Chapter 2 Vocab (Text)

Question 1

Adverse Selection

Answer 1

the tendency of persons with a higher-than-average chance of loss to seek insurance at standard (average) rates, which if not controlled by underwriting, results in higher-than-expected loss levels

Question 2

Casualty Insurance

Answer 2

broad field of insurance that covers whatever is not covered by fire, marine, and life insurance

Question 3

Commercial Lines

Answer 3

Refer to property and casualty coverages for business firms, nonprofit organizations, and government agencies

Question 4

Expense Loading

Answer 4

The amount needed to pay all expenses, including commissions, general administrative expenses, state premium taxes, acquisition expenses, and an allowance for contingencies and profit.

Question 5

Fidelity Bonds

Answer 5

cover loss caused by the dishonest or fraudulent acts of employees, such as embezzlement and the theft of money

Question 6

Fortuitous Loss

Answer 6

A loss that is unforseen and unexpected by the insured and occurs as a result of chance

Question 7

Indemnification

Answer 7

The insured is restored to his or her approximate financial position prior to the occurrence of the loss

Question 8

Inland Marine Insurance

Answer 8

covers goods being shipped on land, which includes imports, exports, domestic shipments, and instrumentalities of transportation

Question 9

Insurance

Answer 9

The pooling of fortuitous losses by transfer of such risks to insurers, who agree to indemnify insureds for such losses, to provide other pecuniary benefits on their occurrence, or to render services connected with the risk

Question 10

Law of Large Numbers

Answer 10

The greater the number of exposures, the more closely will the actual results approach the probable results that are expected from an infinite number of exposures

Question 11

Liability Insurance

Answer 11

covers the insured’s legal liability arising out of property damage or bodily injury to others; legal defense costs are also paid.

Question 12

Life Insurance

Answer 12

pays death benefits to designated beneficiaries when the insured dies.

Question 13

Ocean Marine Insurance

Answer 13

covers ocean-going vessels and their cargo from loss or damage because of perils of the sea

Question 14

Personal Lines

Answer 14

refers to coverages that insure the real estate and personal property of individuals and families or provide them with protection against legal liability

Question 15

Pooling

Answer 15

The spreading of losses incurred by the few over the entire group, so that in the process, average loss is substituted for actual loss

Question 16

Property Insurance

Answer 16

indemnifies property owners against the loss or damage of real or personal property caused by various perils, such as fire, lightning, windstorm, or tornado

Question 17

Reinsurance

Answer 17

an arrangement by which the primary insurer that initially writes the insurance transfers to another insurer part or all of the potential losses associated with such insurance

Question 18

Requirements of an Insurable Risk

Answer 18

includes pooling of losses, payment of fortuitous losses, risk transfer, indemnification

Question 19

Risk transfer

Answer 19

A pure risk is transferred from the insured to an insurer, who typically is in a stronger financial position to pay the loss than the insured.

Question 20

Social Insurance

Answer 20

government insurance programs with certain characteristics that distinguish them from other government insurance plans

Question 21

Surety Bonds

Answer 21

provide for monetary compensation in the case of failure by bonded persons to perform certain acts, such as failure of a contractor to construct a building on time

Question 22

Underwriting

Answer 22

refers to the process of selecting and classifying applicants for insurance

Question 23

Personal Lines

Answer 23

Coverages that insure the real estate and personal property of individuals and families to provide them with protection against legal liability