 n Internet Resources 127 n Selected References 128 Notes 128 Case Application 125 Insight 6.1: Stiffed by Your Insurer? Check Your Insurer's Complaint Record 115 Insight 6.2: New Proposals for Dealing with Mega- Catastrophes 121 Chapter 7 Financial Operations of Insurers 130 Property and Casualty Insurers 131 Life Insurance Companies 136 Rate Making in Property and Casualty Insurance 139 Rate Making in Life Insurance 143 Summary 144 n Key Concepts and Terms 145 n Review Questions 145 Application Questions 145 n Internet Resources 146 n Selected References 147 Notes 147 Case Application 143 Insight 7.1: Profitability of Insurance Industry and other Selected Industries 137 Chapter 8 Government Regulation of Insurance 149 Reasons for Insurance Regulation 150 Historical Development of Insurance Regulation 151 Methods for Regulating Insurers 153 What Areas Are Regulated? 153 State Versus Federal Regulation 161 Current Problems and Issues in Insurance Regulation 163 Summary 169 n Key Concepts and Terms 169 n Review Questions 169 Application Questions 170 n Internet Resources 171 n Selected References 171 Notes 172 Case Application 168 Insight 8.1: 2005 Annual Ranking of Automobile Insurance Complaints in New York State (based on 2004 data) 159 Part THREE Legal Principles in Risks and Insurance 173 Chapter 9 Fundamental Legal Principles 174 Principle of Indemnity 175 Principle of Insurable Interest 178 Principle of Subrogation 179 Principle of Utmost Good Faith 181 Requirements of an Insurance Contract 183 Distinct Legal Characteristics of Insurance Contracts 185 Law and the Insurance Agent 186 Summary 188 n Key Concepts and Terms 189 n Review Questions 190 Application Questions 190 n Internet Resources 191 n Selected References 191 Notes 191 Case Application 188 Insight 9.1: Corporation Lacking Insurable Interest at Time of Death Can Receive Life Insurance Proceeds 180 Insight 9.2: Auto Insurer Denies Coverage Because of Material Misrepresentation 182 Insight 9.3 Insurer Voids Coverage Because of Misrepresentations in Proof of Loss 182 Chapter 10 Analysis of Insurance Contracts 193 Basic Parts of an Insurance Contract 194 Definition of the "Insured" 197 Endorsements and Riders 198 Deductibles 198 Coinsurance 200 Coinsurance in Health Insurance 201 Other-Insurance Provisions 201 Summary 204 n Key Concepts and Terms 204 n Review Questions 205 Application Questions 205 n Internet Resources 206 n Selected References 206 Notes 207 Case Application 203 Insight 10.1: Will Your Auto Insurance Cover You When You Drive Another Person's Car? 197 Part Four Life and health Risks 209 Chapter 11 Life Insurance 210 Premature Death 211 Financial Impact of Premature Death on Different Types of Families 212 Amount of Life Insurance to Own 213 Types of Life Insurance 219 Variations of Whole Life Insurance 225 Other Types of Insurance 234 Summary 237 n Key Concepts and Terms 238 n Review Questions 239 Application Questions 239 n Internet Resources 241 n Selected References 242 Notes 242 Case Application 237 Insight 11.1: 2001 CSO Mortality Table 222 Insight 11.2: How Good Is Cash-Value Life Insurance as an Investment? 224 Insight 11.3: Variable Universal Life Insurance: Is It Worth It? 232 Chapter 12 Life Insurance Contractual Provisions 244 Life Insurance Contractual Provisions 245 Dividend Options 251 Nonforfeiture Options 253 Settlement Options 254 Additional Life Insurance Benefits 259 Summary 264 n Key Concepts and Terms 264 n Review Questions 265 Application Questions 265 n Internet Resources 266 n Selected References 267 Notes 267 Case Application 262 Insight 12.1: Is This Death a Suicide? 247 Insight 12.2: Don't Be Confused About Dividend Options 252 Insight 12.3: Examples of Life Settlement Cases 262 Chapter 13 Buying Life Insurance 268 Determining the Cost of Life Insurance 269 Rate of Return on Saving Component 273 Taxation of Life Insurance 275 Shopping for Life Insurance 272 Summary 280 n Key Concepts and Terms 281 n Review Questions 281 Application Questions 281 n Internet Resources 282 n Selected References 282 Notes 283 Case Application 279 Insight 13.1: Be Careful in Replacing an Existing Life Insurance Policy 273 Appendix Calculation of Life Insurance Premiums 284 Chapter 14 Annuities and Individual Retirement Accounts 290 Individual Annuities 291 Types of Annuities 292 Taxation of Individual Annuities 295 Individual Retirement Accounts 297 Summary 305 n Key Concepts and Terms 306 n Review Questions 306 Application Questions 306 n Internet Resources 307 n Selected References 307 Notes 307 Case Application 