Chapter 1 FUNDAMENTALS AND TERMINOLOGY 1
Chapter Objectives 1
Introduction 2
Insurance Defined 2
Financial Definition 3
Legal Definition 4
Loss，Chance of Loss，Peril，Hazard，and Proximate Cause 5
Loss 5Chance of Loss 5
Proximate Cause 6
Peril and Hazard 6
Risk 7
Risk Management 9
The Mathematical Basis for Insurance 9
Four Basic Components 10
Building Blocks of an Insurance Premium 10
A Mathematical Example of an Insurance System's Operations 10
Cash Flow Underwriting 11
ContentsPrefce 13
Benefits 13
Costs 13
The Benefits and Costs to Society of Insurance Systems 13
Arson：Who Really Pays for Insured Losses 14
Summary 16
Review 17
Review Terms 17
Suggestions for Further Study 18
Research Assignment 18
Discussion Questions 18
Chapter Objectives 21
Chapter 2 INSURABLE LOSS EXPOSURES 21
Gambling and Speculative Risks 22
Introduction 22
A Large Group of Similar Units Exposed to the Same Peril（s） 23
Ideally Insurable Loss Exposures 23
Losses Must be Accidental and Beyond the Insured's Control 24
Catastrophic Losses 25
Losses Must be Definite，Measurable，and of Sufficient Severity to Cause Economic Hardship 25
When Only the People Most Exposed to Loss Want Coverage，Insurance Becomes Unfeasible 29
Subsidization 31
Risk Classification 31
Adverse Selection 32
Principles of Risk Classification 33
AIDS （Acquired Immune Deficiency Syndrome） 34
Important Social Issues 34
Automobile Insurance 36
Pension Benefits 37
Branches of Insurance 38
Conclusion 38
Review Terms 40
Summary 40
Discussion Questions 41
Review 41
Suggestions for Further Study 42
Research Assignment 42
Chapter Objectives 43
Chapter 3 RISK MANAGEMENT 1：ESSENTIALS 43
The Risk Management Function 44
Introduction 44
Statement of Objectives and Principles 45
Risk Management Staff 45
Step One：Identification and Measurement of Exposures 47
The Risk Management Process 47
Direct Property Losses 48
Liability Losses 50
Loss of Income 50
Loss of Key Personnel 51
Emergency Planning—Disastor Recovery 52
Estimation of Maximum Loss 52
Step Two：Loss Control and Risk Financing53Loss Control 53
Risk Financing 55
Step Three：Regular Review of the Risk Management Program 61
Summary 63
Chicago Tunnel Collapse：A Risk Management Problem 63
Review Terms 65
Research Assignment：Case Study 66
Review 66
Appendix：Personal Risk Management 67
Suggestions for Further Study 67
Chapter Objectives 71
Chapter 4 RISK MANAGEMENT 2：ADVANCED TOPICS 71
Loss Data 72
Risk Management Information Systems（RMIS） 72
Introduction 72
Other Information 74
Deductibles and Policy Limits 75
Financial and Other Considerations 76
British Petroleum：A Case Study 78
International Risk Management 79
Identification and Measurement of Exposures 80
Regular Review and Evaluation 81
Development and Implementation of Plans 81
Foreign Insurance 82
Financial Risk Management 87
Summary 89
Review 90
Review Terms 90
Suggestions for Further Study 91
Research Assignment 91
Discussion Questions 91
The Story 92
Introduction 92
Case Study：Blue Star Airlines 92
The Risk Management Process 93
Facts and Assumptions 94
Assignment 95
Chapter Obiectives 99
Chapter 5 PRIVATE INSURANCE COMPANIES 99
Two Different Types of Insurance Companies 100
Introduction 100
Mutual Insurance Companies 101
Demutualization 103
Stock Versus Mutual：A Consumer's Viewpoint 103
Stock Insurance Companies 103
Lloyd's of London Is an Insurance Market 104
Lloyd's of London 104
Lloyd's History 105
Lloyd's and the Risk Management Function 106
Typical Transaction 106
The Reciprocal Exchange 107
