General Insurance Principles - Risk and Loss

Question 1

What is the main purpose of insurance?

Answer 1

The transference of financial risk associated with loss onto an insurance company.

Question 2

Risk

Answer 2

The chance of loss

Question 3

How one handles the chance of loss

Answer 3

Risk Management

Question 4

Loss

Answer 4

Unplanned reduction in economic value

Question 5

Pure Risk

Answer 5

Risk that can only result in loss, not gain. This type of risk is insurable.

Question 6

Speculative Risk

Answer 6

Risk that can result in either loss or gain. This type of risk is uninsurable.

Question 7

Direct Loss

Answer 7

An immediate result of the occurrence of an insured peril. (e.g., the death of a household’s breadwinner)

Question 8

Indirect Loss

Answer 8

A result of an insured loss that is not directly related to the peril. (e.g., loss of income due to the death of a household’s breadwinner)

Question 9

Loss Exposure

Answer 9

State of being exposed to a an insurable loss.

Question 10

Exposure Units

Answer 10

Units assigned to measure loss exposure.

Question 11

Peril

Answer 11

The event(s) that insurance protects against (e.g., death, disability)

Question 12

Hazard

Answer 12

Condition that increases the chance of encountering a peril or the severity of a peril.

Question 13

Three types of hazards

Answer 13

1. ) Moral Hazards
2. ) Morale Hazards
3. ) Physical Hazards

Question 14

Two Types of Risk

Answer 14

1. ) Pure Risk

2. ) Speculative Risk

Question 15

Moral Hazard

Answer 15

An individual’s character traits or habits that increase the likelihood of a loss. (e.g., alcoholism, drug abuse)

Question 16

Morale Hazard

Answer 16

Individual tendency to take on more risk out of a state of mind, attitude or indifference to loss. (e.g., “I can drive fast in the snow because I have insurance.”)

Question 17

Physical Hazard

Answer 17

An individual’s physical traits that increase the likelihood of loss. (e.g., obesity, high cholesterol)

Question 18

The Five Risk Management Techniques

Answer 18

1. ) Avoid the Risk
2. ) Reduce the Risk
3. ) Retain the Risk
4. ) Share the Risk
5. ) Transfer the Risk

Question 19

Risk Avoidance

Answer 19

A way to reduce the likelihood of loss by avoiding situations that could result in loss. Risk avoidance is a good practice in general, but it especially is helpful in dealing with avoidable, dangerous risks. (e.g., don’t drink and drive)

Question 20

Risk Reduction

Answer 20

A ways to reduce the likelihood of loss by proactively reducing the chance of a loss. (e.g., exercising and eating healthy to prevent illness)

Question 21

Risk Retention

Answer 21

The acceptance of risk and dealing with it through the use of personal funds should a loss occur. Great to use if financial loss is small and risk is remote. (e.g., self-insurance, deductible)

Question 22

Sharing Risk

Answer 22

A ways to reduce the likelihood of financial loss whereby people who share a common risk band together and promise to “chip in” and compensate a member of the group who suffers a covered loss. The custom of risk sharing made sense for small groups facing relatively modest losses, but it is difficult to achieve in larger groups.

Question 23

Risk Transference

Answer 23

A way to reduce the financial impact of a loss by transferring the loss to a third party.

Question 24

Six Elements of Insurable Risk

Answer 24

1. ) Loss must be definable;
2. ) Loss must be measurable;
3. ) The peril must be outside the insured’s control;
4. ) The risk must be part of a large group of similar risks;
5. ) The risk must not be catastrophic (e.g., result of war);
6. ) The risk must not be a stated exclusion.

Question 25

Underwriting

Answer 25

Insurance companies use this process to determine if the risk proposed for insurance should be accepted or rejected. That is, it seeks to determine if the applicant represents an insurable risk using information from the application and the agent.

Question 26

Law of Large Numbers

Answer 26

Based on the idea that predictions become more accurate as the number of exposures increase, this is the mathematical principle that insurance is based on.

Question 27

Actuaries

Answer 27

Mathematicians hired by insurance companies to determine the morbidity and mortality of men and women at various ages.

Question 28

Morbidity

Answer 28

The likelihood of serious illness. This information is used to determine premiums for health and disability insurance.

Question 29

Mortality

Answer 29

The likelihood of death. This information is used to determine premiums for life insurance.

Question 30

Adverse Selection (“Selection Against the Company”)

Answer 30

The tendency of persons at greater risk of loss to seek out and maintain insurance.

Question 31

Who is primarily responsible for regulating insurance?

Answer 31

State governments

Question 32

Insurance Department

Answer 32

A division of a state government assigned the responsibility of regulating insurance companies, producers, and transactions within their jurisdiction.

Question 33

Insurance Commissioner (Director)

Answer 33

The individual that heads a state’s insurance department.

Question 34

Regulatory associations that seek to promote uniformity among states regarding their insurance regulation policies and procedures.

Answer 34

National Association of Insurance Commissioners (NAIC);

National Conference of Insurance Legislators (NCOIL)