1 304 Case Application 2 304 Insight 14.1: At a Glance; Advantages of an Immediate Annuity 293 Insight 14.2: Ten Questions to Answer Before You Buy a Variable Annuity 298 Insight 14.3: Will You Have Enough Money at Retirement? Monte Carlo Simulations Can Be Helpful 303 Chapter 15 Individual Health Insurance Coverages 309 Health-Care Problems in the United States 310 Large Member of Uninsured Persons in the Population 312 Individual Health Insurance Coverages 313 Hospital-Surgical Insurance 314 Major Medical Insurance 314 Health Savings Accounts 316 Long-Term-Care Insurance 319 Disability-Income Insurance 321 Individual Medical Expense Contractual Provisions 324 Shopping for Individual Health Insurance 326 Summary 330 n Key Concepts and Terms 330 n Review Questions 331 Application Questions 331 n Internet Resources 332 n Selected References 332 Notes 333 Case Application 329 Insight 15.1: Health Savings Accounts Are Not an Effective Way to Control Costs 318 Insight 15.2: Don't Delay Applying for Disability-Income Insurance 327 Insight 15.3: State High-Risk Pools for the Uninsurable 328 Chapter 16 Employee Benefits: Group Life and Health Insurance 334 Group Insurance 335 Group Life Insurance Plans 337 Group Medical Expense Insurance 340 Traditional Indemnity Plans 341 Managed Care Plans 343 Consumer-Driven Health Plans 349 Patients Bill of Rights 350 Group Medical Expense Contractual Provisions 351 Group Dental Insurance 352 Group Disability-Income Insurance 353 Cafeteria Plans 355 Summary 356 n Key Concepts and Terms 357 n Review Questions 358 Application Questions 358 n Internet Resources 359 n Selected References 360 Notes 360 Case Application 356 Insight 16.1: Credit Insurance Overcharges Cost Consumers Billions of Dollars Annually 339 Chapter 17 Employee Benefits: Retirement Plans 361 Fundamentals of Private Retirement Plans 362 Types of Qualified Retirement Plans 368 Defined-Contribution Plans 368 Defined-Benefit Plans 369 Section 401(k) Plans 371 Section 403(B) Plans 373 Profit-Sharing Plans 374 Retirement Plans for the Self-Employed 374 Simplified Employee Pension (SEP) 376 SIMPLE Retirement Plans 376 Funding Agency and Funding Instruments 377 Summary 378 n Key Concepts and Terms 379 n Review Questions 380 Application Questions 380 n Internet Resources 381 n Selected References 381 Notes 382 Case Application 378 Insight 17.1: Check It Out; The New Roth 401(k) Plan 373 Insight 17.2: Maximum Tax Savings for a Sole Proprietor with a Self-Employed 401(k) Plan 375 Chapter 18 Social Insurance 383 Social Insurance 384 Old-Age, Survivors, and Disability Insurance (OASDI) 386 Types of Benefits 387 Medicare 394 Unemployment Insurance 401 Workers Compensation 405 Summary 410 n Key Concepts and Terms 411 n Review Questions 411 Application Questions 411 n Internet Resources 413 n Selected References 413 Notes 414 Case Application 410 Insight 18.1: When Is the Right Time to Draw Social Security? 389 Insight 18.2: How Would You Fix Social Security 395 Insight 18.3: At a Glance; The Pros and Cons of Personal Retirement Accounts Under Social Security 396 Part Five Personal Property and Liability Risks 415 Chapter 19 The Liability Risk 416 Basis of Legal Liability 417 Law of Negligence 418 Imputed Negligence 420 Res Ipsa Loquitur 420 Specific Applications of the Law of Negligence 421 Current Tort Liability Problems 423 Summary 434 n Key Concepts and Terms 435 n Review Questions 435 Application Questions 435 n Internet Resources 436 n Selected References 437 Notes 437 Case Application 433 Insight 19.1: Which Cities and Countries are Perceived as "Judicial Hellholes"? 427 Insight 19.2: Study Says Wrong-Site Surgery is Very Rare and Preventable 430 Insight 19.3: Medical Errors Rank with Highway Accidents and Breast Cancer as a Major Killer in the United States 431 Chapter 20 Homeowners Insurance, Section I 439 Homeowners Insurance 440 Analysis of Homeowners 3 Policy (Special Form) 441 Section I Coverages 445 Section I Perils Insured Against 451 Section I Exclusions 455 Section I Conditions 457 Section I and II Conditions 461 Summary 462 n Key Concepts and Terms 463 n Review Questions 463 Application Questions 464 n Internet Resources 465 n Selected References 466 Notes 466 Case Application 462 Insight 20.1: Renters Insurance: Shattering a Few Myths 444 Insight 20.2: Hurricane Katrina; Windstorm and Flood Damage Answers to Frequently Asked Questions 454 Insight 20.3: The Big Gap Between Replacement Cost and Actual Cash Value Can Empty Your Wallet 458 Chapter 21 Homeowners Insurance, Section II 467 Personal