Basic Concepts and Principles

Question 1

Pure Risk vs Speculative Risk

Answer 1

Pure Risk: Can only result in a loss and is the only type of risk that an insurance company will accept.

Speculative Risk: Can result in either loss or financial gain. This type of risk is not insurable.

Question 2

What is a Peril?

Answer 2

Peril: The causes of loss insured against.

Question 3

Define Hazard

Answer 3

Hazard: Conditions or situations that increase the probability of an insured loss occurring

Question 4

What are the 3 types of Hazard?

Answer 4

Physical
Moral
Morale

Question 5

What is the Law of Large Numbers?

Answer 5

Law of large numbers: The larger the number of people with a similar risk exposure to loss, the more predictable the loss will be.

Question 6

Give an example of Reduction in insurance.

Answer 6

Example:
Having smoke detectors put up in your home
Going for an annual physical .

Question 7

What does Loss Ratio compare and what is the formula?

Answer 7

Loss Ratio: Compares premium income to losses

(Incurred losses+Loss adjusting expense) / Earned premium = Loss Ratio

Question 8

What is Reinsurance?

Answer 8

Reinsurance: the insurer produces a third person to insure it against loss or liability, and not merely against damages.

Question 9

What is Profitable Distribution of Exposures?

Answer 9

When poor risks are balanced with preferred risks and average risks are in the middle.

Question 10

An agent is a legal person who acts on behalf of?

Answer 10

The Principle

Question 11

What is the main purpose of insurance regulation?

Answer 11

To protect the general public.

Question 12

An insurer who deliberately makes a maliciously critical statement about another insurer is guilty of unfair trade practice called what?

Answer 12

Defamation

Question 13

Define risk.

Answer 13

Risk: Is a chance of a loss occurring.