General insurance Section 1

Question 1

What is insurance?

Answer 1

A contract where one protects another against loss, damage, or liability.

Question 2

Define Risk

Answer 2

Chance, possibility, or uncertainty of loss happening.

Question 3

What two types of risk are there?

Answer 3

Pure risk and speculative risk.

Question 4

Define Pure Risk

Answer 4

Pure risk provides only two possible outcomes: Loss or no loss. There is no possible gain involved. This is the only type of risk that insurance agencies will employ.

Question 5

Define speculative risk

Answer 5

It involves the possibility for loss or gain. EX: playing the lotto, real estate, gambling.

Question 6

What is STARR?

Answer 6

5 methods of handling risk.

Sharing
Transfer
Avoid
Reduce
Retain

Question 7

What is Sharing in STARR?

Answer 7

When the risk is too high, there may be more than one primary insurer. Several insurers would agree to insure a percentage of the risk so that no single insurer would be responsible for total claim.

Question 8

What is Reduce in STARR?

Answer 8

When the insured takes steps to minimize the risk, reduce the risk. EX: Fire sprinklers, smoke alarms, live a healthier lifestyle.

Question 8

What is Transfer is STARR?

Answer 8

When risk is shifted to another.
“Transfer of risk”
Buying of insurance is the most common type.

Question 8

What is Avoid in STARR?

Answer 8

A person may avoid participating in certain activities such as bungee jumping or skydiving, therefore avoiding risk.

Removing the hazard or object that causes the risk.

Question 9

What is reduce in STARR?

Answer 9

When insurer takes steps to minimize risk such as adding sprinklers, smoke detectors, and living a healthier lifestyle.

Question 9

What is Retain in STARR?

Answer 9

When a person or other entity has the money to cover a loss, and therefore does not buy insurance. A person might also only retain part of the loss by using a deductible.

Question 10

What is a Peril?

Answer 10

The actual cause of a loss. (Fire, wind, theft, collision, etc.)

Question 11

What is “Named Peril”

Answer 11

The get covered by insurance, the actual peril must be named in the policy. Burden is on the insured to show proof.

Question 12

What is “Open Peril”

Answer 12

Covers all and any peril other than any exclusions. Burden is on the insurer to show evidence that the damage was caused by an exclusion.

Question 13

What is a hazard?

Answer 13

Something that increases the likelihood of a loss happening or increases the severity of the loss. However, it does not directly cause damage.

Question 14

What are the 4 types of hazards?

Answer 14

Moral, Morale, Physical, and legal

Question 15

What is a Moral Hazard?

Answer 15

Associated with mental attitudes, behaviors, habits, and ethics.

EX: Dishonest acts such as lying on application, exaggerating to get more money, fraudulent claims, or breaking the law.

Question 16

What is a Morale Hazard?

Answer 16

They deal with how people behave, but specifically with a person’s state of mind. Arises out of human carelessness and irresponsibility.

EX: Leaving car keys in unlocked car

Question 17

What is a Physical Hazard?

Answer 17

Anything that poses a risk that can be seen, heard, touches, tasted, or smelled.

Question 18

What is a legal Hazard?

Answer 18

The chance of a certain case ending up in a court.

Question 19

What is the law of large numbers?

Answer 19

It states that the more data collected, the more accurate information will be.

The greater number of exposure units, the more predictable the loss.

Once expectation of loss is established, the insurer can calculate their rates.

Question 20

What is “Loss”?

Answer 20

Any reduction in quality, quantity, or value.

Question 21

What is “Loss Exposure”?

Answer 21

The possibility of a loss.

3 dimensions to loss exposure:
- The type of value exposed to loss
- The peril that causes loss
- The extent of the potential financial consequences

The degree to which a person or property is at risk for loss.

3 major types of loss exposure used for categorizing are:
- Property loss exposure
- liability loss exposure
- Personal and personnel loss exposure (human loss)

Question 22

Describe Property Loss Exposure.

Answer 22

The degree of loss a person/ organization faces in regard to property (includes real and personal property).

Question 23

Describe Personal/ Personnel Loss Exposure.

Answer 23

Presents the possibility of a financial loss to an individual or a family because of death, disability, unemployment, illness, or injury.

Question 23

Describe Liability Loss Exposure.

Answer 23

The degree of loss faces in regard to a lawsuit brought by a third party. “Claims”

Question 24

What is “TARR”?

Answer 24

Four methods used to manage or treat risk.

Risk Transfer
Risk Avoidance
Risk Retention
Risk Reduction

Question 25

What is Risk Transfer?

Answer 25

Risk is shifted to another party. Most common form or risk transfer is an individual purchasing insurance.

EX: Purchasing, increasing, adding insurance

Question 26

What is Risk Avoidance?

Answer 26

To avoid dangerous activities. One cannot avoid death but avoid activities such as bungee jumping, or dangerous habits like smoking.

EX: Not proposing to girlfriend, not participating in skydiving

Question 27

What is Risk Retention?

Answer 27

To not purchase insurance at all and to pay for all losses out of one’s own pocket. Another form of risk retention is to self-insure.

EX: Self-insuring, deductibles

Question 28

What is Risk Reduction?

Answer 28

Taking steps to lessen the chance or severity of a loss occurring. Can reduce the chance of premature death by controlling what we eat, by exercising, quitting smoking, etc..

EX: Not taking hot air balloon rides, wearing seatbelts.

Question 29

What is an ideally insurable risk?

Answer 29

A risk that is financially within reason which makes it reasonable to insure.

Question 30

What are the requirements of an ideally insurable risk?

Answer 30

Loss must be an accident.

Must be possible to calculate the chance of loss. (Combo of the probable frequency and severity of a loss.

Loss must create economic hardship.
Insured person must fit a category to which the company can apply the law of large numbers.

Cost of insurance must be reasonable in relationship to the possible loss.

The loss must be definite and measurable.

The loss cannot be catastrophic.

Question 31

What is a deductible?

Answer 31

The portion of the loss that the insured must pay before the insurer pays any portion of the claim.

Question 32

What is reassurance?

Answer 32

A contract by which an insurer procures a third party to insure it against loss or liability caused by the original insurance.

A form of insurance between insurers.