Chartered Financial Consultant (ChFC) Insurance and Risk Management Syllabus

Insurance and Risk Management syllabus — full chapter and topic list

Expand any chapter to see its topics and sub-topics. This is the whole examinable outline for Insurance and Risk Management in Chartered Financial Consultant (ChFC), not a summary of it.

1. 1

   Principles of Risk and Insurance

   5 topics

   • Risk Identification and Measurement
   • Risk Management Techniques
     • Risk avoidance, reduction, retention, and transfer
   • Insurable Risk Characteristics and the Law of Large Numbers
   • Insurance Contract Principles
     • Indemnity, insurable interest, and utmost good faith
     • Subrogation and contribution
   • Insurer Selection and Financial Strength Ratings
2. 2

   Life Insurance Planning

   4 topics

   • Determining Life Insurance Needs
     • Human life value approach
     • Needs (capital needs) analysis approach
   • Types of Life Insurance
     • Term life insurance
     • Whole life and universal life
     • Variable and indexed universal life
   • Policy Provisions, Riders, and Settlement Options
   • Taxation of Life Insurance
     • Death benefit and cash value taxation
     • Modified endowment contracts (MECs)
3. 3

   Health, Disability, and Long-Term Care Insurance

   4 topics

   • Health Insurance Plan Types
     • HMO, PPO, and high-deductible health plans
     • Health savings accounts (HSAs)
   • Disability Income Insurance
     • Definitions of disability and elimination periods
     • Benefit periods and taxation
   • Long-Term Care Insurance
     • Activities of daily living and benefit triggers
     • Hybrid LTC products
   • Medicare and Medicaid Coverage
4. 4

   Property, Casualty, and Liability Insurance

   4 topics

   • Homeowners Insurance Coverage Forms
   • Personal Automobile Policy
   • Personal Liability and Umbrella Coverage
   • Business Risk Coverage
     • Commercial general liability
     • Business owners policy (BOP)

Insurance and Risk Management flashcards for Chartered Financial Consultant (ChFC)

21 of 50 cards from the Insurance and Risk Management deck — real questions with worked answers.

1. In risk management, distinguish between "pure risk" and "speculative risk."

   Pure risk involves only the chance of loss or no loss (no possibility of gain), e.g., death, fire, illness — and is the only type that is insurable. Speculative risk involves a chance of loss, no loss, OR gain (e.g., gambling, stock investing) and is generally not insurable.

2. Define "peril" and "hazard," and name the three classes of hazard.

   A peril is the direct cause of a loss (e.g., fire, theft, death). A hazard is a condition that increases the likelihood or severity of a loss. The three classes are: physical hazard (a physical condition, e.g., icy road), moral hazard (dishonesty/intent to cause loss for gain), and morale (attitudinal) hazard (carelessness/indifference because one is insured).

3. What two dimensions are used to measure risk, and how do they map to risk management techniques?

   Loss frequency (how often a loss occurs) and loss severity (how large the loss is). Low frequency/low severity → retain; high frequency/low severity → retain or reduce; low frequency/high severity → transfer (insure); high frequency/high severity → avoid.

4. List the steps of the risk management process.

   1) Identify loss exposures; 2) Measure/analyze the exposures (frequency and severity); 3) Select the appropriate risk management technique(s); 4) Implement the chosen technique(s); 5) Monitor and review/adjust the program.

5. Name the major risk management techniques (methods of handling risk).

   Risk avoidance, risk reduction (loss control/prevention), risk retention (self-insurance, deductibles), risk transfer (insurance and non-insurance transfers such as hold-harmless agreements), and risk sharing.

6. What is the difference between risk avoidance and risk reduction?

   Avoidance eliminates the exposure entirely by not undertaking the activity (probability of loss = 0). Reduction (loss control) accepts the activity but lowers loss frequency (prevention) or loss severity (e.g., sprinklers, seatbelts).

7. What is risk retention, and when is it most appropriate?

   Retention means the individual/firm keeps the financial responsibility for a loss (e.g., deductibles, self-insurance). It is most appropriate for losses that are high in frequency but low in severity, or where the cost of insurance exceeds the expected loss.

8. List the ideal characteristics of an insurable risk.

   1) Large number of similar/homogeneous exposure units; 2) Loss is definite (in time, place, amount) and measurable; 3) Loss is accidental and unintentional from the insured's standpoint; 4) Loss is not catastrophic to the insurer (no fundamental/correlated risk); 5) Premium is economically feasible; 6) Probability of loss is calculable.

