Chapter 2 - General Insurance Flashcards
Risk Management
Managing risks rather than just paying premiums to an insurance company.
Right premium for right risk
What is insurance?
Insurance protects people and businesses against certain losses by transferring the risk from individuals to a group.
Risk
The chance of financial loss, or the uncertainty of loss
The 2 types of risk
Pure risk
Speculative risk
Pure risk
Exists when only the chance of loss is present without the potential for a financial gain.
Only pure risk is insurable
Speculative risk
When a chance is taken that may result in a financial gain such as gambling or the stock market.
Hazard
Any condition that increases the chance of loss or increases the frequency or severity of loss
Exposure
The possibility of a loss caused by surroundings
Peril
The event that causes a loss such as a fire, lightning or windstorm
Loss
The reduction in the value of an asset and the financial consequences of a reduction in value of an asset.
What are the 2 types of losses?
Direct
Indirect
Direct Loss
A loss incurred as a direct result of a peril
An example is a house destroyed by a fire, the house would be a direct loss
Indirect loss
Any loss that is a consequence of a direct loss.
Consequential loss
Example is after a house is destroyed in a fire, the owner will have additional expenses such as hotel and eating at restaurants while house is being repaired.
Methods of Handling Risk
STARR
Sharing - sharing exposure to a loss with another person or organization
Transfer - transferring financial impact of a loss to another party (insurance)
Avoidance - eliminating the risk
Retention - absorbing all or part of risk involved with a particular exposure
Reduction - reducing the severity of losses that do occur
Elements of Insurable Risks
Independence
Definiteness
Calculability
Accidental
What element of insurable risk is uninsurable?
A loss must be a random event over which the insured has no control.
Intentional losses are excluded.
Law of Large Numbers
The greater the numbers, the more accurate the statistics will be that permit an insurer to predict frequency and severity of losses and calculate a premium to spread the cost of risk among all policyholders.
Reinsurance
Safety net
Insurance on insurance
Allows an insurance company to sell part of the risk they have assumed from a policyholder and thereby write more insurance and protect the company from any large losses it would not be able to handle on its own.
Stock Companies
Insurance companies owned by stockholders.
Charge non-assessable fixed premiums.
If company creates a profit, they may pay stockholders through dividends.