GLOBAL

EDITION

Principles of Risk Management

and Insurance
THIRTEENTH EDITION

Rejda • McNamara
George E. Rejda • Michael J. McNamara
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 Principles of Risk Management and
Insurance, Global Edition
Table of Contents

Cover
Title Page
Copyright Page
Contents
Preface
PART ONE BASIC CONCEPTS IN RISK MANAGEMENT AND
INSURANCE
CHAPTER 1 RISK AND ITS TREATMENT
Definitions of Risk
Chance of Loss
Peril and Hazard
Classification of Risk
Major Personal Risks and Commercial
Risks
Burden of Risk on Society
Techniques for Managing Risk
Summary
Key Concepts and Terms
Review Questions
Application Questions
Internet Resources
Selected References
Notes
Case Application
INSIGHT 1.1: WHAT ARE YOUR CHANCES OF NOT BEING ABLE TO EARN AN INCOME?
CALCULATE YOUR PERSONAL DISABILITY
QUOTIENT
CHAPTER 2 INSURANCE AND RISK
Definition of Insurance
Basic Characteristics of Insurance
Characteristics of an Ideally Insurable
Risk
Two Applications: The Risks of Fire and
Unemployment
Adverse Selection and Insurance
Insurance and Gambling Compared
Insurance and Hedging Compared
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Types of Insurance
Benefits of Insurance to Society
Costs of Insurance to Society
Summary
Key Concepts and Terms
Review Questions
Application Questions
Internet Resources
Selected References
Notes
Case Application
INSIGHT 2.1: EXAMPLES OF INSURANCE FRAUD—HALL OF
SHAME
INSIGHT 2.2: HAVE YOU EVER COMMITTED INSURANCE FRAUD? THINK
AGAIN
Appendix: Basic Statistics and the Law of Large
Numbers
CHAPTER 3 INTRODUCTION TO RISK
MANAGEMENT
Meaning of Risk Management
Objectives of Risk Management
Steps in the Risk Management Process
Benefits of Risk Management
Personal Risk Management
Summary
Key Concepts and Terms
Review Questions
Application Questions
Internet Resources
Selected References
Notes
Case Application
INSIGHT 3.1: BERMUDA LEADS GLOBAL CAPTIVE
DOMICILES
INSIGHT 3.2: ADVANTAGES OF
SELF-INSURANCE
CHAPTER 4 ENTERPRISE RISK MANAGEMENT AND RELATED
TOPICS
Enterprise Risk Management
Insurance Market Dynamics
Loss Forecasting
Financial Analysis in Risk Management Decision
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Making
Other Risk Management Tools
Summary
Key Concepts and Terms
Review Questions
Application Questions
Internet Resources
Selected References
Notes
Case Application
INSIGHT 4.1: WEATHER FUTURES AND OPTIONS: FINANCIAL TOOLS THAT PROVIDE A MEANS
OF TRANSFERRING RISK ASSOCIATED WITH ADVERSE WEATHER
EVENTS

