ch1 keywords

Question 1

Reserves

Answer 1

the accounting measurement of an insurer’s future obligation to its policyholders. - classified as liabilities on the insurance company’s accounting statements since they must be settled at a future date.

Question 2

liquidity

Answer 2

indicates a company’s ability to make unpredictable payouts to policy owners.

Question 3

*Annuities

Answer 3

provide income by making a series of payments to the annuitant for a specific period of time or for life.

Question 4

*liquidity

Answer 4

indicates a company’s ability to make unpredictable payouts to policy owners.

Question 5

Reinsurer

Answer 5

specialized branch of insurance they insure insurers. Arrangement by which an insurance company transfers portion of risk has assumed to another insurer. Reinsurance takes places to limit loss of any one insurer would face if a large claim become payable.

** enable a company to meet certain objectives : favorable UW or morality results. Company transferring the risk = ceding company. Company assuming risk = reinsurer.

** common reinsurance contract between 2 insurance companies = treaty reinsurance - involves an automatic sharing of risk assumed.

** the agreement , insurance company that transfers the loss exposure to another insurer is called primary insurer.

Question 6

*private insurance - commerical

Answer 6

multi line insurers : life and annuities, accident, health, property and casualty insurance.

Stock companies (non participating)- purpose of making a profit for its stock holders (private)

Mutual companies (participating)- owners are policy holders

Question 7

Fraternal Benefit Socities

Answer 7

social, charitable, benevolent activities membership based on religious, national or ethnic lines. non profit, lodge system = ritualistic work and maintain representative form of government with elected officers. Must be formed for reasons other than obtaining insurance.

Question 8

Fair Credit Reporting Act

Answer 8

1970 attempt to protect an individual’s right to privacy, the govt passed this act which requires fair and accurate reporting of information about consumers, including applications for insurance.

Question 9

NAIC

Answer 9

state insurance commissioners or directors are members. work regularly to examine various aspects of insurance industry and to recommend appropriate insurance laws and regulations.

1. encourage uniformity in state insurance laws and regu
2. assist in the admin of those laws and regu by promoting efficeincy
3. protect the interests of policyowners and consumers
4. preserve state regu of the insurance business

Question 10

*Government as insurer

Answer 10

social insurance programs

funded with taxes and serve national and state social purposes

• Old age, survivors and Disability insurance (OASDI) (Social Security)
• Medicaid & Medicare

Question 11

*Self insurers

Answer 11

self insurer established its own reserves to cover potential loss. Often used by large company for funding pension and some health plans.

Question 12

Risk pooling

Answer 12

loss sharing, spreads risk by sharing the possibility of loss over a large number of people. transfers risk from an individual to a group

Question 13

Risk

Answer 13

uncertainty regarding loss - property loss, negiligence or carelessness can give risk to liability risk. Loss involved is characterized by lessening of value.

Question 14

Peril

Answer 14

can cause financial loss, such as earthquake or tornado. Perils can be referred to as the accident itself.

Question 15

Pure Risk

Answer 15

involve change of loss; never possibility of gain or profit. chance of injury from accident. *insurable

Question 16

Speculative risk

Answer 16

involve the chance of both loss and gain. gambling or investing *not insurable

Question 17

*homogeneous exposure unit

Answer 17

similar objects of insurance that are exposed to the same group of perils

Question 18

Risk transfer

Answer 18

transfer it so that the loss is absorbed by another party. insurance is most common method of transferring risk. enables/relieves insures losses these risk bring.

Question 19

Risk retention

Answer 19

accepting the risk and confronting it if and when it occurs. - self insurance setting up fund to offset cost of potential loss

Question 20

Risk reduction

Answer 20

attempt to lessen the possibility of loss by taking action to reduce risk - smoke alarm in house will not lessen possibility but may reduce risk of loss.

Question 21

Risk avoidance

Answer 21

avoiding as many risks as possible - choosing not to drive avoid risk of driving - choose not to fly avoid risk of place crash - not investing in stock avoid risk of market crash.

Question 22

Hazard

Answer 22

condition or situation that creates or increases a chance of loss

Question 23

Reinsurance

Answer 23

one way insureers deal with catastrophic loss - spreading risk from one insurer to one or more other insurers

** many insurers are able to minimize exposure to loss by reinsuring risks**

Question 24

Moral hazard

Answer 24

tendencies that people have which increase risk and the chance of loss - alcoholism and drug addiction

Question 25

Morale hazard

Answer 25

arise from an attitude or state of mind causing indifference to loss - driving recklessly with no fear increases change of death or injury

Question 26

Adverse Selection

Answer 26

tendency for poorer than average risks to seek out insurance - insurers must minimize adverse selection.

Question 27

*risk management

Answer 27

process of analyzing exposures that create risk and designing programs to handle them

Question 28

*principle of indemnity

Answer 28

involves making an insured whole by restoring them to the same condition as before a loss

Question 29

physical hazard

Answer 29

individual characteristics increase chance of peril *blind and deaf

Question 30

Lloyd’s of london

Answer 30

an association formed to UW and issue insurance on certain items and areas that might be uninsurable