Other Legal Forms of Insurance Companies 107
American Lloyds 107
Blue Cross and Blue Shield 108
Savings Bank Life Insurance 108
Fraternal Insurers 108
Health Maintenance Organizations（HMOs）and Preferred Provider Organizations（PPOs） 110
Industrial Organization 112
Insurance Industry 113
Summary 114
Discussion Questions 115
Review 115
Review Terms 115
Introduction 116
Appendix：Insurance and Private Enterprise：The Potential for Eastern Europe 116
Research Assignment 116
Suggestions for Further Study 116
Why Private Insurance？ 117
Why Insurance？ 117
Competition and Efficiency 118
The Requirements of a Private Insurance System 119
Essential Requirements of a Free Enterprise（Capitalist）System 119
Difficulties Starting a Private Insurance System in Eastern Europe 120
The Future 122
Chapter Objectives 123
Chapter 6 INSURANCE OCCUPATIONS 123
Agency Law 124
Insurance Agents and Brokers 124
Introduction 124
Insurance Brokers 126
Property and Liability Insurance Agents and Brokers 128
Licensing Requirements 128
Life Insurance Agents and Brokers 129
An Insurance Agent's Duties 130
Loss Adjuster 131
Employees，Independent Adjustment Bureaus，and Public Adjusters 133
Adjusters Are Agents 134
Underwriter 135
Property Insurance Underwriting 137
Underwriting and Privacy 138
Life Insurance Underwriting 138
Actuary 139
Finance 140
Attorney 140
Summary 141
Other Occupations 141
Review 142
Review Terms 142
Suggestions for Further Study 143
Research Assignment 143
Discussion Questions 143
Case 1 144
Appendix：Legal Issues Involving Insurance Agents and Brokers 144
Introduction 145
Appendix：The Ethical Choice 145
Case 2 145
Vocabulary 146
Ethical Norms 147
Three Practice Cases 149
Suggestions for Further Study 152
Chapter Objectives 153
Chapter 7 THE INSURANCE MARKET：THE ECONOMIC PROBLEM 153
Supply and Demand 154
Economic Theory 154
Introduction 154
Historical Problems 157
The Insurance Consumer 158
The Consumer's Choice：Company，Agent or Broker，Policy，Amount，and Price 159
The Courts 164
Consumer Protection：The Role of the Courts，the Law，and the Insurance Commissioner 164
The Insurance Commissioner 165
The Law 165
Summary 166
Discussion Questions 167
Review 167
Review Terms 167
Elasticity of Supply and Demand for Insurance 168
Appendix：Further Consideration of Supply and Demand 168
Research Assignment 168
Suggestions for Further Study 168
Shifting Supply and Demand Curues 170
Chapter Objectives 171
Chapter 8 INSURANCE REGULATION 171
Insurance Regulation 172
Introduction 172
Solvency 173
The Reasons for Insurance Regulation 173
Prices 174
Unequal Knowledge and Bargaining Power 174
The History of Insurance Regulation 175
Promotion of Social Goals 175
South-Eastern Underwriters Association（SEUA） 176
Armstrong and Merritt Investigations 176
Paulv．Virginia 176
State or Federal Regulation？ 177
The McCarran Act 177
The National Association of Insurance Commissioners （NAIC） 178
State Insurance Regulation 178
Repeal of P．L．-15 179
Both Sides of the Argument 180
Legal Reserves and Surplus 182
Regulated Activities 182
Regular Audits and Solvency Testing 185
Rate Regulations 187
Guaranty Funds 187
Investment Activities 188
Qualifications or Licenses for Companies，Agents，Brokers，Loss Adjusters，and Company Officers 189
Policy Form Approval and Expense Limitations 189
Consumer Complaints 190
Summary 191
Taxation 191
Review 192
Review Terms 192
Suggestions for Further Study 193
Research Assignment 193
Discussion Questions 193
Appendix：The McCarran Act（P．L．-15） 194
Chapter Objectives 197
