Basic Insurance Concepts Flashcards
What is insurance
Insurance is the transfer of risk of loss. The cost of an insured’s loss is transferred over to the insurer and spread among other insureds.
What’s is pure risk
Refers to situations that can only result in a loss or no change. No opportunity for financial gain. This is the only type of risk that is acceptable.
Speculative risk
Involves the opportunity for either loss or gain. Like gambling
Peril
Perils are the causes of loss insured against in an insurance policy
Hazards
Hazards are conditions or situations that increase the probability of an insured loss occurring.
Physical hazard
Are individual characteristics that increase the chances of the cause of loss. Like your physical condition, medical history.
Moral hazard
Tendencies toward risks. Your character. Did you lie on your application or in the past when submitting claims.
Morale hazard
They arise from your state of mind, which make you indifferent. You act reckless and have no care about your actions that could cause injury.
Legal hazard
Set of legal or regulatory conditions that affect an insurers ability to collect premiums that are commensurate with (equal to in value) the exposure to loss that the insurer must bear
Law of large numbers
States that the larger the number of people with a similar exposure to loss, the more predictable actual losses will be. This law forms the basis for statistical prediction of loss upon which insurance rates at calculated
What is the basis for insurance
Is sharing risk among a large pool of people with a similar exposure to loss(a homogeneous group)
Exposure
Is a unit of measure used to determine rates charged for insurance coverage
A risk is
A chance that a loss will occur; a hazard increases the probability of loss; a peril is a cause of loss
Distribution of exposure
A profitable distribution of exposures or spread of risks, exists when poor risks are balanced with preferred risks, with “average” or “standard” risks in the middle. This is to protect insurers from adverse selection
Adverse selection
The insuring of risks that are more prone to losses than the average risk. Insurance companies have an option to refuse or restrict coverage for bad risks or charge them a higher rate for insurance coverage
Methods of risk management
Sharing, transfer, avoidance, retention, reduction
Sharing risks method
Is a method of dealing with risk for a group of individual persons or businesses with the same or similar exposure to loss to share the losses that occur within that group. A reciprocal exchange is a formal risk-sharing arrangement
Transfer method
Transfer your risk of loss to another party. Insurance is the most common method of transferring risk from an individual or group to an insurance company.
Avoidance method
Which means eliminating exposure to a loss. That not driving or riding on an airplane
Retention method
Self insurance. The insured accepts the responsibility for the loss before the insurance company pays. The purpose is to reduce expenses and improve cash flow, to increase control of claim reserving and claim settlements and to fund for losses that cannot be insured
Reduction method
Reduces the possibility or severity of loss. Like installing a smoke detector or having annual physicals.
Characteristics that must be present before a pure risk can be insured
The loss must be due to chance
The loss must be definite and measurable
The loss must be statistically predictable
The loss can’t be catastrophic
The loss exposure must involve large homogeneous units
The insurance must not be mandatory
Insurable interest
In life insurance insurable interest must exist between the policy owner and the insured at the time of the application. The insured must face the possibility of losing money or something of value in the event of a loss.
A valid Insurable interest exists between the policy owner and the insured in a policy when it’s under
The policy owners own life
The life of a family member
The life of a business partner, key employee, or someone who has a financial obligation to the policy owner
