Exam 1: Chapters 1, 2, 3, 5 Flashcards
Risk
a condition in which there is a possibility of an adverse deviation from a desired outcome that is expected or hoped for
Peril
a cause of a loss (fine, theft, wind, explosion)
hazard
a condition that creates an increase in the loss of the peril
three types of hazards
1) physical
2) moral
3) morale
physical hazard
material condition that increases the chance of the loss, ex. plasticware by the fryer, cancel policy
moral hazard
the increase in the probability of a loss that results from dishonest tendencies on the part of the insured that may induce that person to attempt to defraud the insurance company
morale hazard
acts to increase losses where insurance exists, not necessarily because of dishonesty but because of a different attitude toward losses that will be paid by insurance
financial risk
market risk, credit risk, liquidity risk
non-financial risk
no insurance for something like a bad grade
pure risk
used to designate those situations that involve only the chance of loss or no loss, ownership of property
speculative risk
there is a probability of loss, but also a possibility of gain, gambling
Is insurance gambling?
No
Does gambling involve a gain?
No
4 primary ways of dealing with risk
1) Avoidance
2) Retention
3) Transfer (insurance)
4) Reduction
risk avoidance
takes place when decisions are made that prevent a risk from even coming into existence
risk retention
the most common method of dealing with risk, when nothing is done about a particular exposure, the risk is this, risk is not recognized
risk transferal
purchase of insurance contracts, hedging
risk reduction
all techniques that are designed to reduce the likelihood of loss, or the potential severity of those losses that do occur
Why is insurance important?
security
Why is the law of large numbers important to us in the insurance business?
it helps the insurer to make predictions for the group as a whole using the theory of probability
What makes for an insurable risk?
Large number of homogenous units, losses have to be definite and measurable, losses have to be accidental or beyond the control of the person, cannot be catastrophic or it will wipe out the insurance business
Where did insurance get started years ago?
marine and cargo insurance
premium
cost of insurance
How did insurance used to be sold?
through monoline insurance Post WW2
mutual companies
owned by its policyholders, started by organizations, policy holders vote for who serves on the board of directors of the company which makes it hard for one person to have control over the company
stock companies
organized as profit-making ventures, with the stockholders assuming the risk that is transferred by the individual insureds
assessment mutuals
most have gone away and have advanced to premium non assessment mutuals
importance of an agent in most insurance arrangements
valuable source of advice to decide what coverage to have. needs to have wide knowledge of insurance business and the desire to help the client
life insurance general agent
independent contractors, or employees of the general agency or insurer
5 areas of cost of productions
losses, acquisition expenses, administrative costs, taxes or profit
