Chapter 1 Flashcards
Insurance is based of what
the existence of risk
What is Speculative Risk:
there is a chance of loss and there is a chance of profit
Typical business operations. The business ability of the owner and economic conditions in general will determine whether there is a profit or loss
What is Pure Risk
entails a chance of loss but no chance of profit
Own a car> financial loss arising out of a crash constitutes a pure risk> suffer injuries, medical costs> unable to work> lost wages> car is damaged or destroyed. The owner cannot benefit or profit from this accident unless they do some illegal things
What kind of risk is insurance concerned with
Pure risk
What kind of risk is uninsurable
Speculative risk
How to test if something is not insurable
Chance of loss?
Chance of profit?
Chance of loss; yes & Chance of profit no = may not be insurable
What are the types of insurable risk
Personal
Property
Liability
What is personal insurance
The chance of loss arising from a person’s own bodily injury, loss of life, or loss of income b/c of the following
Death, physical disability (resulting from accident or sickness), old age, unemployment
What is property insurance
The chance of loss arising from the destruction of or damage to property, two types
What are the two types of damages that can happen to a property
Direct Loss
Indirect Loss
In property insurance what is direct loss
Cost of repairing a collision damaged automobile
Cost of replacing a stolen gaming console
Cost of rebuilding a house if it burns down
In property insurance what is indirect loss
occurs b/c of direct losses
Is you rent the basement of your house and your house burns down, you will lose rental income from your tenants
What is liability insurance
The chance of loss arising from an individual’s legal obligation to pay damages b/c of the injury or death of another or damage to another’s property.
Liability insurance obligation based on the individuals negligent act or legal liability in relation to
Their conduct
Operations of a vehicle
Ownership or occupation or both of property
Manufacture of products
Rendering of professional services
What are the two categories of insurance
General
life
What does General insurance include
property insurance and casualty insurance.
Casualty insurance is a blanket term used to describe insurance for subjects other than life, fire, or vehicle
General insurance license
What does life insurance need to practise
Require special license
What are three general insurance for general insurance
Personal Lines
Commercial Lines
Special risk
What is commercial lines insurance
Commercial operations, stores, offices, trucking operations, construction vehicles and contractors
What does special risk include
Marine, aviation, high risk industrial operations
What is a peril
An event that may cause a loss
What is burglary
unlawful removal of property from premises involving visible forceable entry
What is robbery
taking another person’s property, in the person’s presences, by violence or threat of violence
What is theft
wrongful taking of property of another. Broad term includes larceny, pilfering, holdup, robbery, and pickpocketing
What is negligence
doing something a reasonable person would not do, or not something a reasonable person would do - is the peril insured in liability insurance
What is Hazard
Is a condition that may cause a peril to occur or make the loss more severe.
What are the two major divisions of hazard
physical
moral
What is physical hazard
Subject matter of insurance and concerns those facts that can be ascertained by inspection of the risk, such as
Construction of property, manufacturing process, age of a vehicle, location in relation to water supplies for firefighting
Slippery floors, loose tiles, debris piled in basement or stairwells, poorly maintained heating and air conditioning units
What is moral hazard
Human element of risk
Steams from mental attitudes and depends on the character of the insured and the insured’s employee
Dishonesty, carelessness, and poor management
What are the two categories of moral hazard
Characteristics of the insured that increase the probability or severity of loss
A particular attitude on the part of the insured
What is morale hazard
Does not relate to dishonesty but to a particular attitude on part of the insured
Typically about care and maintenance
Example:
Upkeep of your property
What is proximate cause
When a loss occurs, the peril that was the proximate cause of the loss must be one of the perils insured
Proximate cause is the immediate and effective cause of the loss
Not always the last event to occur
Clare has a building and it collapses after being damaged and weakened by a raging fire in another building. Although the building collapsed, the fire next door directly precipitated the collapse and qualifies as the proximate cause of the loss
What is a remote cause
A cause that is not proximate
Example
Clare’s building is not damaged by fire but when Clare’s neighbour hires a contractor to repair the other building, the contractor negligently causes Clare’s building to collapse. The fire is the remote cause and the proximate cause if the action of the contractor
What is an immediate cause
The last link in the chain to the events
What is the risk management process used for
Determine the exposures clients need to make
Provide a plan of action manage those risk
Recommend insurance coverage for those risk best served by insurance cover
Pre loss objectives - those to be met before a loss occurs: SPEC
Social responsibility
Peace of mind (tolerance level of uncertainty)
Externally imposed obligations
Cost of risk
Post loss objectives - those to be met after a loss occurs: SSOSS
Social responsibility
Survival
Operational continuity
Stable earnings
Sustained growth
What is the risk management process
Step 1: identifying and analyzing exposures
Step 2: Formulating options
Step 3: Selecting the best techniques
Step 4: Implementing the risk management plan
Step 5: Monitoring the results and modifying the plan
Step 1: identifying and analyzing exposures
To treat loss exposure, it must first be identified.
Insurance professionals have a broader perspective of the risks organizations are exposed to
Outside resources may be accessed; ex. fire department
Methods to identify loss exposures: Surveys, Flow Charts, Financial Statements & Inspections
Three distinct elements to loss exposure
Asset subject to loss
Potential cause of loss (peril)
Financial consequences of the occurrence
What is asset subject to loss
Physical, tangible property
Loss of use, physical asset damaged/destroyed
Legal liability, duty of care issues; slipping on an icy sidewalk in front of a business
Intangible assets, not physical; patent expiring causing financial loss
Human, employees; owner of business dies
What are the three general categories of perils cause loss
Humans - perils caused by human behaviour, such as arson, theft
Natural - perils caused by natural forces in the weather and the earth, such as earthquakes, floods
Economic - such events as changes in consumer tastes, currency fluctuations, crock market declines
Step 2: Formulating options
to formulate the nest technique or combo of techniques for dealing with each exposure
Two major categories used to classify techniques from dealing with each exposure
Loss control techniques to control exposure to prevent losses or reduce their severity
Loss financing techniques to pay for losses that occur
What are some Loss financing techniques to pay for losses that occur
Retention
Transfer
What are Loss control techniques to control exposure to prevent losses or reduce their severity
Avoidance
loss prevention
loss reduction
non insurance risk transfer
separation or diversification
