03. Insurers, Hazards, and Risks Flashcards
Government Insurers ( characteristics )
- non profit
- mandatory participation
- benefits prescribed by law
- designed to meet needs of general public
- government has monopoly
Private Insurers ( characteristics )
- 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
Stock Insurance Companies
characteristics
- always for profit
- usually publicly traded
- stockholders provide capital and participate in profits or losses
- “non-participating” insurers: no dividends go to policyholders
Mutual Insurance Companies
characteristics
- owned by policyholders ( no shareholders )
- policyholders elect board of directors
- “participating” insurers: policyholders participate in dividends
Re-insurer
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
Reciprocal Insurer
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
Fraternal Benefit Societies
- 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
Captive Insurers
- 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
Risk Retention Groups
- basically a mutual insurance company for multiple businesses
- members must be involved in similar businesses
- need not be licensed in multiple states
Domestic Insurer
Located in a particular state, abides by that state’s laws
Foreign Insurer
Obeys a state’s or U.S. laws, but can be located elsewhere
Alien Insurer
Obeys laws of another country altogether
Risk ( two meanings )
- the potential for financial loss; being exposed or open to damage
- an insured item
Speculative Risk
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
Pure Risk
- a risk with no chance of gain
- can only result in either loss or no loss ( see principle of indemnity )
- can be insured
Exposure ( of risk )
The extent to which an insured risk ( person, item, or organization ) is open to damage or loss.
Hazard
A condition increasing the likelihood or severity of a loss.
- can be physical, moral, or morale
Peril
the actual cause of loss or damage
what people buy insurance to protect against
Named-Peril Policy
An insurance policy that lists every peril that it specifically covers
Open-Peril
aka “All-Peril”
An insurance policy that covers all causes of loss, except those that are specifically excluded in the policy
Loss
- 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 )
Q: what are the six qualifications of insurable risk?
- Adequate Premiums
- Definable Risk
- Unexpected Losses
- Substantial Losses
- Exclusions
- Law of Large Numbers
Adequate Premiums ( qualification of insurable risk )
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
Definable Risk ( qualification of insurable risk )
- 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
Unexpected Loss ( qualification of insurable risk )
the loss must be:
- unforeseeable
- unexpected
- reasonably unpreventable
- completely random in nature
Substantial Losses ( qualification of insurable risk )
The loss must cause substantial economic hardship
Exclusions ( qualifications of insurable risk )
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 )
Law of Large Numbers ( qualification of insurable risk )
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.)
Adverse Selection
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.
Q: what are some of the problems associated with adverse selection that insurers face? ( and a solution )
- 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
