Insurance 1- Principles of Risk & Insurance Flashcards
Adverse Selection
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
Elements of Insurable Risk
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
Risk Avoidance
avoid the risk- i.e. don’t own property, rent it
Risk Diversification
spread out assets, diversify them i.e. store inventory at multiple locations
Risk Reduction
reduce probability of risk or severity of risk- i.e. wear seatbelts, have a fire alarm
Risk Retention
handling the risk internally i.e. deductible, self insurance, coinsurance
Risk Transfer
transfer the risk i.e. buy insurance a policy
Risks that involve HIGH loss severity, LOW loss Frequency. What is the Risk Management strategy/strategies?
Risk transfer– insurance
Risks that involve HIGH loss severity, HIGH loss Frequency. What is the Risk Management strategy/strategies?
Risk avoidance (b/c insurance premiums are probably going to be too high)
Risks that involve LOW loss severity, HIGH loss Frequency. What is the Risk Management strategy/strategies?
Risk retention + risk reduction (high freq. implies the transfer cost will be high)
Risks that involve LOW loss severity, LOW loss Frequency. What is the Risk Management strategy/strategies?
Risk retention (risk don’t occur often, and even when they do they don’t have a huge financial impact)
Principle of indemnity
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)
Insurable Interest
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
Contract requirements
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
Unilateral
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
Adhesion
Contract is accepted “as is” or not at all.
Special note on adhesion
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
Waiver provision
Agents cannot change contract terms; only the president, VP, secretary, etc. may alter the contract
Aleatory
Dollars given up is usually unequal with insurance. Usually the insured is paying more in premiums, or the insurer gives large benefit
Rescission
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
Reformation
when the contract between the parties fails to express the original intent of the parties, the contract can be amended
Collateral Source Rule
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.
Subrogation
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
