Insurance 1- Principles of Risk & Insurance

Question 1

Adverse Selection

Answer 1

Tendency of poorer- than-average risks to seek insurance to a great extent than the average, or better than average risks must be reduce– Person who becomes sick and THEN applied for health insurance

Question 2

Elements of Insurable Risk

Answer 2

1) Must be large # of homogeneous exposure units to make losses reasonably predictable.
2) The loss produced by the risk must be definite +measureable
3) Loss must be fortuitous or accidental
4) Loss must not be catastrophic to insurance company

Question 3

Risk Avoidance

Answer 3

avoid the risk- i.e. don’t own property, rent it

Question 4

Risk Diversification

Answer 4

spread out assets, diversify them i.e. store inventory at multiple locations

Question 5

Risk Reduction

Answer 5

reduce probability of risk or severity of risk- i.e. wear seatbelts, have a fire alarm

Question 6

Risk Retention

Answer 6

handling the risk internally i.e. deductible, self insurance, coinsurance

Question 7

Risk Transfer

Answer 7

transfer the risk i.e. buy insurance a policy

Question 8

Risks that involve HIGH loss severity, LOW loss Frequency. What is the Risk Management strategy/strategies?

Answer 8

Risk transfer– insurance

Question 9

Risks that involve HIGH loss severity, HIGH loss Frequency. What is the Risk Management strategy/strategies?

Answer 9

Risk avoidance (b/c insurance premiums are probably going to be too high)

Question 10

Risks that involve LOW loss severity, HIGH loss Frequency. What is the Risk Management strategy/strategies?

Answer 10

Risk retention + risk reduction (high freq. implies the transfer cost will be high)

Question 11

Risks that involve LOW loss severity, LOW loss Frequency. What is the Risk Management strategy/strategies?

Answer 11

Risk retention (risk don’t occur often, and even when they do they don’t have a huge financial impact)

Question 12

Principle of indemnity

Answer 12

principle underlying most insurance contracts; where the goal is for the insurer to reimburse the insured for approx. the amount loss (no more, no less)

Question 13

Insurable Interest

Answer 13

This means having a financial stake in a piece of property to the extent that if it was damaged or destroyed you would suffer financial loss. Also, it entails that a person probably benefits financially by a person, property not being destroyed or damaged

Question 14

Contract requirements

Answer 14

1) must be an agreement preceded by offer and an acceptance by the one to whom the offer is made
2) must be consideration (generally money)
3) principle must have legal capacity to execute contract

Question 15

Unilateral

Answer 15

based on the premise that a particular party makes a promise and in exchange will receive a specific act from another party (bilateral would mean both parties trade promises). Insurance contracts are unilateral where a person pays premiums and the insurance company makes promises

Question 16

Adhesion

Answer 16

Contract is accepted “as is” or not at all.

Question 17

Special note on adhesion

Answer 17

Insurance policies are general contracts of adhesion; and a consequence of contracts of adhesion happens in the event of ambiguity in the terms. Courts usually rule in FAVOR of the INSURED; and AGAINST the INSURER

Question 18

Waiver provision

Answer 18

Agents cannot change contract terms; only the president, VP, secretary, etc. may alter the contract

Question 19

Aleatory

Answer 19

Dollars given up is usually unequal with insurance. Usually the insured is paying more in premiums, or the insurer gives large benefit

Question 20

Rescission

Answer 20

Cancellation of contract from its beginning to due to fraud, misrepresentation, concealment of material facts. Premiums paid will be refunded & the contract will be rescinded

Question 21

Reformation

Answer 21

when the contract between the parties fails to express the original intent of the parties, the contract can be amended

Question 22

Collateral Source Rule

Answer 22

concept that says plantiff’s measure of damage should not be mitigated by the payments received from sources other than the negligent party. For example, person A may have been injured by person B in a car accident. If person A has medical insurance, the insurance company will generally pay for any medical or nursing costs associated with the car accident. Nonetheless, the compensation from person A’s insurance company is independent from any liability B might face for causing the accident.

Question 23

Subrogation

Answer 23

Subrogation is a term describinga legal right heldby most insurance carriersto legally pursue a third party that caused an insurance loss to the insured. i.e. driver’s car is totaled through the fault of another driver. The insurance carrier reimburses the covered driver under the terms of the policy and then pursues legal action against the driver at fault