PART TWO THE PRIVATE INSURANCE

INDUSTRY
CHAPTER 5 TYPES OF INSURERS AND MARKETING
SYSTEMS
Overview of Private Insurance in the Financial Services
Industry
Types of Private Insurers
Agents and Brokers
Types of Marketing Systems
Group Insurance Marketing
Summary
Key Concepts and Terms
Review Questions
Application Questions
Internet Resources
Selected References
Notes
Case Application
INSIGHT 5.1: SHOW ME THE MONEY—HOW MUCH CAN I EARN AS AN INSURANCE SALES
AGENT?
CHAPTER 6 INSURANCE COMPANY
OPERATIONS
Insurance Company Operations
Rating and Rate Making
Underwriting
Production
Claims Settlement
Reinsurance
Investments
 Table of Contents
Other Insurance Company Functions
Summary
Key Concepts and Terms
Review Questions
Application Questions
Internet Resources
Selected References
Notes
Case Application
INSIGHT 6.1: HOME OWNER’S FAILURE TO COOPERATE YIELDS DENIED
CLAIM
INSIGHT 6.2: BE A SMART CONSUMER—CHECK THE CLAIMS RECORD OF INSURERS BEFORE
YOU
BUY
CHAPTER 7 FINANCIAL OPERATIONS OF
INSURERS
Property and Casualty Insurers
Life Insurance Companies
Rate Making in Property and Casualty
Insurance
Rate Making in Life Insurance
Summary
Key Concepts and Terms
Review Questions
Application Questions
Internet Resources
Selected References
Notes
Case Application
INSIGHT 7.1: HOW PROFITABLE IS THE PROPERTY AND CASUALTY INSURANCE
INDUSTRY?
CHAPTER 8 GOVERNMENT REGULATION OF
INSURANCE
Reasons for Insurance Regulation
Historical Development of Insurance
Regulation
Methods for Regulating Insurers
What Areas Are Regulated?
State versus Federal Regulation
Current Issues in Insurance
Regulation
Modernizing Insurance Regulation
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Insolvency of Insurers
Market Conduct Regulation
Summary
Key Concepts and Terms
Review Questions
Application Questions
Internet Resources
Selected References
Notes
Case Application
INSIGHT 8.1: THE PROS AND CONS OF CREDIT-BASED INSURANCE
SCORES

PART THREE LEGAL PRINCIPLES IN RISK AND

INSURANCE
CHAPTER 9 FUNDAMENTAL LEGAL
PRINCIPLES
Principle of Indemnity
Principle of Insurable Interest
Principle of Subrogation
Principle of Utmost Good Faith
Requirements of an Insurance
Contract
Distinct Legal Characteristics of Insurance
Contracts
Law and the Insurance Agent
Summary
Key Concepts and Terms
Review Questions
Application Questions
Internet Resources
Selected References
Notes
Case Application
INSIGHT 9.1: CORPORATION LACKING INSURABLE INTEREST AT TIME OF DEATH CAN RECEIVE
LIFE INSURANCE
PROCEEDS
INSIGHT 9.2: AUTO INSURER DENIES COVERAGE BECAUSE OF MATERIAL
MISREPRESENTATION
INSIGHT 9.3: INSURER VOIDS COVERAGE BECAUSE OF MISREPRESENTATIONS IN PROOF OF
LOSS
CHAPTER 10 ANALYSIS OF INSURANCE
CONTRACTS
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Basic Parts of an Insurance Contract
Definition of “Insured”
Endorsements and Riders
Deductibles
Coinsurance
Coinsurance in Health Insurance
Other-Insurance Provisions
Summary
Key Concepts and Terms
Review Questions
Application Questions
Internet Resources
Selected References
Notes
Case Application
INSIGHT 10.1: WILL YOUR AUTO INSURANCE COVER YOU WHEN YOU DRIVE ANOTHER
PERSON’S
CAR?

