Chapter 1 (Key concept & terms)

Question 1

Agent/Producer

Answer 1

a legal representative of an insurance company; the classification of producer usually includes agents and brokers; agents are the agents of the insurer

Question 2

Applicant or proposed insured

Answer 2

a person applying for insurance

Question 3

Beneficiary

Answer 3

a person who receives the benefits of an insurance policy

Question 4

Broker

Answer 4

an insurance producer not appointed by an insurer and is deemed to represent the client

Question 5

Insurance policy

Answer 5

a contract between a policyowner (and/or insured) and an insurance company which agrees to pay the insured or the beneficiary for loss caused by specific events

Question 6

Insured

Answer 6

the person covered by the insurance policy. This person may or may not be the policyowner

Question 7

Insurer (principal)

Answer 7

the company who issues an insurance policy

Question 8

Policyowner

Answer 8

the person entitled to exercise the rights and privileges in the policy

Question 9

Premium

Answer 9

the money paid to the insurance company for the insurance policy

Question 10

Reciprocity/Reciprocal

Answer 10

a mutual interchange of rights and privileges

Question 11

Insurance is a ___________ of risk of loss from an individual or a business entity to an insurance company, which, in turn, spreads the costs of unexpected losses to many individuals.

Answer 11

transfer (he cost of an insured’s loss is transferred over to the insurer and spread among other insureds)

Question 12

The insurance transaction includes what?

Answer 12

1.Solicitation;
2.Negotiations;
3.Sale (effectuation of a contract of insurance);
4. Advising an individual concerning coverage or claims.

Question 13

Risk

Answer 13

is the uncertainty or chance of a loss occurring. The two types of risks are pure and speculative, only one of which is insurable.

Question 14

Pure risk

Answer 14

refers to situations that can only result in a loss or no change. There is no opportunity for financial gain. Pure risk is the only type of risk that insurance companies are willing to accept.

Question 15

Speculative risk

Answer 15

involves the opportunity for either loss or gain. An example of speculative risk is gambling. These types of risks are not insurable.

Question 16

Only _______ risk are insurable.

Answer 16

pure

Question 17

Hazards

Answer 17

are conditions or situations that increase the probability of an insured loss occurring

Question 18

Hazards are classified as _________ hazards, moral hazards, or morale hazards and what are some conditions that classify as that?

Answer 18

physical

Conditions such as lifestyle and existing health, or activities such as scuba diving, are hazards and may increase the chance of a loss occurring.

Question 19

Physical hazards

Answer 19

are individual characteristics that increase the chances of the cause of loss.

Question 20

Moral hazards

Answer 20

are tendencies towards increased risk. Moral hazards involve evaluating the character and reputation of the proposed insured.

( refer to those applicants who may lie on an application for insurance, or in the past, have submitted fraudulent claims against an insurer.)

Question 21

Morale hazards

Answer 21

are similar to moral hazards, except that they arise from a state of mind that causes indifference to loss, such as carelessness.

Question 22

Perils

Answer 22

are the causes of loss insured against in an insurance policy.

Question 23

Loss

Answer 23

is defined as the reduction, decrease, or disappearance of value of the person or property insured in a policy, caused by a named peril. Insurance provides a means to transfer loss.

Question 24

A risk is a chance that a loss will occur; a hazard __________ the probability of loss; a peril is the cause of loss.

Answer 24

increases

Question 25

What are the different methods of handling risk?

Answer 25

1. Avoidance
2. Retention
3. Sharing
4. Reduction
5. Transfer

Question 26

avoidance

Answer 26

which means eliminating exposure to a loss.

For example, if a person wanted to avoid the risk of being killed in an airplane crash, he/she might choose never to fly in an airplane. Risk avoidance is effective, but seldom practical.

Question 27

Risk retention

Answer 27

Is the planned assumption of risk by an insured through the use of deductibles, co-payments, or self-insurance. (also known as self-insurance when the insured accepts the responsibility for the loss before the insurance company pays)

Question 28

What is the purpose of retention?

Answer 28

1. To reduce expenses and improve cash flow;
2. To increase control of claim reserving and claims settlements; and
3. To fund for losses that cannot be insured.

Question 29

Sharing

Answer 29

is a method of dealing with risk for a group of individual persons or businesses with the same or similar exposure to loss to share the losses that occur within that group.

(A reciprocal insurance exchange is a formal risk-sharing arrangement.)

Question 30

Reduction

Answer 30

attempt to lessen the possibility or severity of a loss.

( such as installing smoke detectors in our homes, having an annual physical to detect health problems early, or perhaps making a change in our lifestyles.)

Question 31

The most effective way to handle risk is to ________ it so that the loss is borne by another party.

Answer 31

transfer

Question 32

What are the characteristics of an insurable risk?

Answer 32

1. A loss that is outside the insured’s control. (due to chance)
2. A loss that is specific as to the cause, time, place and amount. (Definite and measurable)
3. Insurers must be able to estimate the average frequency and severity of future losses and set appropriate premium rates (Statistically predictable)
4. Insurers need to be reasonably certain their losses will not exceed specific limits. (Not catastrophic)
5. There must be a sufficiently large pool of the insured that represents a random selection of risks in terms of age, gender, occupation, health and economic status, and geographic location. (Randomly selected and large loss exposure)