Chapter 9 INSURANCE CONTRACTS 197
Contract Terminology 198
Introduction 198
Conditional Receipt 199
Binder 199
Consideration 200
Offer and Acceptance 200
Elements of a Valid Contract 200
Distinguishing Characteristics of Insurance Contracts 201
Legal Purpose 201
Capacity 201
Principle of Indemnity 202
Insurable Interest 203
Actual Cash Value 204
Subrogation 205
Contract of Adhesion 207
The Personal Feature 209
Utmost Good Faith（Latin：Uberrimae Fidei） 210
The Aleatory Feature 213
The Entire Contract andIncontestability Clauses 213
Discharge of Insurance Contracts 214
Summary 215
Review 216
Review Terms 216
Material Misrepresentation 217
Appendix：Cases for Discussion 217
Research Assignment 217
Suggestions for Further Study 217
Contract of Adhesion：The Metpath Case 218
Breach of Warranty：General Chicken Case 219
Chapter Objectives 221
Chapter 10 BASIC PROPERTY AND LIABILITY INSURANCE CONTRACTS 221
Introduction 222
Standard Policies 223
Insuring Agreement 224
Declarations 224
Basic Parts of an Insurance Policy 224
Deductibles 225
Exclusions 226
Definitions 226
Fraud 227
Conditions 227
Endorsements 227
Cancellation 229
Suspension of Coverage 229
Duties After a Loss 230
Other Insurance 230
Salvage 232
Appraisal 232
Summary 233
Conclusion 233
Claims Payment 233
Review 234
Review Terms 234
Suggestions for Further Study 235
Research Assignment 235
Case for Discussion：Vacancy Clause 235
Chapter Objectives 237
Chapter 11 HOMEOWNERS INSURANCE 237
Introduction 238
Policy Layout 239
A General Description of the HO Insurance Policies 239
Declarations 240
Definitions 242
Section 1—Property Coverages 243
Additional Coverage 245
Section 1—Perils Insured Against in the Broad Form，HO-2 246
Specified Perils 247
HO-2：Section 1—Exclusions 249
Other Exclusions 250
Ordinance-or-Law Exclusion 250
Replacement Cost and Coinsurance 251
Loss Settlement 251
Section 1—Conditions 251
Reasons for the Coinsurance Requirement 253
Mortgage Clause 254
Section 2—Liability Coverages 255
Section 2—Exclusions 256
Claims Not Covered Arising from Bodily Injury or Property Damage 256
Sections 1 and 2—Conditions 258
Summary 259
Reduction of Insurance Resulting from Previous Losses 259
Endorsements 259
Review 261
Review Terms 261
Practice Questions 262
Research Assignment 263
Appendix：Buying Homeowners Insurance 264
Suggestions for Further Study 264
Chapter Objectives 267
Chapter 12 THE PERSONAL AUTO POLICY 267
The Tort Liability System and Automobile Insurance：A Review Case 268
Introduction 268
The Personal Auto Policy Layout 269
Definitions 270
Part A—Liability 271
Limit of Liability 272
Exclusions 273
Insureds 273
Part B—Medical Payments 274
Coverage under the PAP 275
Part C—Uninsured Motorist Coverage 275
Contact or No-Contact Rules 276
Part D—Damage to Your Auto 277
Underinsured Motorists 277
The State's Response to Uninsured Motorists 277
Loss Settlement 278
Part E—Duties After an Acddent or Loss 279
Summary 280
Part F—General Provisions 280
Review 281
Review Terms 281
Practice Questions 282
Suggestions for Further Study 283
Research Assignment 283
Chapter Objectives 285
Chapter 13 COMMERCIAL PROPERTY INSURANCE 285
Property and Marine（Transportation）Insurance 286
Commercial and Personal Property Insurance 286
Introduction 286
Commercial Insurance 286
Commercial Package Policy 287
Property Covered 288
Building and Personal Property Form 288
The Insurance Services Office（ISO） 288
Perils Covered 289
Property Excluded from Coverage 289
Definition of Fire 290
Fire Insurance History 290
Reporting Forms 291
