Ch. 1 Flashcards
What are the primary benefits of insurance coverage?
- Helping insureds regain their footing after a loss.
- Managing cash flow uncertainty
- Meeting legal requirements (Think auto ins. Unless you live in NH or AK, in rural areas unconnected to state highways.)
- Promoting risk control
- Enabling efficient use of resources (Money that would be set aside for losses can be used for other things.)
- Providing credit support.
- Providing a source of investment funds (For the consumer as well as the insurer.)
- Reducing social burdens
What are the costs of insurance?
Premiums paid by insureds
Operating costs of insureds
Opportunity costs
Increased losses
What are the 4 major roles of insurance?
A Risk Management Technique – enables a person to deal with loss exposures and their financial consequences.
Risk Management techniques include loss prevention measures, such as safety goggles and helmets, or loss reductions measures such as fire extinguishers to “reduce” the severity of fire losses.
A Transfer system – One party, the insured, transfers the chance of financial loss to another party, the insurance company, or the insurer.
A Business – Various operations must be conducted in a way that generates sufficient income to pay claims and provide a reasonable profit for its owners.
A Contract – A contract exists between the insured and the insurer that states what potential costs of loss the insured is transferring to the insurer and expresses the insurer’s promise to pay for those costs of loss in exchange for a stated payment by the insured.
Explain why insurance would be considered a “Transfer System”?
Insureds exchange the possibility of a large loss for the certainty of a much smaller, periodic payment (premium). Everyone who owns property has a loss exposure, which is any condition or situation that presents the possibility of a loss.
The law of large numbers is a mathematical principle that is the foundation of insurance, and it enables insurers to make predictions about losses.
An example of the law of large numbers is your age as the first factor in determining your life ins. premium because it is based on the mortality of people of your gender, age and other statistics. Actuaries calculate how much you will pay each month for insurance based on ALL the people your age, gender, and with your family statistics for health and longevity.
An exposure unit is a measure of loss potential and is used in pricing insurance.
What is the law of large numbers?
The law of large numbers is a mathematical principle that is the foundation of insurance, and it enables insurers to make predictions about losses.
What’s an “Exposure Unit”?
An exposure unit is a measure of loss potential and is used in pricing insurance.
What are the 3 ways to handle “Loss Exposure” as a policyholder?
You can do this through avoidance (use public transportation instead of buying a car), loss control (safety helmets and goggles for construction workers), and loss reduction (fire extinguishers.)
Each insured retains a certain amount of exposure when he or she determines the amount of deductible for their insurance policies.
What does “Risk Management” mean for the insured party?
Is the process of making and implementing decisions to handle loss exposures.
What are the 3 types of “Loss Exposure”
PERSONAL LOSS EXPOSURES can cause financial loss to individuals because of death, disability or unemployment. Property insurance protects assets while liability insurance provides for payment on behalf of the insured for injury to others, including the cost to defend.
PROPERTY (Real, which is land and property attached to it.) Personal is all property that is not real property, tangible, or intangible. Net income losses are indirect and they reflect a reduction in revenue or an increase in expenses, or both.
LIABILITY LOSS EXPOSURE is any condition or situation that presents the possibility that a liability loss will happen (bodily injury, property damage, libel, slander, humiliation, defamation, invasion of privacy are examples.)
Explain “Personal Loss Exposure”
PERSONAL LOSS EXPOSURES can cause financial loss to individuals because of death, disability or unemployment. Property insurance protects assets while liability insurance provides for payment on behalf of the insured for injury to others, including the cost to defend.
Explain “Property” as a loss exposure.
PROPERTY (Real, which is land and property attached to it.) Personal is all property that is not real property, tangible, or intangible. Net income losses are indirect and they reflect a reduction in revenue or an increase in expenses, or both.
Explain “Liability Loss Exposure”
LIABILITY LOSS EXPOSURE is any condition or situation that presents the possibility that a liability loss will happen (bodily injury, property damage, libel, slander, humiliation, defamation, invasion of privacy are examples.)
What are the six types of “Private Insurers”?
1) Stock
2) Mutual
3) Reciprocal Insurance Exchanges
4) Lloyd’s
5) Surplus Lines Insurers
6) Captive Insurers
What’s the difference between Stock and Mutual insurance companies?
Stock Insurance companies, which are corporations owned by stockholders; purpose is making a profit.
Mutual Insurance companies, which are corporations owned by their policyholders; purpose is providing insurance to policyholders.
What’s a “Reciprocal Insurance Exchange”?
Reciprocal Insurance Exchanges, which are unincorporated associations that provide insurance services to subscribers, which are individuals with similar needs like doctors, etc. The first began with dry good merchants in NY.
(Also known as inter-insurance exchanges, these began in 1881 to provide coverage at minimum cost to subscribers. Difference between these and Mutuals is that the risk is transferred to an organization in a Mutual, but it is transferred to other subscribers in an Exchange.)
