03. Insurers, Hazards, and Risks

Question 1

Government Insurers ( characteristics )

Answer 1

• non profit
• mandatory participation
• benefits prescribed by law
• designed to meet needs of general public
• government has monopoly

Question 2

Private Insurers ( characteristics )

Answer 2

• sell insurance based on consumer preferences
• offer a wide variety of insurance products
• typically exist to generate a profit or benefit a group
• insured party voluntarily participates

Question 3

Stock Insurance Companies

characteristics

Answer 3

• always for profit
• usually publicly traded
• stockholders provide capital and participate in profits or losses
• “non-participating” insurers: no dividends go to policyholders

Question 4

Mutual Insurance Companies

characteristics

Answer 4

• owned by policyholders ( no shareholders )
• policyholders elect board of directors
• “participating” insurers: policyholders participate in dividends

Question 5

Re-insurer

Answer 5

An insurer that provides insurance for other insurers

• the insurer buys insurance to reduce its exposure to loss
• the re-insurer pays a percentage of the insurer’s losses, or any losses over a certain amount

Question 6

Reciprocal Insurer

Answer 6

A group of people or organizations that insure each other

• unincorporated
• non-profit
• operated by an attorney-in-fact
• members pay into individual accounts
• cost of claims shared by whole group

Question 7

Fraternal Benefit Societies

Answer 7

• also called Fraternal Associations
• Non-profit, mutual aid organizations
• engage in charitable activities
• provide some types of insurance to members
• typically consist of people with similar religions, ethnicities, or occupations

Question 8

Captive Insurers

Answer 8

• created by businesses in order to retain risks
• exist to provide insurance only for their “parent” company
• all profits belong to the parent company
• permitted in some states

Question 9

Risk Retention Groups

Answer 9

• basically a mutual insurance company for multiple businesses
• members must be involved in similar businesses
• need not be licensed in multiple states

Question 10

Domestic Insurer

Answer 10

Located in a particular state, abides by that state’s laws

Question 11

Foreign Insurer

Answer 11

Obeys a state’s or U.S. laws, but can be located elsewhere

Question 12

Alien Insurer

Answer 12

Obeys laws of another country altogether

Question 13

Risk ( two meanings )

Answer 13

• the potential for financial loss; being exposed or open to damage
• an insured item

Question 14

Speculative Risk

Answer 14

A risk undertaken without any certainty of gain or certainty of loss (it could go either way)

• made knowingly, by conscious choice
• cannot be insured

Question 15

Pure Risk

Answer 15

• a risk with no chance of gain
• can only result in either loss or no loss ( see principle of indemnity )
• can be insured

Question 16

Exposure ( of risk )

Answer 16

The extent to which an insured risk ( person, item, or organization ) is open to damage or loss.

Question 17

Hazard

Answer 17

A condition increasing the likelihood or severity of a loss.

• can be physical, moral, or morale

Question 18

Peril

Answer 18

the actual cause of loss or damage

what people buy insurance to protect against

Question 19

Named-Peril Policy

Answer 19

An insurance policy that lists every peril that it specifically covers

Question 20

Open-Peril

aka “All-Peril”

Answer 20

An insurance policy that covers all causes of loss, except those that are specifically excluded in the policy

Question 21

Loss

Answer 21

• reduction in value of an insured item
• financial loss due to an occurrence of accident
• for insurers: the amount paid out in a claim settlement

( occurs when the value of an insured item is reduced by a covered peril, or expenses have to be paid because of an incident )

Question 22

Q: what are the six qualifications of insurable risk?

Answer 22

1. Adequate Premiums
2. Definable Risk
3. Unexpected Losses
4. Substantial Losses
5. Exclusions
6. Law of Large Numbers

Question 23

Adequate Premiums ( qualification of insurable risk )

Answer 23

Insurer must be able to cover potential claims with the premium income they charge the insured.

• potential losses cannot be too much for the insurer to pay
• insurer must be able to cover claims and expenses
• if premiums must be set too high, the risk is not insurable

Question 24

Definable Risk ( qualification of insurable risk )

Answer 24

• the insurer can define the exact conditions under which the item is covered by the policy
• the item itself is definable ( can be precisely described )
• the item has precise value

Question 25

Unexpected Loss ( qualification of insurable risk )

Answer 25

the loss must be: - unforeseeable - unexpected - reasonably unpreventable - completely random in nature

Question 26

Substantial Losses ( qualification of insurable risk )

Answer 26

The loss must cause substantial economic hardship

Question 27

Exclusions ( qualifications of insurable risk )

Answer 27

the insurer must exclude coverage for large-scale disasters and catastrophic events ( i have no fucking idea why this is included as a qualification it’s literally a disqualifying factor wtf )

Question 28

Law of Large Numbers ( qualification of insurable risk )

Answer 28

A large number of similar risks must be insured - helps the insurer predict losses more accurately - spreads the risk across more policies (If there are more units involved, there will be much less variation from statistics, which means the rate of claims will be more predictable.)

Question 29

Adverse Selection

Answer 29

When someone decides to buy insurance because he knows he will probably have to file a claim, typically because of information about their risk the insurer is unaware of or unable to discriminate against.

Question 30

Q: what are some of the problems associated with adverse selection that insurers face? ( and a solution )

Answer 30

- insufficient premiums for level of risk exposure - leads to higher premiums, which might cause people to cancel policies One solution: charging higher-risk individuals higher premiums