Chapter 6: Fundamentals of Insurance Flashcards
Insurance (Financial Definition)
transfer of risk of incurred loss to a risk pool administered by insurer and insurer redistributes cost of such loss across all pool members
Premium
Price of insurance based on expected cost of incurred loses
Premium Equation
= Insured loss claims + loading expense - investment income + fair rate return
Insurance (legal definition)
contract in which insurer agrees to compensate insured for loses covered by contract
Insurer
covers loss, provides insurance
insured
policyholder, incurs loss, buys insurance
Policy
insurance contract
Exposure to loss
insured probability of loss
Insurance Contract
Contract where insured pays premium to insurer in exchange for financial losses suffered by insured to be covered by the insurer outlined in insurance policy
Insurable Loss
Unplanned reduction of economic value
Expense
Planned loss
Chance of loss and expressed as
probability of suffering loss expressed as a function
Priori
expected loss/ total loss
Ex Post
Actual loss / total exposures
Peril
cause of loss
Specified Peril
policies identify/ list covered perils
Open peril
insurer agrees to cover all losses except perils specifically excluded
Proximate cause
first peril in chain of events that result in loss
Hazard
increase severity/chance of risk or loss
Physical Hazard
related to the physical environment that increase likelihood of loss
Moral Hazard
Behavioural attitude that increases severity or frequency of loss claims AFTER insurance is bought, etc speeding
Insurance Fraud
Loss is exaggerated or intentionally caused to obtain insurance
Social Insurance
funded by government, financed in premiums and taxes
Private insurance
offered by nongovernment body, contracts and financed by insured. Premiums
Personal Risk Exposures
perils that cause great financial harm to individual
Life insurance
protection from peril of death,
Annuity
insured receives predetermined amount until their death or contract maturity
Health Insurance
Protection from perils of medical relation or expense
Disability Insurance
Protection from peril of disability, inability to work due to sickness, medical condition or injury
Group Insurance Plans
protect multiple people of employee group that joined for reason unrelated to insurance but to job position
Property insurance
protection of physical property, home, equipment, building
Liability Insurance
paying for legal judgments owed to claimants, cost to defend from such litigation
Business Interruption Coverage
payment for indirect losses associated with property damage
Casualty Insurance
protection against auto, health, workers comp, liability risk
Personal Lines Insurance
serve personal risks need for individual and family
Commercial Lines Insurance
Meet needs of commercial organizations: liability, workers comp, property, commercial
Other Insurance
weather, change of law, motion picture
Loss Ratio
loss and claims/premium
Loading Expense
Cost to administer insurance
Expense Ratio
Administrative expense/ premiums written
Investment Income Revenue
income earned by insurers from policyholders months or years in advance of paying insured claims and invest premiums
Combined Ratio
sum of expense and loss ratio if less than 100% profitable insurance company
Profit equation
Premiums + investment income - insured loss claim - expense