Business Income Coverage 292
Property Insurance Rating 293
Additional Forms 293
Ocean Marine Insurance 295
Transportation Insurance 295
Inland Marine Insurance 297
Aviation Insurance 301
Business Automobile Insurance 302
Automobile Property Insurance 302
Review Terms 304
Summary 304
Review 305
Suggestions for Further Study 306
Research Assignments 306
Discussion Questions 306
Chapter Objectives 307
Chapter 14 GENERAL LIABILITY INSURANCE 307
Legal Background 308
Introduction 308
Categories of Torts（Civil Wrongs） 309
Establishing Negligence and Damages 310
Negligence Lawsuits 310
Defenses in a Negligence Suit 314
Legal Judgements 315
Questions of Fact 315
The Relationship Between Negligence and Legal Liability Insurance 315
Ethics and Liability Insurance 316
The Facts 317
Social Host Liquor Liability：An Example 317
Business General Liabilihy Insurance 318
Categories of Liability Insurance 318
Business Liability Umbrella Policies 321
Automobile Liability Insurance 322
Review Terms 326
Summary 326
Review 327
Suggestions for Further Study 328
Research Assignment 328
Discussion Questions 328
Case for Discussion 328
Chapter Objectives 331
Chapter 15 SPECIAL LIABILITY INSURANCE 331
Claims-Made Policies 332
Claims-Made and Occurrence Policies 332
Introduction 332
Occurrence-Basis Policies 333
Environmental Impairment Liabilitv 334
Insurance History 335
Products Liability Insurance 337
Insurance Principles and EIL Coverage 337
Risk Management Strategy 337
The Continuing Controversy 339
Risk Management Strategy 339
What Is a Professional？ 340
Professional Liability Insurance 340
Types of Professional Liability Coverage 341
Claims Settlement 341
Coverage Clause 341
Employment Practices Liability 343
Nuclear Liability Insurance 345
Americans with Disabilities Act（ADA） 345
Summary 348
Review 349
Review Terms 349
Suggestions for Further Study 350
Research Assignments 350
Discussion Questions 350
Case Study：Sexual Harassment 352
Appendix 352
Case Study：Americans with Disabilities Act（ADA） 353
Chapter Objectives 355
Chapter 16 BONDING，CRIME INSURANCE，AND REINSURANCE 355
The Reasons for Surety Bonding 356
Introductory Terminology 356
Introduction 356
Surety Bonding 356
The Difference Between Suretyship and Insurance 357
Underwriting Bonds 358
Types of Bonds 359
Crime Insurance 360
Reinsurance Arrangements 361
Introductory Terminology 361
Reinsurance 361
Reinsurance Coverage 362
Reasons for Reinsurance 364
Providers of Reinsurance 365
Reinsurance and Risk Management 365
Summary 366
Concluding Comments 366
Discussion Questions 367
Review 367
Review Terms 367
Suggestions for Further Study 368
Research Assignment 368
Chapter Objectives 369
Chapter 17 LIFE INSURANCE POLICIES 369
Three Ways Life Insurance Is Distributed 370
Introduction 370
Group Life Insurance 371
Individual Life Insurance 372
Industrial Life Insurance 372
Types of Term Life Insurance 374
Term Insurance 374
Uses of Term Life Insurance 377
Cash Values 378
Whole Life Insurance 378
Types of Whole Life Policies 379
A Whole Life Ledger Sheet 381
Reasons for Saving with Life Insurance 381
The Uses of Whole Life Insurance 381
Buy Term and Invest the Difference：The Consumer's Viewpoint 382
Universal Life Insurance Policies 384
Universal Life Insurance 384
Universal Life Insurance Death Benefits 385
Ledger Sheet for Universal Life Insurance 386
Uses of Universal Life Insurance 386
Variable Life Insurance 387
Summary 388
Review 389
Review Terms 389
Research Assignment 390
Discussion Questions 390