PART FOUR LIFE AND HEALTH RISKS

CHAPTER 11 LIFE INSURANCE
Premature Death
Financial Impact of Premature Death on Different Types of
Families
Amount of Life Insurance to Own
Types of Life Insurance
Variations of Whole Life Insurance
Other Types of Life Insurance
Summary
Key Concepts and Terms
Review Questions
Application Questions
Internet Resources
Selected References
Notes
Case Application
INSIGHT 11.1: CASH-VALUE LIFE INSURANCE AS AN INVESTMENT—DON’T IGNORE TWO
POINTS
INSIGHT 11.2: BE A SAVVY CONSUMER—FOUR LIFE INSURANCE POLICIES TO
AVOID
CHAPTER 12 LIFE INSURANCE CONTRACTUAL
PROVISIONS
Life Insurance Contractual
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Provisions
Dividend Options
Nonforfeiture Options
Settlement Options
Additional Life Insurance Benefits
Summary
Key Concepts and Terms
Review Questions
Application Questions
Internet Resources
Selected References
Notes
Case Application
INSIGHT 12.1: IS THIS DEATH A
SUICIDE?
INSIGHT 12.2: SELECTION OF THE BEST DIVIDEND OPTION IN A PARTICIPATING WHOLE
LIFE
POLICY
INSIGHT 12.3: ACCELERATED DEATH BENEFITS—A REAL-LIFE
EXAMPLE
INSIGHT 12.4: WHAT IS A LIFE SETTLEMENT? EXAMPLES OF ACTUAL
CASES
CHAPTER 13 BUYING LIFE INSURANCE
Determining the Cost of Life
Insurance
Rate of Return on Saving Component
Taxation of Life Insurance
Shopping for Life Insurance
Summary
Key Concepts and Terms
Review Questions
Application Questions
Internet Resources
Selected References
Notes
Case Application
INSIGHT 13.1: BE CAREFUL IN REPLACING AN EXISTING LIFE INSURANCE
POLICY
Appendix: Calculation of Life Insurance
Premiums
CHAPTER 14 ANNUITIES AND INDIVIDUAL RETIREMENT
ACCOUNTS
Individual Annuities
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Types of Annuities
Taxation of Individual Annuities
Individual Retirement Accounts
Adequacy of IRA Funds
Summary
Key Concepts and Terms
Review Questions
Application Questions
Internet Resources
Selected References
Notes
Case Application 1
Case Application 2
INSIGHT 14.1: ADVANTAGES OF AN IMMEDIATE ANNUITY TO RETIRED
WORKERS
INSIGHT 14.2: BELLS AND WHISTLES OF VARIABLE
ANNUITIES
INSIGHT 14.3: TEN QUESTIONS TO ANSWER BEFORE YOU BUY A VARIABLE
ANNUITY
INSIGHT 14.4: WILL YOU HAVE ENOUGH MONEY AT RETIREMENT? MONTE CARLO SIMULATIONS
CAN BE
HELPFUL
CHAPTER 15 HEALTHCARE REFORM: INDIVIDUAL HEALTH INSURANCE
COVERAGES
Defects in the Healthcare System in the United
States
Basic Provisions of the Affordable Care
Act
Individual Medical Expense Insurance
Individual Medical Expense Plans and Managed
Care
Health Savings Accounts
Long-Term Care Insurance
Disability-Income Insurance
Individual Health Insurance Contractual
Provisions
Summary
Key Concepts and Terms
Review Questions
Application Questions
Internet Resources
Selected References
Notes
 Table of Contents
Case Application
INSIGHT 15.1: HEALTH INSURANCE OPTIONS FOR COLLEGE STUDENTS UNDER THE AFFORDABLE
CARE
ACT
CHAPTER 16 EMPLOYEE BENEFITS: GROUP LIFE AND HEALTH
INSURANCE
Meaning of Employee Benefits
Fundamentals of Group Insurance
Group Life Insurance
Group Medical Expense Insurance
Managed Care Plans
Affordable Care Act and Group Medical Expense
Insurance
Key Features of Group Medical Expense
Insurance
Consumer-Directed Health Plans
Recent Developments in Employer-Sponsored Health
Plans
Group Medical Expense Contractual
Provisions
Group Dental Insurance
Group Disability-Income Insurance
Cafeteria Plans
Summary
Key Concepts and Terms
Review Questions
Application Questions
Internet Resources
Selected References
Notes
Case Application
INSIGHT 16.1: BASIC CHARACTERISTICS OF THE SMALL BUSINESS HEALTH OPTIONS (SHOP)
MARKETPLACE
PROGRAM
CHAPTER 17 EMPLOYEE BENEFITS: RETIREMENT
PLANS
Fundamentals of Private Retirement
Plans
Types of Qualified Retirement Plans
Defined-Benefit Plans
Defined-Contribution Plans
Section 401(K) Plan
Section 403(B) Plan
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Profit-Sharing Plans
Retirement Plans for the Self-Employed (Keogh
Plans)
Simplified Employee Pension (SEP)
Simple IRA Plan
Saver’s Credit
Funding Agency and Funding
Instruments
Problems and Issues in Tax-Deferred Retirement
Plans
Summary
Key Concepts and Terms
Review Questions
Application Questions
Internet Resources
Selected References
Notes
Case Application
INSIGHT 17.1: SIX COMMON 401 (K)
MISTAKES
CHAPTER 18 SOCIAL INSURANCE
Social Insurance
Old-Age, Survivors, and Disability
Insurance
Types of Benefits
Medicare
Problems and Issues
Unemployment Insurance
Workers Compensation
Summary
Key Concepts and Terms
Review Questions
Application Questions
Internet Resources
Selected References
Notes
Case Application
INSIGHT 18.1: CLAIMING SOCIAL SECURITY BENEFITS-—-STRATEGIES FOR SINGLE
PERSONS
INSIGHT 18.2: HOW WOULD YOU REDUCE THE LONG-RANGE SOCIAL SECURITY
DEFICIT?

