Chapter 1 - Introduction to Insurance

Question 1

What is the Purpose of Insurance? (3 things)

Answer 1

1. Risk Management Tool: Insurance allows a large group to share financial losses.
2. Risk Transfer: The risk is transferred from the individual to the insurance company.
3. Law of Large Numbers: Larger insured pools help insurers predict losses more accurately.

Question 2

What is the Definition of Risk? (4 things)

Answer 2

1. Risk: The possibility of an adverse outcome.
2. Outcomes: Indeterminate, with at least one undesirable.
3. Objective Condition: Risk is an objective condition in the real world.
4. Measurable Degree: The degree of risk relates to the likelihood of occurrence.

Question 3

Define Peril

Answer 3

Cause of financial loss (e.g., flood, illness).

Question 4

Define Hazard (1 general meaning, then 2 subtypes)

Answer 4

Condition increasing loss probability.

• Physical Hazard: Physical characteristics (e.g., oily rags, high blood pressure).
• Moral Hazard: Dishonesty-related (e.g., intentional loss).

Question 5

Define Loss

Answer 5

Disappearance or reduction in value.

Question 6

Define Deductible

Answer 6

Amount the insured pays before insurance coverage begins.

Question 7

Define Exclusion

Answer 7

Perils not covered (e.g., wars, earthquakes).

Question 8

Define Riders and Endorsements

Answer 8

Additions or corrections to an insurance contract.

Question 9

Classification of Risk: What are the 4 types of risk?

Answer 9

Financial and Nonfinancial Risk

Static and Dynamic Risks

Fundamental and Particular Risk

Pure and Speculative Risks

Question 10

Define Financial and Nonfinancial Risk.

Answer 10

Financial: Risk causing financial loss.

Nonfinancial: Risk not causing financial loss (e.g., pain).

Question 11

Define Static and Dynamic Risks.

Answer 11

Static: Always present risks (e.g., natural disasters).

Dynamic: Risks from economic changes.

Question 12

Define Fundamental and Particular Risk.

Answer 12

Fundamental: Affects large groups (e.g., recession).

Particular: Affects individuals or small groups.

Question 13

Define Pure and Speculative Risks.

Answer 13

Pure: Only chance of loss, insurable (e.g., personal, property, liability, failure of others).

Speculative: Chance of loss or gain, not insurable (e.g., gambling).

Question 14

What is the goal, and what is the focus, when it comes to Risk Management?

Answer 14

Goal: Efficiently handle risks to avoid catastrophic loss.

Focus: Pure risks.

Question 15

List the 7 steps of the Risk Management Process.

Answer 15

Identify goals

Gather data

Analyze and evaluate

Develop plan

Communicate recommendations

Implement recommendations

Monitor for changes

Question 16

List the 5 methods of Risk Management.

Answer 16

1. Avoidance
2. Retention (self-insurance)
3. Transfer (insurance)
4. Sharing (hold harmless agreements)
5. Reduction (loss prevention)

Question 17

Regarding Risk Management, what are 6 ways one could lower insurance premiums?

Answer 17

1. Increase deductibles
2. Lengthen elimination periods
3. Install safety features
4. Improve health
5. Avoid smoking
6. Reduce coverage years

Question 18

List the 4 insurable Risk Elements.

Answer 18

1. Large sample for predictability
2. Measurable and definite loss
3. Accidental loss
4. Non-catastrophic to society

Question 19

Explain adverse selection (2 things).

Answer 19

High-risk individuals more likely to purchase insurance.

Common with age-related premium increases.

Question 20

Describe Social Insurance.

Answer 20

Government-mandated, protects against large risks (e.g., Social Security, Medicare).

Question 21

Describe Public Insurance

Answer 21

Enhances public trust (e.g., FDIC, SIPC).

Question 22

Describe Private Insurance.

Answer 22

Marketed by private companies (e.g., life, health, disability, long-term care, property, liability).

Question 23

Describe the Client Life Cycle Insurance Needs (3 phases, with descriptors).

Answer 23

1. Asset Accumulation Phase (up to ~45 years):Health, disability, life, and property insurance.
   Focus on life and disability if there are dependents.
2. Conservation/Protection Phase (45 to 60 years):Same as accumulation phase, plus consider long-term care insurance.
3. Distribution/Gifting Phase (60+ years):Emphasis on health and long-term care insurance.