Chapter 2 Flashcards
Insurance
Transfers the risk from individuals to a group
Risk
uncertainty of loss
Pure Risk
Insurable. Chance of loss is present without the potential for a financial gain.
Speculative Risk
Chance is taken that may result in a financial gain. NOT insurable
Hazard
Increase the chances or frequency or severity of a loss.
Exposure
Possibility of a loss caused by surroundings
Peril
Causes a loss
Loss
reduction of value of an asset
Direct Loss
Loss incurred as a direct result of a peril
Indirect Loss
Any loss that is a consequence of the direct loss ( example: Hotel and eating expenses)
Methods of Handling Risk (STARR)
Sharing: Sharing the exposure to a loss with another person
Transfer: Transferring the financial impact of a loss to another party
Avoidance: Eliminating the risk entirely
Retention: Absorbing all or part of the risk involved with a particular exposure. (deductibles)
Reduction: Reducing the severity of losses that do occur. (Fire extinguishes)
Elements of Insurable Risk (6)
Independence: Many people must be independently exposed to the same or similar risk.
Definiteness: Losses must be definite as to cause, time, place, and amount.
Calculability: Losses must be frequent enough and in an amount sufficient to calculate rates equitable to all policyholders.
Accidental: Loss must be a random event over which the insured has no control.
Losses cannot be catastrophic.
Adverse Selection
Selecting risks that are against the interest of the insurance company. Poor underwriting.
Law of large numbers
The greater the numbers the more accurate the statistics will be to predict the frequency and severity of losses.
Reinsurance
Allows insurance company to “sell” part of the risk.
Types of Insurance (9)
Stock Companies
Mutual Companies
County Mutual Companies
Farm Mutual Companies
Reciprocal Exchanges
Risk Retention Groups
Purchasing Groups
Lloyds Plan
Self-Insurers
Stock Commpanies
Owned by Stockholders
Mutual Companies
Owned by the policyholders
County Mutual Companies
High risk auto coverage and low value dwelling coverage