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Exam #2
• Average = 76.03 (including extra credit assignment) • Max: 100 • Min: 41 2
FICO Assignment
• Question 1:– What is a consumer credit report? A consumer credit report is a set of credit files (details of credit history) about individual consumer’s borrowing activities.
– Lenders making credit decisions buy credit reports on their prospects, applicants and customers from the credit reporting agencies (credit bureaus).
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Question 1
• Information contained in a credit
report:
– Personal profile; identifying information – Types of credit you use
– Length of time your accounts have been open – Whether you have paid your bills on time – How much credit you have used – Public records/collection items
– Whether you are seeking new sources of credit (credit inquiry).
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A Sample Credit Report
• Yahoo! Finance provides a sample report. • You can see what exactly are included in atypical consumer credit report. • The website address is:
–https://qspace.iplace.com/cobrands/26/produc t4.asp?sc=1327BKML
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Question 2
• A credit score is a snapshot of your credit risk at a particular point in time.
– The most widely used credit scores are FICO scores developed by Fair Isaac.
• The current average FICO score of all consumer borrowers is around 720.
– FICO scores range from about 300 to 850.
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Question 2
• Payment history (approx. 35% of your score is based on this category alone!)
– What is your track record? • Amounts Owed (about 30%) • Length of Credit History (15%) • New Credit (10%)
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Tips for Someone with Bad
Credit
• Pay your bills on time
– Paying off a collection account, or closing an account on which you previous missed a payment, will/will not remove it from your credit report.
• Keep balances low
• Don’t close unused credit cards as a short-term strategy to raise your score.
• If you have been managing credit for a short time, don’t open a lot of new accounts too rapidly.
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Question 2
• Re-establish your credit history if you have had credit problems.
• It’s OK to request and check your own credit report and your own FICO score. • Have credit cards, but manage them
responsibly.
• Make sure that there are no errors on your credit report.
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Question 3
• A credit bureau or a credit reporting
agency collects and maintains credit
file on millions of consumer borrowers. • The three major credit:
1. Equifax
2. Experian (formerly TRW) 3. TransUnion
• A consumer credit report costs around $10.
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Question 3
• What to do if you find an error in your credit report?
– Contact the credit reporting agencies • The credit bureau contacted is required to
investigate and respond to you within 30 days. – Contact your lenders
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Question 4
• Risk classification (pp. 30 – 31): – Separation and class homogeneity • Reliability
• Incentive value • Social acceptability
– Controversy
– Lenders cannot make credit decisions solely based on credit report information.
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Question 5
• Almost all financial institutions use consumer credit reports in their business operations.
• Why? Information contained in a credit report allows a lender to mitigate adverse selection problems.
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Additional Issues
• Check your credit report 6-12 months before applying to a big loan (why?) • How credit scores affect you as a
consumer:
– With a 30-year fixed mortgage of $150,000, you could save approx. $365 on each monthly payment – by first improving your FICO score from a 550 to a 720. –http://www.myfico.com/myfico/CreditCentral/Loan Rates.asp#Calculator
INSU 2500
Chapter 9
March 9, 2006 15CHAPTER 9
BASIC PROPERTY AND LIABILITY INSURANCE CONTRACTS 16
Common Elements of
Insurance Contracts
Declarations Insuring Agreement Deductibles Definitions Exclusions Conditions Endorsements & Riders 17Declarations
• Facts of Policy• Usually first page of an insurance
contract contains such things as:
– Identifies the insurance company – Identifies the named insured – Policy period
– Policy limits – Deductibles – Premium
– Identifies forms and / or endorsements
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Insuring Agreement
• The words that give force to the contract and describe in broad language the rights and duties of both parties to the contract.
– Broadly describes what is covered and the insurer’s and the insured’s rights,
obligations, and duties.
• Example:
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Insuring Agreement Example
“We will pay for bodily injury and property damage for which an insured person is legally liable. Liability must arise from the ownership, maintenance or use of your insured aircraft or use of the premises on which it is stored. The bodily injury and property damage must occur during the Policy Period and be caused by an accident. When bodily injury and property damage are covered under this Insurance, we will also provide an insured person with a legal defense against such claims for bodily injury and property damage.”
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Definitions
• Found in the contract when words or phrases are to be defined in a specific way.
• Try to minimize ambiguous terms and words in the contract for legal
interpretation purposes.
