Chapter 1

Question 1

Define the concept of risk with 4 examples

Answer 1

avoiding risk
controlling risk
transferring risk
accepting risk

Question 2

Define managing risks through insurance with 3 exmaples

Answer 2

characteristics of insurable risks
insurance underwriting
insurable interest requirement

Question 3

what is the definition of risk?

Answer 3

chance or possibility of an unexpected results, either a gain or a loss.

Question 4

what is the definition of speculative risk?

Answer 4

involves 3 possible outcomes: loss, gain, or no change. It can not be insured.

Question 5

what is the definition of pure risk?

Answer 5

involves no possibility of a gain, only a loss or no loss occurs. This risk can be insured.

Question 6

define risk management

Answer 6

it is the process by which individuals and business identify and assess the risks they face and take measures to eliminate or reduce their exposure to those risks.

Question 7

Which of the four concepts of risk does insurance follow?

Answer 7

Transferring method from individual or entity to an insurer.

Question 8

define a policy benefit

Answer 8

is a specific amount of money the insuere agrees to pay under an insurance policy when a specific loss occurs.

Question 9

Define an insurance policy.

Answer 9

is a written document that contains the term of the agreement between the insuere and the owner of the policy.

Question 10

What is the premium?

Answer 10

is the specified amount of money an insuerer charges in exhcnage for agreeing to pay a policy benefirt when a specified loss occurs.

Question 11

Businesses and individuals purchase insruance policies for which 3 types of risks?

Answer 11

personal
property damange
liability

Question 12

what is a personal risk?

Answer 12

the risk of economic loss associated with death, poor helath, injury or outliving ones economic resources.

Question 13

Insurance companies issue products that are individual or group insurance policies. Describe individual insurance.

Answer 13

a policy that is issued to insure the life or health of a named person.

Question 14

Insurance companies issue products that are individual or group insurance policies. Describe group insurance.

Answer 14

a policy that is issued to insure the lives or health of a specific group of people.
ie .employees.

Question 15

what is property damage risk?

Answer 15

is the risk of economic loss resulting from damaged or loss of a persons property.
> provides benefit if items are damaged, destroyed, or lost d/t specific risk as policy describes.

Question 16

what is a liability risk?

Answer 16

risk of economic loss resulting from a person being held legally responsible for harming other or their property.
> cx who slips in a persons store.

Question 17

what is an annuity contract?

Answer 17

Contract under which an insurer promises to make a series of periodic payments to a named individual in exchange for a premium or series of premiums.

Question 18

Are property and liability insurance [AKA property and casualty insurance] marked together in a policy? if yes, give an example

Answer 18

yes, commonly.

• ie. Auto insurance.

Question 19

In Canada what types of insurances exist? [2 categories]

Answer 19

life

non-life

Question 20

define

1. applicant
2. policy owner
3. insured [assured]
4. beneficiary

Answer 20

1. applied.
2. owns the policy [usually the same as above]
3. the one being insured.
4. person who received the life-insurance benefit

Question 21

Define a claim

Answer 21

a request for payment under the terms of an insurance policy.

Question 22

what is risk pooling?

Answer 22

a concept that allows insurers to accept responsibility for the economic losses of their insureds.
>all people pay into a benefit, the insurers know only a certain percent will actually claim the benefit.

Question 23

what 5 basic characteristics must be present for a risk (potential loss) to be considered insurable?

Answer 23

1. loss must occur by chance
2. loss must be definite
3. loss must be significant
4. the loss rate must be predictable
5. the loss must not be catastrophic to the insurer.

Question 24

describe what is meant by “ a loss must be definite”

Answer 24

in terms of time and amount. Terms must be clear about when to pay a policy benefit and how much those benefits should be.

Question 25

what is a contract of indermninity?

Answer 25

a policy under which the amount of the policy benefit payable for a covered loss is based on the actual amount of financial loss that results from the covered event, as determined at the time of the event.

Question 26

Are most insurance policies indemnity contracts? why?

Answer 26

its not easy to just add up bills for claims, so most policies are valued contracts.

Question 27

what is a valued contract?

Answer 27

it specifies the amount of the policy benefit that will be payable when a covered loss occurs, regardless of the actual amount of loss that was incurred.

Question 28

what is face amount?

Answer 28

the amount of the policy benefit that is payable if the insured dies while the policy is in force.
> appears on front [face]page of the policy contract.
> also known as death benefit.

Question 29

What is loss rate?

how is it predicted?

Answer 29

the frequency of losses that insureds are likely to experience. Insurance companies cannot predict losses on individual basis, but as a collective can measure loss rates.
> Based on observations of past events and a concept known as the law of large numbers

Question 30

What is the law of large numbers?

Answer 30

typically the more times we observe a particular event, the more likely that our observed results will approximate the true probability that the event will occur.

Question 31

What is a mortality tables?

Answer 31

a chart developed to show the statistical records of predictability. - they indicate with great accuracy the number of people in a large group who are likely to die at each age.

Question 32

What is a mortality rate?

Answer 32

the rates at which death occurs among a specified group of people during a specific period, typically one year. [ its displayed in the mortality tables]

Question 33

what is a morbidity table?

Answer 33

a similar chart to mortality tables, created by insurance companies, to display morbidity rates, or “incidence’ of sickness and accident by age, occurring amount a given group of people.

Question 34

How to insurance companies prevent the possibility of a catastrophic loss, and ensure that losses occur independently of each other?

Answer 34

the company spreads the risks the choose to insure
> certain number of athletes on a team
> Certain number of houses in a region

Question 35

What is reinsurance

Answer 35

is insurance that on insurance company [known as ceding company] purchases from another company [known as reinsurer/ assuming company]. to reduce possibility of financial catastrophic losses.

Question 36

What is underwriting?

Answer 36

the assessment of the degree of risk an insurance company will be accepting if it inssues the policy. It is the process of identifying and classifying the degree of risk.

Question 37

The premium rates that an insurance company establishes are based on what?

Answer 37

on the amount of risk the company is assuring for the policies it issues.

Question 38

underwriting becomes more difficult because of anti-selection. What is that?

Answer 38

is the tendency of individuals who believe they have a greater-than-average likelihood of loss to seek insurance protection to a greater extent than do other individuals.
> this causes the insure to carefully review each application to assess the degree of risk.,

Question 39

What are the 2 primary stages of undewriting?

Answer 39

1. identifying the risk that the proposed insured presents

2. classifying the degree of risk that a proposed insured represents.

Question 40

What two hazardous does one phase when identifying risks?

Answer 40

1. physical hazard > physical characteriestic that may increase the likely hood of loss
2. Moral hazard > characteristic that exists when the reputation, financial position, or criminal record of an applicant or a proposed insured indicates that the person may act dishonestly in the insurance transaction.

Question 41

What is a risk class? [ in terms of classifying a risk]

Answer 41

a grouping of insured who represent a similar level of risk to the insurer. This establishes an equitable premium rate to charge for the requested coverage.

Question 42

What are the 4 typical risk classes, that a proposed insured would be offered?

Answer 42

1. standard risk
2. preferred risk
3. substandard
4. declined

Question 43

What is an insurable interrest?

Answer 43

the policy owner myst be likely to suffer a genuine loss or detriment should the event insured against occur.

Question 44

Can any one name any beneficiary on their own life?

Answer 44

yes, technically but insurance companies usually require that a beneficiary also have an insurable interest in the life of the insured.
> California has a law where any one can be the beneficiary.