Chapter 1 Flashcards
What is risk?
Risk is a condition where there is a chance, likelihood, or probability of potential loss.
What is a pure risk?
pure risk is one that will result in either a loss or no
change in status—there is no possibility for gain.
What is speculative risk?
A speculative risk, on the other hand, may result in
a loss, a gain, or no change in status.
What is exposure/loss exposure?
Exposure, or loss exposure, is the condition of being at risk for a loss, whether or not an actual loss
occurs.
What is peril?
A peril is the cause of a loss.
What is hazard?
A hazard is a specific condition that increases the probability or likelihood that a loss will occur from
a peril. There are three types of hazards: physical, moral, and morale.
What is physical hazard?
A physical condition that increases
the probability of loss, including
the use, condition, or occupancy
of property. Physical hazards may
often be seen, heard, felt, tasted, or
smelled.
What is Moral Hazard?
Dishonest tendencies that increase
the probability of a loss, including
certain characteristics and
behaviors of people. Moral hazards
are most closely related to some
form of lying, cheating, or stealing.
Moral hazards are intentional, so
these losses are not covered.
What is morale hazard?
An attitude of indifference toward
the risk of loss that increases the
probability of a loss occurring.
What does STARR stand for? & What is it for?
SHARING, TRANSFER, AVOIDANCE, REDUCTION, RETENTION.
These are methods of managing risk.
What is the Law of Large numbers?
Because risk contains the uncertainty of loss, insurers rely on the law of large numbers to accurately
predict the expected losses of a group. The law of large numbers is a probability theory stating
that the larger the number (sample size) of units with the same or similar exposures, the greater the
accuracy in predicting losses.
What is Adverse Selection?
Adverse selection is the principle that people will seek insurance more frequently for risks that are
hard to insure. This is because there is a higher probability that these losses will occur and they may
occur more frequently, compared to average risks that have a lower probability of loss.
What is reinsurance?
Essentially, reinsurance can be thought of as insurance for insurers.
What is the residual market?
Those with higher risks that are rejected by the voluntary market may be eligible for coverage
through residual markets, which are last-resort coverage sources. Residual markets often exist to
provide basic property insurance on real property, state-required personal auto liability coverage, or
Workers’ Compensation coverage.
What insurer is owned by its stockholders, or shareholders?
Stock Insurance Company
What insurer is owned by policyholders, who may be referred to as members?
Mutual Insurance Company
What is a self insurer?
Groups and associations with specific underwriting needs may find self-insuring against loss more
cost effective than paying premiums for insurance. Larger employers with stable cash flows may
choose to self-fund some of their group insurance needs, or for their workers who may be entitled to
Workers’ Compensation benefits.
What is Insurer Domicile?
Domicile refers to the jurisdiction (state, district, territory, or country) where an insurer is formed or
incorporated.
What are the three kinds insurer domiciles?
domestic, foreign, and alien.
What is a domestic insurer, foreign insurer, & alien insurer?
*An insurer organized under the
laws of this state, whether or not it
is admitted to do business in this
state.
*An insurer not organized under the
laws of this state, but in one of the
other states or jurisdictions within
the United States, whether or not
it is admitted to do business in the
state or jurisdiction.
- An insurer organized under the
laws of any jurisdiction outside of
the United States, whether or not
it is admitted to do business in this
state.
What are admitted/authorized insurers?
An admitted, or authorized, insurer is authorized to transact insurance in a given state, and will be
granted a certificate of authority from that state’s department of insurance. Admitted insurers may be
domestic, foreign, or alien insurers.
What is one example of non-admitted/unauthorized insurers?
One example of a non-admitted insurer is a surplus lines insurer, which can insure risks in states it
is not admitted in when coverage cannot be obtained from admitted insurers, usually because the
risk is too great or too difficult to underwrite. Surplus lines insurance is transacted through licensed
surplus lines brokers, and each state regulates the procurement of surplus lines insurance.
What is the actuarial department?
The Actuarial Department gathers and interprets statistical information to determine the probability
of a loss. This information is used to determine premium rates used by the insurer. A rate is the
dollar amount charged for a particular unit of insurance, such as $5 per $1,000 of insurance
coverage. The rates established by actuaries are kept in the insurer’s rating manuals.
What is the underwriting department?
The Underwriting Department is responsible for selecting risks and selecting the specific rate that
applies to those risks in order to determine the actual policy premium for an applicant. The premium
is the total cost for the amount of insurance purchased by an insured.