Endowment Life Insurance 391
Appendix 391
Suggestions for Further Study 391
Chapter Objectives 393
Chapter 18 ANNUITIES 393
Definitions 394
Introduction 394
Beginning of Benefits 396
Method of Premium Payment 396
Classification of Annuities 396
Promises Purchased 398
Determination of Annuity Benefits 400
Number of Annuitants 400
Types of Benefits 401
Uses of Annuities 401
Taxation of Annuities 402
Withdrawals in Liquidation 403
Withdrawal before Liquidation 403
Review Terms 404
Summary 404
Research Assignment 405
Discussion Questions 405
Review 405
Suggestions for Further Study 406
Chapter Objectives 407
Chapter 19 LIFE INSURANCE PLANNING 407
The Economic Value of the Human Life 408
Introduction 408
The Needs-Based Purchase of Life Insurance 409
Planning Process 410
Life Insurance Planning 410
The Early Adult Years 411
Life Insurance Planning：A Case Study 412
Insurance for Wives，Children，and College Students 413
Life Insurance Planning：The Middle Years 417
Federal Estate Tax 418
Wills 418
Life Insurance Planning：The Later Years 418
Business Uses of Life Insurance 420
Funding Business Continuation Agreements with Life Insurance 421
Death Proceeds 422
The Taxation of Life Insurance 422
Summary 423
Living Benefits：Dividends，Savings，and Accelerated Death Benefits 423
Review 424
Review Terms 424
Research Assignment 425
Discussion Questions 425
Suggestions for Further Study 426
Facts and Data 426
Chapter Objectives 429
Chapter 20 STANDARD LIFE INSURANCE CONTRACT PROVISIONSAND OPTIONS 429
Beneficiary Designation 430
Insured，Owner，and Beneficiary 430
Introduction 430
General Life Insurance Policy Provisions 431
Grace Period 432
The Incontestable Clause 433
The Reinstatement Provision 433
Annual Apportionment of Divisible Surplus 434
The Misstatement-of-Age Provision 434
The Entire-Contract Provision 434
The Suicide Clause and Other Restrictive Clauses 436
Nonforfeiture Options 437
Dividend Options 437
Four Options Providing the Insured with Choices 437
Policyholder Loans 438
Settlement Options 439
Available Riders and Options 440
The Double-Indemnity Option 441
The Waiver-of-Premium Option 441
The Guaranteed-Insurability Option 441
Summary 442
Review 443
Review Terms 443
Discussion Questions 444
Suggestions for Further Study 445
Research Assignment 445
Chapter Objectives 447
Chapter 21 SIMPLIFIED LIFE INSURANCE MATHEMATICS 447
The 1980 CSO 448
Mortality Tables 448
Introduction 448
Some Simplifying Assumptions 453
Interpretation of Mortality Tables 453
Other Mortality Tables 453
Single-Premium，Five-Year Term Insurance 454
Single-Premium，One-Year Term Insurance 454
Single-Premium，Whole Life Insurance 459
Leveling the Whole Life Premium 463
A Complex Issue 465
The Cost of Life Insurance and Sales Illustrations 465
Interest-Adjusted Method 466
Traditional Calculation 466
The Sales Illustration Controversy 467
Review 468
Review Terms 468
Summary 468
Suggestions for Further Study 469
Research Assignment 469
Chapter Objectives 471
Chapter 22 MEDICAL EXPENSE AND DISABILITY INSURANCE 471
Introduction 472
Increasing Health Care Costs 473
Background Information 473
Medical Inflation 474
Cost Containment 475
Entire Contract 476
Common Contract Provisions 476
Legal Action 477
Physical Exam and Autopsy 477
Grace Period 477
Reinstatement 477
Incontestable Clause 477
Claims 477
Definitions and Exclusions 478
Optional Contract Provisions 478
Change of Beneficiary 478
Basic Medical Expense Insurance 479
Five Kinds of Health Insurance Coverage 479
Major Medical Insurance 480
