Basic Insurance Concepts

Question 1

What is insurance

Answer 1

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.

Question 2

What’s is pure risk

Answer 2

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.

Question 3

Speculative risk

Answer 3

Involves the opportunity for either loss or gain. Like gambling

Question 4

Peril

Answer 4

Perils are the causes of loss insured against in an insurance policy

Question 5

Hazards

Answer 5

Hazards are conditions or situations that increase the probability of an insured loss occurring.

Question 6

Physical hazard

Answer 6

Are individual characteristics that increase the chances of the cause of loss. Like your physical condition, medical history.

Question 7

Moral hazard

Answer 7

Tendencies toward risks. Your character. Did you lie on your application or in the past when submitting claims.

Question 8

Morale hazard

Answer 8

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.

Question 9

Legal hazard

Answer 9

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

Question 10

Law of large numbers

Answer 10

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

Question 11

What is the basis for insurance

Answer 11

Is sharing risk among a large pool of people with a similar exposure to loss(a homogeneous group)

Question 12

Exposure

Answer 12

Is a unit of measure used to determine rates charged for insurance coverage

Question 13

A risk is

Answer 13

A chance that a loss will occur; a hazard increases the probability of loss; a peril is a cause of loss

Question 14

Distribution of exposure

Answer 14

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

Question 15

Adverse selection

Answer 15

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

Question 16

Methods of risk management

Answer 16

Sharing, transfer, avoidance, retention, reduction

Question 17

Sharing risks method

Answer 17

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

Question 18

Transfer method

Answer 18

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.

Question 19

Avoidance method

Answer 19

Which means eliminating exposure to a loss. That not driving or riding on an airplane

Question 20

Retention method

Answer 20

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

Question 21

Reduction method

Answer 21

Reduces the possibility or severity of loss. Like installing a smoke detector or having annual physicals.

Question 22

Characteristics that must be present before a pure risk can be insured

Answer 22

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

Question 23

Insurable interest

Answer 23

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.

Question 24

A valid Insurable interest exists between the policy owner and the insured in a policy when it’s under

Answer 24

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

Question 25

Indemnity

Answer 25

Also referred to as reimbursement. Is a provision in an insurance policy that states that in the event of loss, an insured or a beneficiary is permitted to collect only to the extent of the financial loss and is not allowed to gain financially because of the existence of an insurance contract