Chapter 6: Fundamentals of Insurance

Question 1

Insurance (Financial Definition)

Answer 1

transfer of risk of incurred loss to a risk pool administered by insurer and insurer redistributes cost of such loss across all pool members

Question 2

Premium

Answer 2

Price of insurance based on expected cost of incurred loses

Question 3

Premium Equation

Answer 3

= Insured loss claims + loading expense - investment income + fair rate return

Question 4

Insurance (legal definition)

Answer 4

contract in which insurer agrees to compensate insured for loses covered by contract

Question 5

Insurer

Answer 5

covers loss, provides insurance

Question 6

insured

Answer 6

policyholder, incurs loss, buys insurance

Question 7

Policy

Answer 7

insurance contract

Question 8

Exposure to loss

Answer 8

insured probability of loss

Question 9

Insurance Contract

Answer 9

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

Question 10

Insurable Loss

Answer 10

Unplanned reduction of economic value

Question 11

Expense

Answer 11

Planned loss

Question 12

Chance of loss and expressed as

Answer 12

probability of suffering loss expressed as a function

Question 13

Priori

Answer 13

expected loss/ total loss

Question 14

Ex Post

Answer 14

Actual loss / total exposures

Question 15

Peril

Answer 15

cause of loss

Question 16

Specified Peril

Answer 16

policies identify/ list covered perils

Question 17

Open peril

Answer 17

insurer agrees to cover all losses except perils specifically excluded

Question 18

Proximate cause

Answer 18

first peril in chain of events that result in loss

Question 19

Hazard

Answer 19

increase severity/chance of risk or loss

Question 20

Physical Hazard

Answer 20

related to the physical environment that increase likelihood of loss

Question 21

Moral Hazard

Answer 21

Behavioural attitude that increases severity or frequency of loss claims AFTER insurance is bought, etc speeding

Question 22

Insurance Fraud

Answer 22

Loss is exaggerated or intentionally caused to obtain insurance

Question 23

Social Insurance

Answer 23

funded by government, financed in premiums and taxes

Question 24

Private insurance

Answer 24

offered by nongovernment body, contracts and financed by insured. Premiums

Question 25

Personal Risk Exposures

Answer 25

perils that cause great financial harm to individual

Question 26

Life insurance

Answer 26

protection from peril of death,

Question 27

Annuity

Answer 27

insured receives predetermined amount until their death or contract maturity

Question 28

Health Insurance

Answer 28

Protection from perils of medical relation or expense

Question 29

Disability Insurance

Answer 29

Protection from peril of disability, inability to work due to sickness, medical condition or injury

Question 30

Group Insurance Plans

Answer 30

protect multiple people of employee group that joined for reason unrelated to insurance but to job position

Question 31

Property insurance

Answer 31

protection of physical property, home, equipment, building

Question 32

Liability Insurance

Answer 32

paying for legal judgments owed to claimants, cost to defend from such litigation

Question 33

Business Interruption Coverage

Answer 33

payment for indirect losses associated with property damage

Question 34

Casualty Insurance

Answer 34

protection against auto, health, workers comp, liability risk

Question 35

Personal Lines Insurance

Answer 35

serve personal risks need for individual and family

Question 36

Commercial Lines Insurance

Answer 36

Meet needs of commercial organizations: liability, workers comp, property, commercial

Question 37

Other Insurance

Answer 37

weather, change of law, motion picture

Question 38

Loss Ratio

Answer 38

loss and claims/premium

Question 39

Loading Expense

Answer 39

Cost to administer insurance

Question 40

Expense Ratio

Answer 40

Administrative expense/ premiums written

Question 41

Investment Income Revenue

Answer 41

income earned by insurers from policyholders months or years in advance of paying insured claims and invest premiums

Question 42

Combined Ratio

Answer 42

sum of expense and loss ratio if less than 100% profitable insurance company

Question 43

Profit equation

Answer 43

Premiums + investment income - insured loss claim - expense