Insurance and Risk Management: Master Exam Summary

Posted on Jan 22, 2026 in Philosophy and ethics

Insurance & Risk Management: Master Exam Summary

(Detailed Reference Material)

Core Risk Management Foundations

Risk Definitions

  • Risk: Uncertainty concerning the occurrence of a loss.

  • Pure Risk: Chance of loss or no loss (insurable).

  • Speculative Risk: Chance of loss, no loss, or gain (not insurable).

Categories of Risk

  • Personal Risk: Affects individual income (death, disability).

  • Property Risk: Loss or damage to owned property.

  • Liability Risk: Legal responsibility for injury to others.

  • Financial Risk: Loss due to market changes (prices, interest rates).

Perils Versus Hazards

  • Peril: The direct cause of loss (e.g., fire, theft).

  • Hazard: A condition increasing the likelihood or severity of loss:

    • Physical Hazard: Physical condition (e.g., icy roads).

    • Moral Hazard: Dishonesty or character defects (e.g., fraud).

    • Morale Hazard: Carelessness due to having insurance.

    • Legal Hazard: Laws increasing insurer liability.

Loss Frequency & Severity

  • Frequency: How often losses occur.

  • Severity: Financial magnitude of the loss.

  • Ideal risk for insurance: low frequency, high severity.

Law of Large Numbers

  • As exposure units increase, actual loss experience approaches expected loss.

  • Enables accurate loss prediction and premium setting.

Risk Management Objectives

Pre-Loss Objectives

  • Economy: Minimize the cost of risk.

  • Reduction of Anxiety: Provide peace of mind.

  • Legal Compliance: Meet laws and regulations.

  • Social Responsibility: Protect others from harm.

Post-Loss Objectives

  • Survival: Continue operations after a loss.

  • Continuity: Maintain operations.

  • Stability of Earnings: Reduce volatility.

  • Growth: Resume expansion plans.

Risk Management Techniques

  • Risk Control: Techniques to reduce frequency/severity.

  • Risk Financing: Methods to pay for losses that occur.

Retention Tools

  • Deductible: Amount insured pays before benefits apply.

  • Self-Insured Retention (SIR): Amount paid before insurance applies.

Legal Foundations of Insurance

Elements of a Contract

  1. Offer

  2. Acceptance

  3. Consideration

  4. Legal Purpose

  5. Competent Parties

Negligence

  • Failure to act as a reasonable person.

Elements of Negligence:

  1. Duty of Care

  2. Breach of Duty

  3. Causation

    • Factual (but-for)

    • Proximate (legal)

  4. Damages

Types of Negligence

  • Ordinary negligence

  • Gross negligence

  • Imputed negligence

Liability Standards

  • Negligence

  • Strict Liability (no fault required)

Types of Damages

  • Compensatory

    • Special

    • General

  • Punitive

Indemnification

  • Restore insured to financial position prior to loss (no profit).

Subrogation

  • Insurer assumes the insured’s right to recover from a negligent third party.

Chapter 10: Managing Loss of Life Risk

Purpose of Life Insurance

  • Protect dependents against financial consequences of premature death.

Determining Coverage Amount

  • Human Life Value (HLV): Present value of future earnings.

  • Needs Approach: Funeral + debts + income needed − assets.

Types of Life Insurance

  • Term, Whole Life, Universal Life, Variable Life, Variable Universal Life, Group Life.

Policy Provisions

  • Ownership, entire contract, contestability, suicide, grace period, reinstatement, misstatement, assignment.

Beneficiaries & Insurable Interest

  • Primary versus contingent beneficiaries.

  • Insurable interest required at policy inception.

Key Features

  • Dividends, Nonforfeiture Options, Settlement Options, Accelerated Benefits.

Chapter 11: Managing Loss of Health Risk

Cost Sharing Mechanisms

  • Deductible, Copay, Coinsurance, Out-of-Pocket Maximum.

Health Plans

  • HMO, PPO, POS, HDHP (High Deductible Health Plan).

Public Health Insurance

  • Medicare (A, B, C, D) and Medicaid.

Disability Insurance

  • Own-Occupation versus Any-Occupation definitions.

Chapter 12: Employee Benefits

Benefit Types

  • Required: Social Security, Medicare, Unemployment Insurance (UI), Workers’ Compensation (WC).

  • Voluntary: Life, health, disability, retirement plans.

Group Insurance Characteristics

  • Issued under a master contract; typically no individual underwriting.

Chapters 13 & 14: Retirement & Annuities

Retirement Plans

  • Defined Benefit (DB)

  • Defined Contribution (DC)

ERISA & Vesting

IRAs & Annuities

  • Traditional vs. Roth IRAs.

  • Immediate vs. Deferred Annuities.

Chapter 18: Risk Management & Insurance Industry

Insurer Types

  • Stock, Mutual, Reciprocal, Lloyd’s, Captive.

Distribution Channels

  • Agent, Broker, Managing General Agent (MGA), Surplus Lines.

Industry Concepts

  • Enterprise Risk Management (ERM) and Reinsurance.

Chapter 19: Functions & Organization of Insurers

Core Operations

  • Underwriting, Ratemaking, Claims Handling, Investments.

Performance Ratios & Market Cycle

  • Loss Ratio, Expense Ratio, Combined Ratio.

  • Soft Markets versus Hard Markets.

Chapter 20: Government Regulation of Insurance

Regulatory Focus

  • Solvency, Rate Approval, Consumer Protection.

Key Mechanisms

  • Rate Laws and State Guaranty Funds.

Note: This comprehensive summary includes all essential concepts.