PART FIVE PERSONAL PROPERTY AND LIABILITY

 Table of Contents
RISKS
CHAPTER 19 THE LIABILITY RISK
Basis of Legal Liability
Law of Negligence
Imputed Negligence
Res Ipsa Loquitur
Specific Applications of the Law of
Negligence
Current Tort Liability Problems
Summary
Key Concepts and Terms
Review Questions
Application Questions
Internet Resources
Selected References
Notes
Case Application
INSIGHT 19.1: JUDICIAL HELLHOLES
2014–2015
CHAPTER 20 AUTO INSURANCE
Overview of Personal Auto Policy
Part A: Liability Coverage
Part B: Medical Payments Coverage
Part C: Uninsured Motorists Coverage
Part D: Coverage for Damage to Your
Auto
Part E: Duties after an Accident or
Loss
Part F: General Provisions
Insuring Motorcycles and Other
Vehicles
Summary
Key Concepts and Terms
Review Questions
Application Questions
Internet Resources
Selected References
Notes
Case Application
INSIGHT 20.1: WHAT DO RIDE SHARING AND CAR SHARING MEAN FOR PERSONAL AUTO
INSURANCE?
INSIGHT 20.2: NEW STUDY REVEALS A DECLINING TREND IN THE PERCENTAGE OF UNINSURED
 Table of Contents
MOTORISTS
INSIGHT 20.3: USING ELECTRONIC DEVICES WHILE DRIVING IS A SERIOUS
PROBLEM
CHAPTER 21 AUTO INSURANCE
(CONTINUED)
Approaches for Compensating Auto Accident
Victims
Auto Insurance for High-Risk Drivers
Cost of Auto Insurance
Shopping for Auto Insurance
Summary
Key Concepts and Terms
Review Questions
Application Questions
Internet Resources
Selected References
Notes
Case Application
INSIGHT 21.1: FILING AN AUTO CLAIM WITH THE OTHER PARTY’S INSURANCE
COMPANY
INSIGHT 21.2: PROTECT YOURSELF: INSURING YOUR TEEN
DRIVER
INSIGHT 21.3: MORE FOLKS ARE TWEETING, TEXTING, AND TAKING PICTURES WHILE
DRIVING: AT&T
SURVEY
CHAPTER 22 HOMEOWNERS INSURANCE, SECTION
I
Homeowners Insurance
Analysis of Homeowners 3 Policy (Special
Form)
Section I Coverages
Section I Perils Insured Against
Section I Exclusions
Section I Conditions
Section I and II Conditions
Summary
Key Concepts and Terms
Review Questions
Application Questions
Internet Resources
Selected References
Notes
Case Application
 Table of Contents
INSIGHT 22.1: RENTERS INSURANCE
CHECKLIST
INSIGHT 22.2: HOW DO I TAKE A HOME INVENTORY AND
WHY?
INSIGHT 22.3: THE BIG GAP BETWEEN REPLACEMENT COST AND ACTUAL CASH VALUE CAN
EMPTY YOUR
WALLET
CHAPTER 23 HOMEOWNERS INSURANCE, SECTION
II
Personal Liability Insurance
Section II Exclusions
Section II Additional Coverages
Section II Conditions
Endorsements to a Homeowners Policy
Cost of Homeowners Insurance
Summary
Key Concepts and Terms
Review Questions
Application Questions
Internet Resources
Selected References
Notes
Case Application
INSIGHT 23.1: DOG BITES HURT, SO DO
LAWSUITS
INSIGHT 23.2: TRYING TO SAVE MONEY? AVOID THE FIVE BIGGEST INSURANCE
MISTAKES!
CHAPTER 24 OTHER PROPERTY AND LIABILITY INSURANCE
COVERAGES
ISO Dwelling Program
Mobile Home Insurance
Inland Marine Floaters
Watercraft Insurance
Government Property Insurance
Programs
Title Insurance
Personal Umbrella Policy
Summary
Key Concepts and Terms
Review Questions
Application Questions
Internet Resources
 Table of Contents
Selected References
Notes
Case Application
INSIGHT 24.1: DISPELLING MYTHS ABOUT FLOOD
INSURANCE
INSIGHT 24.2: TITLE INSURANCE: PROTECTING YOUR HOME INVESTMENT AGAINST UNKNOWN
TITLE
DEFECTS
INSIGHT 24.3: UMBRELLA INSURANCE POLICIES: WHY YOU MIGHT WANT THAT EXTRA
PROTECTION