Liability Insurance 468 Section II Exclusions 470 Section II Additional Coverages 474 Endorsements to a Homeowners Policy 476 Cost of Homeowners Insurance 478 Summary 486 n Key Concepts and Terms 487 n Review Questions 487 Application Questions 487 n Internet Resources 489 n Selected References 489 Notes 490 Case Application 486 Insight 21.1: Don't Let Your Dog Jeopardize Your Homeowners Coverage 469 Insight 21.2: Identity Theft Insurance Can Restore Your Good Name 479 Appendix How to Save Money on a Homeowners Policy 491 Chapter 22 Auto Insurance 494 Overview of Personal Auto Policy 495 Part A: Liability Coverage 497 Part B: Medical Payments Coverage 500 Part C: Uninsured Motorists Coverage 502 Part D: Coverage for Damage to Your Auto 505 Part E: Duties After an Accident or Loss 512 Part F: General Provisions 513 Insuring Motorcycles and Other Vehicles 514 Summary 515 n Key Concepts and Terms 515 n Review Questions 515 Application Questions 516 n Internet Resources 518 n Selected References 518 Notes 519 Case Application 514 Insight 22.1: The Top 10 Reasons to Purchase the Rental Car Collision Damage Waiver (CDW) 508 Insight 22.2: Crash Risk Is Four Times Higher When Drivers Use Cell Phones, Study Says 510 Chapter 23 Auto Insurance and Society 520 Approaches for Compensating Auto Accident Victims 521 Auto Insurance for High-Risk Drivers 530 Cost of Auto Insurance 532 Shopping for Auto Insurance 536 Summary 540 n Key Concepts and Terms 542 n Review Questions 542 Application Questions 542 n Internet Resources 543 n Selected References 543 Notes 544 Case Application 541 Insight 23.1: Claims Against Another Driver's Insurance Company 524 Insight 23.2: Insuring Young Drivers 534 Chapter 24 Other Property and Liability Insurance Coverages 545 ISO Dwelling Program 546 Mobilehome Insurance 547 Inland Marine Floaters 548 Watercraft Insurance 549 Government Property Insurance Programs 550 Title Insurance 555 Personal Umbrella Policy 556 Summary 560 n Key Concepts and Terms 560 n Review Questions 561 Application Questions 561 n Internet Resources 562 n Selected References 563 Notes 563 Case Application 559 Insight 24.1: Myths and Facts about the National Flood Insurance Program (NFIP) 553 Insight 24.2: Examples of Claims Covered by Personal Umbrella Policy 558 Part Six Commercial Property and Liability Risks 565 Chapter 25 Commercial Property Insurance 566 ISO Commercial Property Program 567 Building and Personal Property Coverage Form 569 Causes-of-Loss Forms 572 Reporting Forms 574 Business Income Insurance 574 Other Commercial Property Coverages 577 Transportation Insurance 580 Businessowners Policy (BOP) 584 Summary 587 n Key Concepts and Terms 588 n Review Questions 588 Application Questions 589 n Internet Resources 590 n Selected References 591 Notes 591 Case Application 586 Insight 25.1: Examples of Coverage Under the Building and Personal Property Coverage Form 570 Insight 25.2: Advantages of the Special Causes-of-Loss Form 573 Insight 25.3: Examples of Equipment Breakdown Losses 579 Chapter 26 Commercial Liability Insurance 592 General Liability Loss Exposures 593 Commercial General Liability Policy 594 Employment-Related Practices Liability Insurance 600 Workers Compensation Insurance 601 Commercial Auto Insurance 604 Aircraft Insurance 606 Commercial Umbrella Policy 607 Businessowners Policy 609 Professional Liability Insurance 609 Directors and Officers Liability Insurance 611 Summary 612 n Key Concepts and Terms 613 n Review Questions 614 Application Questions 614 n Internet Resources 615 n Selected References 616 Notes 616 Case Application 612 Insight 26.1: Basic Facts about Workers Compensation 602 Chapter 27 Crime Insurance and Surety Bonds 618 ISO Commercial Crime Insurance Program 619 Commercial Crime Coverage Form (Loss-Sustained Form) 620 Financial Institution Bonds 625 Surety Bonds 626 Summary 629 n Key Concepts and Terms 630 n Review Questions 630 Application Questions 630 n Internet Resources 631 n Selected References 631 Notes 632 Case Application 628 Insight 27.1: Taking Home More Than a Paycheck: Employee Theft Costs U.S. Employers $20 Billion/$40 Billion a Year 621 Insight 27.2: FBI: 90% of Organizations Face Computer Attack; 64% Incur Financial Loss 624 Appendix A Homeowners 3 (Special Form) 633 Appendix B Personal Auto Policy 656 Appendix C Whole Life Insurance Policy with Riders 670 Appendix D Flexible Premium (Universal) Life Insurance Policy 688 Glossary 708 Index 000
Library of Congress Subject Headings for this publication:
Insurance.
Risk (Insurance).
Risk management.