Chapter 7: Insurable Perils and Insuring Organizations

Question 1

Ideally Insurable Losses (4)

Answer 1

1. Large group of similar items are exposed to peril
2. Accidental Losses Beyond Insured’s control
3. Definite losses capable of causing economic hardship
4. Low probability of catastrophic loss

Question 2

Large Loss Principle

Answer 2

Insurance bought when loss is large and uncertain

Question 3

Catastrophic Loss Exposure

Answer 3

Potential loss that is unpredictable & capable of producing extraordinary amount of damage

Question 4

Insurer Death Spiral

Answer 4

premium increases, individuals leave as premium to high, premium increases again and more see as poor value so do not insure

Question 5

Risk Classification System RCS

Answer 5

sort policyholders into different pricing groups based on risk of suffering loss

Question 6

Risk classification criteria (3)

Answer 6

1. large homogenous groups
2. forecast expected losses
3. insurable events/risk

Question 7

Subsidization and how reduced

Answer 7

each insured does not mathematically pay fair price for insurance. Pay more = subsidy, pay less = receive subsidy

reduced through competition

Question 8

Adverse/anti selection

Answer 8

policyholder has better information than insurer about their risk level, negotiate for lower premium (ethical moral questions)

Question 9

Risk classification minimizes

Answer 9

adverse selection, subsidization

Question 10

RCS Reliability

Answer 10

Info about risk classification variable easily obtainable , not subject to manipulation

Question 11

RCS Inventive Value

Answer 11

rewarded for maintaining clean records, reduce loss frequency, better rates

Question 12

Socially Acceptable and 2 controversial topics

Answer 12

risk variables that violate social norms regarding discrimination is inappropriate etc race, gender removed for pension

Genetic testing, credit score

Question 13

Stock Insurance Company (4)

Answer 13

owned by investors and stockholders. They provide capital to establish and operate corporation, not necessarily buy insurance (Canada Life)

not all profit and losses are passed on to insureds

Question 14

Mutual Insurance Company

Answer 14

Owned by policyholders and customers in corporation - (Wawanesa)

Question 15

Main Difference between stock and mutual

Answer 15

possible to own stock but not purchase insurance or vice versa
mutual insurers have less access to sources of financial capital then stock holders

Question 16

Mutual Insurance, 2 mutual models

Answer 16

Advanced Premium Mutual
Assessment Mutuals

Question 17

Advanced Premium Mutual?
It is the ________and most _________ found form of _______ company

Answer 17

policyholder pays premium when insurance begins and becomes eligible for dividend when period ends

Blanks: Largest, frequent, mutual

Question 18

Assessment Mutuals

Answer 18

provide primary fire, windstorm insurance for farmers and small towns

Question 19

Demutualization

Answer 19

Mutual insurance becomes stock company form

Question 20

Reciprocal Exchange

Answer 20

unincorporated, each insured insurers every other insured and in turn is insured by every other member, like mutual insurance

Question 21

Attorney-In-Fact

Answer 21

Manages reciprocal exchange, provide all admin service to operate organization