insurance

Question 1

advantages of insurance in handling risk

Answer 1

greater predictability of actual losses
transfer of risk
specialized approach to analyzing, assessing, and handling risk

Question 2

two basic premises of insurance

Answer 2

1. business should have coverage if premium is less than risk adjusted present value of the expected loss
2. businesses should consider whether or not the asset for which insurance coverage is sought is redundant

Question 3

definition of insurance

Answer 3

the pooling of fortuitous losses by transfer of such risks to third parties who agree to indemnify the transferee for such losses and to provide certain services related to the risk

Question 4

four basic characteristics of insurance

Answer 4

pooling of losses
payment of fortuitous losses
risk transfer
indemnification

Question 5

pooling of losses

Answer 5

law of large numbers applies

Question 6

payment of fortuitous losses

Answer 6

must be unforeseen and accidental

cannot be intentional

Question 7

risk transfer

Answer 7

actual transfer of risk needs to occur to the insurance company
has to have an unknown trasnferred

Question 8

indemnificiation

Answer 8

trying to restore the injured party back to the pre-loss condition had the accident not occured
not always possible

Question 9

indemnification limit for cars

Answer 9

$30,000

Question 10

requirements of an insurable risk

Answer 10

large number of exposure units
accidental and unintentional loss
determinable and measurable loss
no catastrophic loss 
calculable chance of loss
economically feasible premium

Question 11

four things to know about loss

Answer 11

cause
time
place
amount

Question 12

adverse selection and insurance

Answer 12

adverse selection: sellers have info that the buyers do not have

Question 13

nature of adverse selection

Answer 13

people who worry about losses will buy insurance

Question 14

underwriting

Answer 14

sign and accept liability under (an insurance policy), this guaranteeing payment in case of loss or damage occurs
meaning of underwriting: insurance companies will do all the research on the factors and people, then individuals will read the info, process it, and sign

Question 15

consequences of adverse selection

Answer 15

higher losses

Question 16

types of insurable risk

Answer 16

personal, property, liability

Question 17

generally uninsurable risks

Answer 17

stock market
finances
production (will not insure actual action, but will insure losses due to production issues)
political

Question 18

types of insurance

Answer 18

private and governement

Question 19

private insurace

Answer 19

life and health

property and liability

Question 20

government insurance

Answer 20

social (unemployment)
crop
flood

Question 21

social benefits of insurance

Answer 21

indemnification
less worry and fear 
source of investment funds
loss prevention
enhancement of credit

Question 22

cost of insurance to society

Answer 22

cost of doing business
fraudulent claims
inflated claims

Question 23

cost of doing business

Answer 23

administrative load (rent, wages)

Question 24

expense load

Answer 24

cost of running the insurance company

Question 25

risk premium

Answer 25

pure loss + expense load

Question 26

types of inflated claims

Answer 26

overstatement of loss
misrepresenting facts
misrepresenting the nature of loss of the payment
misrepresenting the situation to pay a lower premium

Question 27

underwriting cycle

Answer 27

fluctuations in the insurance business over a period of time

Question 28

hard market

Answer 28

high prices, low availability

Question 29

soft market

Answer 29

low prices, high availiabilty

Question 30

three ways to forecast loss

Answer 30

probability analysis
regression analysis
forecasting with loss distributions

Question 31

capital budgeting; current expected loss

Answer 31

(cost of building * % of total loss) + (cost of other building * % of total loss)…. for however many buildings there are

Question 32

capital budgeting; future benefit

Answer 32

(cost of building * difference in % of total loss) + (cost of building * difference in % of total loss)…. for total amount of buildings

Question 33

capital budgeting; net present value

Answer 33

future benefit / 1 + discount rate