ERM - Insurance Flashcards
Has a long and effective history in transferring risk from individuals to loss-sharing groups.
Insurance
The most important risk financing method
Insurance
Financial definition has these 4 elements
- A risk pool (group of exposure units)
- Loss-sharing within that risk pool
- Certainty of payment for losses of the members of the group
- The exchange of a certain amount (premium) for an uncertain amount (potential losses)
Based on the transaction where one party to a contract agrees to compensate the other party for losses covered by the contract.
Legal definition of Insurance
Involves the exchange of premium for a promise to pay
Combination definition of Insurance
An undesired, unplanned reduction of economic value.
Loss
A cause of a loss
Peril
A condition that makes losses more frequent or more severe
Hazard
A physical condition, e.g., unsafe tools, slippery floors.
Physical Hazard
A tendency of a human being to cause, or be indifferent to, loss, e.g., arson, unsafe work habits.
Moral Hazard
Is used when an insurer pools the exposure units
Law of Large Numbers
Increased in that, as sample size increases, the deviation from the statistic, e.g., the mean, decreases. In other words, the insurers’ estimate of average losses gets better.
Predictability
Is not based on group equity but on benefit adequacy.
Social Insurance
Programs are sponsored by governments, but are not for government employees.
Social Insurance
Many programs are mandatory, e.g Social Security
Social Insurance
