Ains 21 Understanding Insurance

Question 1

Loss Exposures

Answer 1

Any condition or situation that presents a possibility of loss, whether or not an actual loss occurs.

Question 2

4 major roles of insurance

Answer 2

1: risk management technique that enables a person or organization to deal with loss exposures and their financial consequences.
2: transfer system, in which one party (insured) transfers the chance of incancial loss to another (insurer)
3: as a business, which includes various operations that must be conducted in a way that generates sufficient revenue to pay claims and provide reasonable profit for its owners
4: as a contract between the insured and the issue=user that states the potential costs of loss that the insured is transferring to the insurer and expresses the insurer’s promise to pay for those costs of loss in exchange for stated payment by the insured.

Question 3

Risk Management

Answer 3

Process of making and implementing decisions that will initiate the adverse effects of accidental losses on an organization.
Insurance, from this point of view, is used to transfer the cost of losses.

Question 4

Loss Prevention

Answer 4

Risk control technique that reduces the frequency of a particular loss.
For example: using safety goggles and helmets

Question 5

Loss Reduction

Answer 5

Risk control technique that reduces the severity of a particular loss.
For example: Fire extinguishers

Question 6

Exposure units

Answer 6

Measure of the loss exposure assumed by an insurer.

Question 7

Property-casualty insurance

Answer 7

One of the two main sectors of the insurance industry, encompassing numerous types of insurance, most of which cover the financial consequences of damage to ones own property or legal liability to others.
For example: home owners insurance, auto insurance, commercial general liability insurance

Question 8

Life-health insurance

Answer 8

One of the two main sectors of the is range industry, encompassing numerous types of insurance that cover the finial consequences of death, injury, or sickness.
For example: life insurance, health insurance, and disability

Question 9

Private versus state government insurance

Answer 9

Private (nongovernment) insurers vary enormously in size and structure, products sold, and territories served. Federal and state governments provide insurance that aren’t being met by the private insurers.

Question 10

Insurers revenue

Answer 10

The primary sources of revenue are premiums and investment income.
Insuers have investments because they receive prisms before they have to pay for losses and expenses. They invest the money in the meantime and receive investment income as a result.

Question 11

Loss payments and expenses

Answer 11

Loss settlement expenses which includes costs of investigating, and settling claims. Expenses to acquire new business (advertising, commissions), general expenses (salaries, employee benefits, utilities, computers). Also pay premium taxes, income taxes, licensing and other fees.

Question 12

Insurance contracts: three particular key special characteristics:

Answer 12

1: utmost good faith- obligation to act in complete honesty and to disclose all relevant facts. For example: insurer should deny coverage for a claim that is clearly covered. Conversely, an insurer could be released from a contract because of a concealment by the insured.
2: contract of adhesion- one party must either accept the agreement as written b the other party or reject it. If the policy is ambiguous, a court will generally apply the interpretation that favors the insured.
3: contract of indemnity- the insurer agrees, in the event of a covered loss, to pay an amount directly related to the amount of the loss.

Question 13

Self-Contained Policy

Answer 13

A single document that contains all the agreements between the insured and the insurer and that forms a complete insurance policy.
For example, the ISO, Insurance Services Office Personal Auto Policy. A widely used auto insurance policy, the personal auto policy includes both property and liability insurance coverage in a single document.

Question 14

Modular Policies

Answer 14

An insurance policy that consists of several different documents, non of which by itself forms a complete policy.
Commercial package policies, for example, are modular policies.

Question 15

Utmost good faith

Answer 15

Both parties, the insurer and the insured, are expected to be ethical in their dealings with one another.

Question 16

Contract of adhesion

Answer 16

Any contract in which one party must either accept the agreement as written by the other party or reject it. If policy wording is ambiguous, a court will generally apply the interpretation that favors the insured.