• Also reduces word count when words that need to be defined are used multiple times.
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Exclusions
• Identify losses that are not covered. • Designed to:
– Eliminate catastrophic events - flood, war
– Eliminate moral or morale hazards - intentional loss, failure to protect property
– Require extra charge - unfair to charge all insureds for covering $100,000 gun collections
– Eliminate coverage where another policy is specifically designed for the coverage – To truncate the doctrine of proximate cause
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Endorsements
• Modify standard insurance contracts in predetermined ways
• Examples: – Expand coverage
– Delete exclusions in contract – Change definitions
• e.g.: “Baby-sitting is NOT a “business” – Add locations / insureds / perils – Add additional insureds
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Conditions
• If you want the claim paid, you must meet the conditions stated in the contract. These include:
– No Concealment or Fraud – No Suspension of coverage – Cancellation – policy must be in force
– Other insurance does not apply or loss is shared – Meet your duties after a loss
– Abide by the appraisal procedure – Agree to salvage
– Agree to claims payment - time limits
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Fraud
• Homeowners contract:
– Intentionally concealed or misrepresented any fact or circumstances;
– Engaged in fraudulent conduct; or – Made false statements; relating to the
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Cancellation
• The insured may cancel the HO contract at any time and receive a refund for any unearned portion of the premium.
– When the insureds cancel, the short-rate cancellation schedule is used (allowing insurers to recover expense).
• Insurers also may cancel property policies. – When the insurers cancel, the pro rata cancellation
method is used.
• What is the difference between the two approaches?
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Other Insurance
• If a loss covered by this policy is also covered by other insurance, the insurer will pay only the portion of the loss that the limit of liability that applies under this policy bears to the total amount of insurance covering the loss.
• <Example> A $250,000 house insured with 2 insurance contracts (each contract covers up to $250,000). What happens if the house is totally destroyed by fire?
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Insured’s Duties After Loss
Homework!28
Appraisal
• Appraisal procedure:
– Unsettled disagreements about the property losses.
– Appraisers selected
– Umpire then chosen by the appraisers – If still not settled, the case goes to the court – Each party pays its own appraiser; and – Bear the other expenses of the appraisal and
umpire equally.
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Deductibles
• Straight deductible - amount paid by insured before the insurer pays any money
– Example: from the loss v. from the claim • $25,000 loss
• $20,000 coverage • $ 1,000 deductible • Deductible from the loss
– $25,000 - $1,000 = $24,000; $20,000 paid because hit policy limit
• Deductible from claim
– $20,000 - $1,000 = $19,000; deductible taken from claim
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Reasons for Deductibles
• Reduces moral and morale hazard sinceinsured pays a small portion of each loss • Eliminates the expenses involved in small,
frequent claims and most losses are small • As a result premiums are lower.
• Deductibles can be treated as risk assumption or risk transfer?
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Objective Question #1
• Deductiblesa. Cause the insured to pay the first dollars of a loss. b. Cause the insurance company to pay the first
dollars of a loss.
c. Cause the loss to be deducted from the policy face.
d. Cause the policy face limit to be deducted from the loss.
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Objective Question #2
If an insured cancels her insurance policy:a. The short-rate cancellation table is used to calculate the refund.
b. The Greenwich mean cancellation table is used to calculate the refund.
c. The pro rata cancellation calculation is used to calculate the refund.
d. The mensa table is used to calculate the refund.
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Objective Question #4
The purpose of the declarations section of an insurance policy is to:a. Declare the insurance company’s intention to provide coverage.
b. Declare the insured’s intention to purchase insurance.
c. State the important facts about the coverage provided and personalize the coverage to a particular insured. d. Declare the policy to be canceled by mutual
agreement.
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Objective Question #5
The clause that creates a binding agreement between the insurer and insured is called the: a. binding clause b. mutual agreement c. ratification clause d. insuring agreement 35Objective Question #7
If an insured files a fraudulent claim after a loss occurs, the most likely result will be:a. The insured will go to jail.
b. The insurer will not pay the claim after the fraud is discovered.
c. The insurer will pay the claim, but try to recover the insurance proceeds by way of subrogation against the insured.
d. The insured will collect, but only for half the amount claimed, with half the loss being considered a “fraud” penalty.
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Objective Question #8
To settle disagreements over the amount of property losses, the ___________procedure is used: a. appraisal
b. settlement / pro rata c. disagreement d. salvage
