Chapter 2 Flashcards
What is the primary purpose of insurance?
Insurance indemnifies individuals or organizations against loss, or liability for loss, for specified risks, or pays a sum of money when a specified event occurs.
What is meant by “pooling of funds” in insurance?
collecting premiums from a group of insureds and using the accumulated money to pay for the losses of the few within the group who suffer covered losses.
Why must premiums be commensurate with risk?
To ensure fairness, those with higher risks or higher coverage amounts pay higher premiums, as their likelihood or severity of loss is greater.
What is the purpose of an insurance contract?
The insurance contract specifies the arrangements between the insured and the insurer, including premiums, covered losses, and the process for settling claims.
What is the difference between an insurance agent and an insurance broker?
Agent: Represents one insurer and helps arrange insurance contracts.
Broker: Acts on behalf of the insured to arrange insurance with various insurers
What role does an adjuster play in insurance?
Adjusters assess and settle claims. They can be staff adjusters (employed by the insurer), independent adjusters (contracted by the insurer), or public adjusters (hired by the insured).
How does pooling funds benefit insured individuals?
exchange the uncertainty of large, unpredictable financial losses for the certainty of a manageable premium payment, making protection affordable and ensuring financial security for all members.
What factors influence the premium an insured must pay?
Likelihood of losses (higher risk = higher premiums).
The amount of insurance coverage (higher coverage = higher premiums).
The fair share principle, where each member pays a premium commensurate with their level of risk.
Differentiate between staff adjusters and independent adjusters.
Staff Adjusters: Employees of the insurer who handle claims directly.
Independent Adjusters: Third-party businesspersons hired by the insurer, typically for complex or remote claims, but still act on behalf of the insurer.
What is meant by the “spread of risk” in insurance?
The spread of risk refers to distributing potential losses among many insureds, allowing the losses of the few to be covered by premiums from the many, achieving financial stability for both insurers and society.
How do insurers achieve a spread of risk for their operations?
Volume: Insuring a large number of risks.
Diversity of Type: Writing policies for different classes of risk.
Diversity of Location: Insuring risks in various geographical areas to avoid concentration of exposures.
How does insurance contribute to peace of mind for insured individuals?
By removing uncertainty around potential financial losses, insurance allows individuals and businesses to plan for the future, take calculated risks, and avoid setting aside large reserves of money.
Why is insurance essential for obtaining credit?
Credit granters, such as banks, require insurance to protect their investments (e.g., mortgages on homes or loans for vehicles). Without insurance, credit would involve unacceptable financial risk for lenders.
How do insurers contribute to loss prevention?
Insurers fund research and implement programs to reduce risks, such as fire prevention campaigns, safe driving initiatives, support for antitheft systems, and hail-suppression programs.
What is an unearned premium reserve?
An unearned premium reserve is the portion of premiums held by insurers to refund policyholders for coverage periods that have not yet been used if policies are cancelled.
