General insurance Section 1 Flashcards
What is insurance?
A contract where one protects another against loss, damage, or liability.
Define Risk
Chance, possibility, or uncertainty of loss happening.
What two types of risk are there?
Pure risk and speculative risk.
Define Pure Risk
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.
Define speculative risk
It involves the possibility for loss or gain. EX: playing the lotto, real estate, gambling.
What is STARR?
5 methods of handling risk.
Sharing
Transfer
Avoid
Reduce
Retain
What is Sharing in STARR?
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.
What is Reduce in STARR?
When the insured takes steps to minimize the risk, reduce the risk. EX: Fire sprinklers, smoke alarms, live a healthier lifestyle.
What is Transfer is STARR?
When risk is shifted to another.
“Transfer of risk”
Buying of insurance is the most common type.
What is Avoid in STARR?
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.
What is reduce in STARR?
When insurer takes steps to minimize risk such as adding sprinklers, smoke detectors, and living a healthier lifestyle.
What is Retain in STARR?
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.
What is a Peril?
The actual cause of a loss. (Fire, wind, theft, collision, etc.)
What is “Named Peril”
The get covered by insurance, the actual peril must be named in the policy. Burden is on the insured to show proof.
What is “Open Peril”
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.
What is a hazard?
Something that increases the likelihood of a loss happening or increases the severity of the loss. However, it does not directly cause damage.
What are the 4 types of hazards?
Moral, Morale, Physical, and legal
What is a Moral Hazard?
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.
What is a Morale Hazard?
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
What is a Physical Hazard?
Anything that poses a risk that can be seen, heard, touches, tasted, or smelled.
What is a legal Hazard?
The chance of a certain case ending up in a court.
What is the law of large numbers?
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.
What is “Loss”?
Any reduction in quality, quantity, or value.
What is “Loss Exposure”?
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)
Describe Property Loss Exposure.
The degree of loss a person/ organization faces in regard to property (includes real and personal property).
Describe Personal/ Personnel Loss Exposure.
Presents the possibility of a financial loss to an individual or a family because of death, disability, unemployment, illness, or injury.
Describe Liability Loss Exposure.
The degree of loss faces in regard to a lawsuit brought by a third party. “Claims”
What is “TARR”?
Four methods used to manage or treat risk.
Risk Transfer
Risk Avoidance
Risk Retention
Risk Reduction
What is Risk Transfer?
Risk is shifted to another party. Most common form or risk transfer is an individual purchasing insurance.
EX: Purchasing, increasing, adding insurance
What is Risk Avoidance?
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
What is Risk Retention?
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
What is Risk Reduction?
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.
What is an ideally insurable risk?
A risk that is financially within reason which makes it reasonable to insure.
What are the requirements of an ideally insurable risk?
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.
What is a deductible?
The portion of the loss that the insured must pay before the insurer pays any portion of the claim.
What is reassurance?
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.
