Chapter 1: Introduction to General Insurance

Question 1

Major function of insurance

Answer 1

to achieve a spread of risk

Question 2

Explain what is meant by “spread of risk”

Answer 2

to share the losses of the few among the many

Question 3

Meaning of insurance

Answer 3

an undertaking by one person to indemnify another if a specific peril damages an object of insurance

Question 4

Definition of insurance: 5 major points

Answer 4

1. insurance provides a means of shifting one’s financial responsibility for a loss to another party
2. payment will be made only in the event of the happening of a certain risk or peril
3. the amount of the payment is restricted to the amount required to indemnify the insured
4. insurance pays only for accidental losses that happen after the agreement starts
5. payment can be in money or other thing of value

Question 5

Principle of indemnity

Answer 5

ensures that people receive the ACTUAL amount of their loss, no more and no less

Question 6

Types of general insurance

Answer 6

1. automobile
2. property
3. liability

Question 7

Identify 2 types of major insurers. Provide examples of organizational differences.

Answer 7

1. Private
   - stock companies: owned by shareholders and profit oriented
   - mutual companies: owned by policy holders and not profit oriented
2. Government
   - usually compulsory

Question 8

Identify 2 methods used by insurers to sell their products

Answer 8

1. direct writing system: insurer has own sales force for its own products
2. independent brokerage system: represents more than 1 insurer and gets commission. Clients belong to the broker

Question 9

Define risk

Answer 9

the chance of financial loss to which the object of insurance may be exposed

Question 10

Define peril

Answer 10

the cause of loss