Insurance: Chapter 1 Flashcards
What is Risk?
A condition with a possibility of loss or a situation with an exposure to loss
What is Peril?
The cause of a loss.
- Fire
- Windstorm
- Liability
- Collision
- Theft
- Sickness/Injury
What is a Hazard?
A condition that may create or increase the chance of loss arising from a given peril. May also increase the frequency or severity of the loss
-Building on on earthquake fault
-Poor maintenance of a car’s brakes
Law of large numbers states that?
As number of independent events increases, the likelihood grows of that actual results will be close to the expected results
There should be the same portion of good and bad risks in the insured group as there were from in the one from which the statistics were taken is the definition of?
Adverse Selection
The incidence and severity of sickness and accidents in a well-defined class/es of persons?
Morbidity
What is shown on a mortality table?
The probable rate of death at each age, usually shown as how many per thousand
What are the characteristics that risk must have in order for an insurance company to assume the risk?
- Must be sufficiently large number of homogeneous exposure units to make losses reasonably predictable
- Loss produced by the risk must be definite and measurable
- Loss must be fortuitous or accidental
- Loss must not be catastrophic to the insurance company
What is self-insurance?
A formal program of risk retention for a business. It performs most of functions of an insurance company for its own risks. It is primarily used by large companies.
What are the advantages of self-insurance?
- Avoiding costs associated with commercial insurance
- Reserves can be invested in short term money markets and earnings can be used to offset the costs of the program
What are the disadvantages of self-insurance?
- Exposure to catastrophic loss
- Company may have to pay taxes on reserves held for future claims at year-end
- Company must duplicate services provided by insurance company
What are the 3 areas of Risk Control?
- Risk Avoidance (renting property instead of purchasing or not buying house with a pool)
- Risk Diversification (store assets in different locations)
- Risk Reduction (install sprinklers, smoke detectors, burglar alarms or create safety program for businesses
What are the two ways of risk financing?
- Risk Retention (deductibles in insurance policies, coinsurance in insurance policies or self-insurance)
- Risk Transfer (Insurance, incorporation of your business, hedging contracts or hold harmless agreements)
*these are called risk sharing, they are not insurance transfers
What are the 3 basic rules of risk management?
- Coverage for potential catastrophes should be purchased first
- Severity is more important than probability
- High probability will mean high premiums or a decline of coverage by the carrier
What is probably the most suitable technique for risks that involve high loss severity and low loss frequency?
Risk Transfer
What is probably the most suitable technique for risks that involve high loss severity and high loss frequency?
Risk Avoidance, because insurance premiums would be prohibitive
What is probably the most suitable techniques for risks that involve low loss severity and high loss frequency?
Either risk retention or risk reduction. The high frequency implies that the transfer will be costly
What is probably the most suitable technique for risks that involve low loss severity and low loss frequency?
Risk retention. These risks seldom occur and their financial impact is inconsequential when they do.
What is the principle of indemnity?
Principle underlying insurance contracts under which the insurer seeks to reimburse the insured for ~ the amount lost, no more and no less.
Four principles supporting indemnity
1. Insurable interest
2. The concept of actual value
3. Other insurance
4. Subrogation
What is insurable interest?
A right or relationship which is insured so that the insured will not suffer a financial loss from a loss. It must operate at the issuance of an insurance policy and at the time of loss in property and casualty insurance.
(Note life insurance insurable interest must operate at time of issuance but not at time of death.)
What are the four requirements for a contract to be legally enforceable?
- There must be an agreement preceded by an offer and an acceptance to whom the offer is made
- There must be consideration
- The principal must have legal capacity to execute contract. Minors must have adult sign. Incompetent or intoxicated adults have limited or no capacity to execute contracts
- Contract must be for lawful purposes
What is a unilateral contract characteristic?
Only one of the parties of an insurance contract makes a binding promise that if broken breaches the contract.
What is contract adhesion?
Contract is accepted as is or not at all. Not a regulated contract. Because
Who can alter an insurance contract via waiver provision?
President, VP, secretary etc.
Agents cannot change the contract terms.
Why are insurance contracts called aleatory contracts?
Because the amount of dollars spent by the contract parties is typically unequal. The insured may pay large premiums and receive no proceeds from the policy. Conversely they may pay only a small premium and receive a large benefit.
What is rescission of an insurance contract?
When a contract is deemed null from its beginning due to fraud, misrepresentation, concealment or mutual mistakes as to a material fact.
The carrier will refund the premium paid and rescind the contract.
What is reformation?
The amendment to a contract between the parties when the contract fails to express the original intent of the parties.
What is the collateral source rule?
In tort liability (someone is held accountable for wrong actions), the plaintiff’s measure of damage should not be mitigated by payments received from sources other than the negligent party.
What is subrogation?
When an insurer pays a claim, it takes over the rights its insured had against a negligent third party.
(Insurer pays collision coverage to their insured driver, then takes over right to sue negligent driver)
What are the 5 parts of an insurance contract?
- Declarations: Factual statements that identify specific person, property or activity being insured and the parties to the transaction. Not pre-printed
- Definitions: Explains the key policy terms
- Insuring Agreements: Spells out the basic promises of the insurance company
- Conditions: Spells out in detail the duties and rights of both parties
- Exclusions: Spells out the circumstances when the insurer will not pay
What may the insured owner do with policy ownership?
Since life insurance is a financial asset, it may have cash value and typically has a death benefit, the owner can transfer the policy to someone else, receive the cash values or dividends, borrow against the cash value or change the beneficiary.
What is beneficiary designation?
The person named in the contract to receive all or a portion of the proceeds of the policy. There can be primary and contingent beneficiaries