Question 17

Contract of indemnity

Answer 17

A contract in which the insurer agrees, in the event of a covered loss, to pay an amount directly related to the amount of the loss. Liability insurance generally pays to a third-party claimant, on behalf of the insured.

Question 18

Retention

Answer 18

Often used in combination with insurance as a way of treating loss exposures. One major downsides of individuals using retention alone is the potential for financial ruin

Question 19

Pure Risk

Answer 19

A characteristic of an ideally insurable loss exposure; not speculative risk. A chance of loss or no loss, but no chance of gain. Insurance is not designed to finance speculative risks; not to enable the insured to profit from the loss.

Question 20

Fortuitous Losses

Answer 20

Characteristic of an ideally insurable loss exposure; occurring by chance for the insured’s standpoint. Vandalism, for example, is not fortuitous from the perspective of the individual committing the act. But it is fortuitous from the victim’s and thus insurable. The insured cannot have had control over whether or when a loss will occur. If they do have control, then they have an incentive to cause a loss and this is known as a moral hazard.

Question 21

Definite and Measurable

Answer 21

Another characteristic of an ideally insurable loss exposure; time cause and location. Must be able to determine the event, when and where the loss occurred. A typical property-casualty policy has a policy period ranging from 6 months to one year.
Insurers cannot determine an appropriate premium if they cannot measure the frequency or severity of the potential losses. So, in the case of a house fire, this is a measurable loss exposure. Underwriters can analyze past data and determine from the frequency and severity patterns to determine potential fire losses. But, contagious diseases are difficult to measure. Insurers are reluctant to insure losses that are highly uncertain without receiving substantial compensation (high premium)

Question 22

Large Number of Similar Exposure Units

Answer 22

Another characteristic of an ideally insurable loss exposure; one of the large number of similar exposure units. For example home, office, and autos. If a house is bought, the risk of fire, for example, is transferred with the purchase of a homeowners insurance policy. The insurer insures thousands of similar homes with similar exposures. The insurer knows that only a small percentage will experience a fire loss and can spread the risk of fire loss over its entire pool of insured homes.

Question 23

Independent and Not Catastrophic

Answer 23

Another characteristic of an ideally insurable loss exposure; it is independent and not catastrophic. Independent: suffered by one insured, not group. Buying a home in the woods, the insurer is not going to insure all the homes in that same area because a forest fire loss exposure would put them all at risk.
Catastrophic: involves numerous exposure units suffering the same type of loss simultaneously. So in the case of a catastrophic hurricane loss, an insurer will diversity the homes and business it insures and will not have a large concentration in any one geographic area. Similarly, a small insurer should not insure a multimillion dollar property such as an oil refinery. While the loss exposure may be independent of other properties, the insurer has chosen to insure a loss that may cause the insurers severe financial difficulty.

Question 24

Affordable

Answer 24

A characteristic of an ideally insurable loss exposure; insurer is able to charge an economically feasible premium, one that the insured can afford to pay.Insurers seek to cover only loss exposures that are economically feasible to insure. Loss exposures involving only small losses as well as high losses are generally considered uninsurable. Covering small losses, such as the disappearance of office supplies may require more time to investigate and to issue claim checks that it would for the insured to simply absorb the cost of replacing the supplies. Also doesn’t make sense to cover losses that are almost certain to occur. For example covering the damage of wear and tear on autos because they are certain to incur such damage over time.

Question 25

Claim Buildup

Answer 25

A form of insurance fraud; the intentional exaggeration of a loss in an otherwise-legitimate claim.
For example more thanks that actual were loss, or they were worth more, or the severity of their bodily injury or property damage in a liability claim. Physicians, lawyers, contractors, and auto body shop operators may participate in claim buildup.

Question 26

Costs of Insurance

Answer 26

Premiums paid by insured’s

Operating costs of insurers

Opportunity costs- the capital and labor used in the insurance industry could be used elsewhere and create other productive contributions to society; loss opportunities in other areas

Increased losses