9. State the law of large numbers and its role in insurance.

   As the number of independent exposure units increases, the actual loss experience will more closely approach the expected (probable) loss. This lets insurers predict aggregate losses accurately and set actuarially fair premiums, even though any single outcome is uncertain.

10. What is adverse selection, and how do insurers control it?

    Adverse selection is the tendency of higher-than-average-risk individuals to seek or continue insurance more than lower-risk individuals, threatening the insurer's loss predictions. Insurers control it through underwriting, medical exams, risk classification, exclusions, waiting periods, and rate differentiation.

11. List the four essential elements of a valid insurance contract.

    1) Offer and acceptance (agreement); 2) Consideration (the premium and the insurer's promise to pay); 3) Competent parties (legal capacity); 4) Legal purpose (lawful object). Many states also require that the contract conform to legal form.

12. Define the principle of indemnity and the principle of insurable interest.

    Indemnity: the insured should be restored to their pre-loss financial position but not profit from a loss (applies mainly to property/casualty). Insurable interest: the insured must stand to suffer a genuine financial loss; for property it must exist at the time of loss, for life insurance it must exist at policy inception (application).

13. Explain the doctrines of subrogation and contribution in insurance.

    Subrogation: after paying a claim, the insurer assumes the insured's right to recover from the negligent third party (supports indemnity, prevents double recovery). Contribution (other insurance/pro rata): when multiple policies cover the same loss, each pays its proportionate share so the insured does not collect more than the loss.

14. Distinguish a representation, a warranty, and concealment in insurance contracting.

    A representation is a statement believed true by the applicant; it must be materially false to void coverage. A warranty is a guarantee made part of the contract that must be literally true. Concealment is the intentional withholding of a material fact the applicant knew should be disclosed — it can void the policy.

15. What are the key distinguishing legal characteristics of an insurance contract (aleatory, unilateral, conditional, contract of adhesion, utmost good faith)?

    Aleatory: unequal dollar exchange depending on chance. Unilateral: only the insurer makes a legally enforceable promise. Conditional: the insured must meet conditions (e.g., pay premium, file proof) for the insurer to pay. Contract of adhesion: drafted by the insurer, take-it-or-leave-it (ambiguities construed against the insurer). Utmost good faith: both parties rely on each other's honesty.

16. What do the major rating agencies measure, and name the four life-insurer rating agencies?

    They measure an insurer's financial strength and claims-paying ability. The four agencies are A.M. Best, Standard & Poor's (S&P), Moody's, and Fitch. A.M. Best's top rating is A++ (Superior); S&P, Moody's, and Fitch top ratings are AAA/Aaa.

17. What two human-life-value and needs-based methods are used to determine life insurance needs?

    The human life value approach estimates the present value of the insured's future net earnings lost to dependents. The needs approach (needs analysis) totals the family's cash needs at death (final expenses, debt payoff, income replacement, education, emergency fund) minus existing assets/resources to find the additional coverage required.

18. List the typical cash "needs" categories in a needs-analysis for life insurance.

    Final expenses (funeral, medical, estate settlement), debt liquidation (including mortgage), an emergency/readjustment fund, dependent income (income replacement) needs, education fund for children, and any special needs (e.g., for a disabled dependent).

19. Compare term life insurance with permanent (cash-value) life insurance.

    Term provides pure death-benefit protection for a set period, no cash value, low initial premium that rises with age — temporary needs. Permanent (whole, universal, variable) provides lifetime coverage, builds tax-deferred cash value, and has a level/flexible higher premium — permanent needs.

20. Distinguish whole life, universal life, and variable life insurance.

    Whole life: fixed premium, guaranteed death benefit and guaranteed cash value, insurer bears investment risk. Universal life: flexible premiums and adjustable death benefit, cash value earns a current interest rate with a guaranteed minimum. Variable life: fixed premium with cash value invested in separate-account subaccounts; the policyowner bears investment risk and the death benefit/cash value fluctuate with performance.

21. What is the difference between Universal Life Option A and Option B death benefits?

    Option A (Level): the death benefit stays level; as cash value grows, the net amount at risk decreases. Option B (Increasing): the death benefit equals the face amount PLUS the accumulated cash value, so the total payout increases as cash value grows (higher cost).

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