Chapter 1 Flashcards
What is demutualization?
Mutual companies can convert to stock companies through a process called demutualization.
What is Reinsurers?
Reinsurance is an arrangement by which an insurance company transfers a portion of an assumed risk to another insurer. Usually, reinsurance occurs to limit the loss any one insurer would face should a very large claim become payable. Another reason for reinsurance is to enable a company to meet specific objectives, such as favorable underwriting or mortality results.
What is a ceding company?
The company transferring the risk is called the ceding company.
What is reinsurer?
The company assuming the risk is the reinsurer.
What is treaty reinsurance?
A typical reinsurance contract between two insurance companies is called treaty reinsurance, which involves an automatic sharing of the risks assumed.
What is a primary insurer?
In a reinsurance agreement, the insurance company that transfers its loss exposure to another insurer is called the primary insurer.
What is Fraternal Benefit Societies?
Insurance is also issued by fraternal benefit societies, which have existed in the United States for more than a century. Fraternal societies, noted primarily for their social, charitable, and benevolent activities, have memberships based on religious, national, or ethnic lines.
What is Lloyd’s of London
Contrary to popular belief, Lloyd’s of London is not an insurer but rather a syndicate of individuals and companies that individually underwrite insurance. Lloyd’s can be compared to the New York Stock Exchange, which provides the arena and facilities for buying and selling public stock. Lloyd’s function is to gather and disseminate underwriting information, help its associates settle claims and disputes, and, through its member underwriters, provide coverages that might otherwise be unavailable in certain areas.
What is Self-Insurers
Though self-insurance is not a method of transferring risk, it is an important concept to understand. Rather than transfer risk to an insurance company, a self-insurer establishes a self-funded plan to cover potential losses. Large companies often use Self-insurance to fund pension plans and some health insurance plans. A self-insurer will often look to an insurance company to provide insurance above a specified maximum loss level. The self-insurer will bear the loss below that maximum amount.
What is a Captive Insurer?
An insurer established and owned by a parent firm to insure the parent firm’s loss exposure is known as a captive insurer.
What is Surplus Lines Insurance?
Surplus lines insurance is available to those who need protection, but it is not available through private or commercial carriers. Surplus lines insurance refers to the nontraditional insurance market. A person will seek coverage through a surplus lines broker to secure coverage for high, substandard, or unusual risks (i.e., hole-in-one insurance or nonappearance coverage). To qualify for surplus line coverage, an individual must attempt to secure coverage in the authorized market. An individual may not attempt to secure coverage just because it may be less expensive.
Industrial Insurer
Insurance is also sold through a specialized branch of the industry known as home service or debit insurers. These companies specialize in a particular type of insurance called industrial insurance. Industrial insurance is characterized by relatively small face amounts (usually $1,000 to $2,000) and weekly premiums.
What is the PRINCIPLE OF INDEMNITY
The “Principle of Indemnification” is designed to “restore” the insured to the same financial position that he or she was in prior to the loss occurrence. The principle of indemnity also stands for the fact that an insured shall not profit or gain by their loss.
what is the LAW OF LARGE NUMBERS (SPREAD OF RISK)
The law of large numbers states that larger groups provide an increased degree of accuracy in loss predictions, based on past experience.
For example, if an insurance company insures one million homes (instead of only 100 homes) for total loss and collects $1,000 in premium from each homeowner, this should provide enough money so the insurer can pay all losses to policyholders during the year while meeting all overhead obligation and still make a profit. If an insurer only insured 100 homes and five of them were total losses in the same year, it would likely bankrupt the carrier. There is safety in larger numbers.
What is ADVERSE SELECTION
Insurers must minimize adverse selection, which is defined as the tendency for higher-than-average risks to seek out insurance.
Adverse selection is represented by a company taking on more significant risks or not being accurately compensated for actual risk. The adverse selection of risk must be avoided in order for the company to be profitable and to stay in business. The company must avoid risks that put them in a position to experience a catastrophic loss. If an insurer cannot compensate for higher risks with better than average risks, then its loss experience will increase, and its ability to pay claims may be compromised. Therefore, sound and competent underwriting may reduce the chance of adverse selection.
What is PERIL
A peril is an immediate, specific event that causes a loss. Perils can also be referred to as the accident itself.
what is Loss exposure
Loss exposure is the risk of a possible loss. Basically, any situation that presents the possibility of a loss.
what is Homogeneous exposure units
Homogeneous exposure units are similar objects of insurance that are exposed to the same group of perils. The larger the number of homogeneous units (similar risks), the easier it becomes to predict loss.
what is Moral hazards
Moral hazards make the loss more likely to occur due to the dishonest character of the insured, who may be more disposed to either engage in criminal activity or cause a loss because of their negative habits. The chance of loss is higher because of who the insured is. It is due to the individual character of the insured.
what is Morale hazard
The insured unintentionally creates a loss situation on an unconscious level. They just do not care about loss prevention since the property is insured.
For example, Alex leaves his car running unattended, with the doors unlocked to heat it up on a cold winter morning. This act makes it more likely that his car will be easily stolen by a passing car thief on the lookout for such vehicles. On some unintentional mental level, the insured simply does not care that this kind of loss might happen, probably because the vehicle is insured.
