Chapter 1 - Intro To Insurance Flashcards
Risk is defined as
The chance of loss or uncertainty of loss
Pure risk
Is the chance of experiencing loss without possibility of gain
Speculative risk
Is the chance of loss one accepts in the hope of realizing a gain
risk management techniques:
Risk Avoidance: Risk avoidance means staying away from risky activities altogether.
Risk Reduction: Risk reduction means taking measures to reduce your risk.
Risk Shifting: Sometimes referred to as Risk Transfer or Risk Transference. Get someone else to assume the risk. Inserting a “hold harmless agreement” in a contract shifts the risk to the other party in the contract. Incorporating a business (LLC) provides owners with limited liability protection.
Buying Insurance. For most of us, the obvious way to manage many risks is to buy insurance. Buying insurance is just one risk management technique. When you buy insurance you transfer a portion of your risk to the Insurer
Risk Retention (Self Insured): Some individuals and businesses choose to save the expense of insurance premiums and accumulate a fund to pay claims that an insurance company would have paid. In these situations, the individual or business that opts not to buy insurance retains the entire risk. Self-insur- ing is nothing more than having enough funds to cover losses. Self-insuring means that we have NOT bought insurance.
What is Insurance
a social device through which individuals by paying a premium fee, transfer a defined and limited portion of their risk to an insurance company.
Indemnification
an insurance concept that states that some portions of the insurance industry prefer that we be made only
whole after a loss rather than coming out ahead.
Peril
is the cause of loss. Life Insurance deals with the peril of death. Health Insurance deals with several perils relating to accidents and sicknesses.
Law of Large Numbers
is the mathematical concept that makes it easier to predict losses if we have a large number of Insureds.
Types of Insurable losses: Economic
This simply means that the loss must have economic value before an Insurer will be interested in providing a policy.
Types of Insurable losses: Predictable
This simply means that the loss must be fore-seeable enough for the company to reliably predict its likelihood and establish premiums.
Types of Insurable losses: Accidental and Accidental Means policies
An insurable loss may result from the policy-holder’s unintentional act (accident), but not from an Insured’s
intentional act. Accidental Means means that the insured will only be covered if it is not their fault. This provision attempts to not pay claims when the insured is foreseeable the cause. Most policies ignore this.
Types of Insurable losses: Measurable
An insurable loss must be quantifiable (calculable) in terms of dollars.
Types of Insurable losses: Non-Catastrophic
Insurance companies prefer not to in-sure societal catastrophes, such as nuclear accidents or wars.
Stock company vs Mutual vs Fraternal vs Captive vs Reciprocal vs Risk Retention Group vs Syndicate vs Loyds of London vs Government
Stock companies - are owned by stake holders. Exists for the sole purpose of generating profit. Pay out in dividends. They are None-participating companies because policyholders don’t share in the profits.
Mutual companies - Owned by its policy holders. There are no stocks or shares. The surplus goes out as dividends to the policy holders.
Fraternal - owned by fraternal benefit society. Such as labor unions, credit unions and religious groups.
Captive - owned by the company it insurers.
Reciprocal - owned by its members who insure each other by agreeing to pay an assessment if the company has a bad claim experience. Run typically by ATTORNEY -IN -FACT who is responsible for purchasing reinsurance, marketing, collecting premiums, paying claims.
Risk Retention Group - group of businesses form a liability insurance. They can provide a variety of liability insurance but not workers comp.
Syndicate - group of insurance companies who get together to share risk.
Lloyds of London - insurance market made up of members who are grouped into syndicates. The insurance is written by the syndicates which is operated by a managing agent who receives insurance applications from the Lloyd’s broker. A broker may place parts of the same insurance with more than one syndicate.
Lloyd’s Association - refers to an association that is organized similar to Lloy’ds of London
Government = owned by the state or federal government. Medicaid and Medicare. Also, terrorism, workers comp, flood, wind and crop.
Policy Owners vs Beneficiary
Policy owner is Heather as she has the plan and I am the beneficiary. I hold a life insurance policy but if I die, my wife is the beneficiary.