Disability Income Insurance 481
Medicare Supplement Insurance 483
The Financial Problem 484
Demographics 484
Long-Term Care Insurance 484
Long-Term Care Policy Development 485
The Continuing Debate 486
Health Insurance Providers 487
Review Terms 489
Summary 489
Discussion Questions 490
Review 490
Suggestions for Further Study 491
Research Assignment 491
Chapter Objectives 493
Chapter 23 EMPLOYEE BENEFITS 493
Introduction 494
The Government 495
The Goals of the Government，Employer，and Employee 495
The Employee 497
The Employer 497
General Features 498
Qualification Rules 498
Insured Employee Benefits 498
Group Life Insurance 499
Long-Term Disability 501
Group Disability Income Insurance 501
Social Problems 502
Group Health Insurance 502
Health Insurance Contracts 503
Health Insurance Providers 503
General Provisions of Group Health Insurance Contracts 505
Two Federal Regulations 506
Introduction 507
Insured Pension Plans 507
Federal Regulation of Pension Plans 508
Requirements for Qualified Plans 508
The Role of Insurance in Pension Plans 509
Keogh Plans 511
403（b）Plans or Tax-Deferred Annuities （TDAs） 511
Profit-Sharing，401（k），403（b），Keogh，and Cafeteria Plans 511
Profit-Sharing Plans 511
401（K） Plans 511
Cafeteria Plans 512
Individual Retirement Account（IRA） 512
Eligibility for Deductible Contributions 512
Investment Alternative 513
Rollovers 513
Taxation 514
Summary 514
Review Terms 515
Review 515
Discussion Questions 516
Research Assignment 516
Suggestions for Further Study 516
Appendix：Tax Deferral 517
The Advantages of Tax Deferral 519
Chapter 24 SOCIAL SECURITY 521
Chapter Objectives 521
In troduction 522
Social Insurance Background 522
The History and Philosophy of the American Social Security System 524
Social Security Is Not a Public Assistance Program 524
Social Security and Private Insurance Are Different 525
Social Security Is an Insurance System 525
The Program Is Compulsory for Almost Every Worker 526
A Tax on Wages Is the Main Source of Funds 526
The Operation of the Social Security Program 526
Insured Status and Eligibility for Benefits 527
Quarters of Coverage 527
Benefits Are Not Fully Funded 527
Calculation of Benefits 528
Categories of Benefits 528
Retirement Benefits 529
Survivor Benefits 530
Disability Benefits 531
Medicare（Health Insurance for the Aged and Disabled） 533
Some Current Issues Facing the Social Security System 535
Will Social Security“Be There”for Young and Middle-Aged Americans？ 535
The Social Security Surplus and the Federal Deficit 536
Other Criticism 536
Summary 537
Review Terms 537
Review 538
Research Assignment 539
Suggestions for Further Study 539
Discussion Questions 539
Chapter 25 UNEMPLOYMENT AND WORKERS'COMPENSATION INSURANCE 541
Chapter Objectives 541
Introduction 542
Unemployment Insurance 542
Some Backround Information 543
Operations of the Unemployment Insurance Program 544
Is Unemployment Insurance Really Insurance？ 545
General Provisions of State Programs 546
Summary—Unemployment Insurance 546
Workers'Compensation 547
The Problem 547
The Solution 548
The Purposes of Workers'Compensation Laws 550
Operations of Workers'Compensation Systems 551
Current Concerns About Workers'Compensation 552
Summary—Worker's Compensation 554
Review Terms 555
Review 555
Research Assignment 556
Suggestions for Further Study 556
Discussion Questions 556
Glossary 557
Appendix A：Homeowner's Insu rance Policy 569
Appendix B：Personal Auto Policy 587
Appendix C：Sample Whole Life Insurance Policy and Application 599
Index 615