Insurance Flashcards
What is the basic concept behind insurance?
Shared risk or risk pooling
What does the law of large numbers say about insurance?
That all humans in a pool in free peacetime society are independent and so mass car crashes or deaths are not expected
What is selection bias?
When a potential insurance customer tries to buy insurance to pay for a pre-existing sickness, for example
What is moral hazard?
When the insurance amount is more than what you could get, eg for a house, at current rates— so burn it down and make that money
Insurance prices
Will be commensurate with risk, eg, flood insurance adds a high premium to house insurance
Why wasn’t life insurance accepted at first?
Because women felt like they were betting against their husband
What did the McCarran-Ferguson Act of 1945 do, and what is the problem it created?
It delegated insurance regulation to the state level. This complicated things for national insurance companies because now there’s a different regulator per state with different requirements
Who created NAIC, and What problem was the NAIC created to solve?
The insurance companies created it to simplify the complexity brought upon by the 50 different regulators at the state level (McCarran-Ferguson Act) by standardizing insurance laws somewhat
What problem was the HMO created to solve?
Doctors were not incentivized to cure people or perform preventive care because they were paid when people were sick
Before 9/11, what was insurance companies attitude towards terrorism?
Most insurers did not exclude terrorism risk because they thought it was inconsequential
What is the Terrorism Risk Insurance Act of 2002?
US government required insurers to offer terrorism insurance for 3 years, but the government would pay for 90% of losses above $100B.
Why wasn’t TRIA permanent?
Because it’s felt it’s just a problem of the moment. Like bankruptcy law, it may become permanent