PART SIX COMMERCIAL PROPERTY AND LIABILITY

RISKS
CHAPTER 25 COMMERCIAL PROPERTY
INSURANCE
Commercial Package Policy
Building and Personal Property Coverage
Form
Causes-of-Loss Forms
Endorsements
Reporting Forms
Business Income Insurance
Other Commercial Property Coverages
Transportation Insurance
Businessowners Policy (BOP)
Summary
Key Concepts and Terms
Review Questions
Application Questions
Internet Resources
Selected References
Notes
Case Application
INSIGHT 25.1: THREE COMMERCIAL PROPERTY ENDORSEMENTS THAT EVERY CLIENT SHOULD
HAVE
INSIGHT 25.2: EXAMPLES OF EQUIPMENT BREAKDOWN CLAIMS: RECENT PAID
CLAIMS
CHAPTER 26 COMMERCIAL LIABILITY
INSURANCE
General Liability Loss Exposures
Commercial General Liability Policy
Employment-Related Practices Liability
Insurance
 Table of Contents
Workers Compensation Insurance
Commercial Auto Insurance
Aircraft Insurance
Commercial Umbrella Policy
Cyber Liability Insurance
Businessowners Policy
Professional Liability Insurance
Directors and Officers Liability
Insurance
Summary
Key Concepts and Terms
Review Questions
Application Questions
Internet Resources
Selected References
Notes
Case Application
INSIGHT 26.1: CYBER LOSS EXPOSURE—NO LONGER BREACHING THE
CGL
INSIGHT 26.2: BASIC FACTS ABOUT WORKERS
COMPENSATION
CHAPTER 27 CRIME INSURANCE AND SURETY
BONDS
The ISO Commercial Crime Insurance
Program
Commercial Crime Coverage Form (Loss-Sustained
Form)
Financial Institution Bonds
Surety Bonds
Summary
Key Concepts and Terms
Review Questions
Application Questions
Internet Resources
Selected References
Notes
Case Application
INSIGHT 27.1: CRIME PREVENTION TIPS FOR SMALL
BUSINESSES

Appendix A: Personal Auto Policy

Appendix B: Homeowners 3 (Special
Form)
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Glossary
Index
A
B
C
D
E
F
G
H
I
J
K
L
M
N
O
P
Q
R
S
T
U
V
W
Y