Insurance - Chapter 1 - ?

Question 1

What is insurance?

Answer 1

Insurance is a device used to manage risk by having a large pool of people share in the financial loss suffered by members of the pool

Question 2

What is risk?

Answer 2

Risk is a condition where there is a possibility of an adverse deviation from the desired outcome

Question 3

What is a peril?

Answer 3

A peril is the cause of the financial loss (e.g., flood or illness)

Question 4

What does a hazard do?

Answer 4

It increases the probability of a peril

Question 5

Describe a physical hazard.

Answer 5

physical characteristics of the person or property that increases the chance of loss (e.g. oily rags left near a furnace or high blood pressure)

Question 6

Describe a moral hazard.

Answer 6

its the chance of loss from dishonesty (e.g., a person intentionally causes a loss or overstates the amount of the loss when a peril occurs)

Question 7

Describe a morale hazard.

Answer 7

acts of carelessness that increases the chance of loss (e.g., failure to lock the door)

Question 8

What are some common exclusions from insurance contracts? (3)

Answer 8

wars, earthquakes, and floods

Question 9

Riders and endorsements are two terms used interchangeably by insurance companies, what are they?

Answer 9

written additions to insurance contracts

Question 10

Static risk are the losses that are….

Answer 10

caused by factors other than a change in the economy, risk that are always present (e.g. natural disaster, earthquake, death, or flood)

Question 11

Dynamic risk are the results of….

Answer 11

the economy changing (e.g., changes in business cycles, inflation). Insurance doesn’t typically cover these risk

Question 12

Fundamental risk is a risk that affects….

Answer 12

large groups of people (e.g. recession or an earthquake)

Question 13

Particular risk is a risk that affects…

Answer 13

individuals in nature or affects a small group of people

Question 14

What does pure risk involve?

Answer 14

it involves only the chance of loss or no loss and is insurable

Question 15

Personal risk is the loss of….

Answer 15

income or asset resulting from the loss of ability to earn income caused by a disability

Question 16

What is property risk?

Answer 16

its the direct or indirect loss to the property itself from theft or destruction (e.g., fire or accident)

Question 17

What is liability risk?

Answer 17

intentional or unintentional injury to property or others (e.g., tort liability or civil suit)

Question 18

Describe risk from failure of others.

Answer 18

its the failure to meet or follow through on an obligation (e.g., breach of contract)

Question 19

Speculative risk involves the….

Answer 19

chance of both loss or gain (e.g., gambling) and is not insurable

Question 20

What are the different risk management methods? (5)

Answer 20

1. Risk avoidance
2. Risk retention
3. Risk Transfer
4. Risk sharing
5. Risk reduction

Question 21

Describe risk avoidance.

Answer 21

risk that may be avoided if the person refuses to engage in an action that creates risk (e.g. refusal to fly or drive)

Question 22

Describe risk retention.

Answer 22

risk may be retained; therefore no action is taken to avoid, transfer or reduce risk

Question 23

What is risk transfer?

Answer 23

Its when we transfer the risk through an individual or insurance contact

Question 24

Describe risk shared

Answer 24

It risks that is shared (e.g., entity sharing using a corporation/limited partnership/suborganization or a hold harmless agreement)

Question 25

Describe risk reduction.

Answer 25

risk that may be reduced through loss prevention methods and/or safety improvements

For example, installing hand rails, fire sprinklers, or a security system

Question 26

What methods can be used to reduce insurance premiums? (7)

Answer 26

1. Increase the deductible (property, casualty, or health)
2. Increase the length of the elimination period (disability or long term care)
3. Install an alarm (property)
4. Improve health and diet (life and health insurance)
5. Avoid tobacco or smoking (life and health)
6. Choose a safer occupation (disability)
7. Reduce the number of years of coverage (long-term care or disability)

Question 27

What are the 4 elements of insurable risk?

Answer 27

1. there must be a large and similar sample of individuals to make the losses reasonably predictable
2. The loss must be measurable and definite
3. The loss must be accidental
4. The loss cannot be catastrophic to society (must be able to spread the risk)

Question 28

Adverse selection is the likelihood…

Answer 28

that people will highest risk of loss are also the most likely to purchase insurance

Question 29

What is Social insurance?

Answer 29

Its a mandatory insurance administered by the government with benefits mandated by law. The purpose is to protect people from large fundamental risk.

Examples;
Social Security, Medicare, Workers Compensation, and Medicaid

Question 30

Public insurance seeks to enhance the public trust in financial institutions. This type of insurance is usually mandatory and administered by the government or quasigovernment institutions. What are the 3 public insurances?

Answer 30

1. Federal Deposit Insurance Corp. (FDIC)
2. Pension Benefit Guaranty Corp. (PBGC)
3. Securities Investor Protection Corp. (SIPC)

Question 31

To be legally binding, an insurance contract must contain what five elements?

Answer 31

1. offer and acceptance
2. consideration
3. legal object
4. legal capacity
5. legal form

Question 32

Describe legal object for an insurance company.

Answer 32

It refers to the subject of the insurance contract must be for a legal business or a legal purpose to make it enforceable

Question 33

What is a tort?

Answer 33

It is an infringement on the rights of another

Question 34

Describe unintentional torts.

Answer 34

an act or failure to act in a reasonably prudent manner which causes harm to another.

Question 35

Describe vicarious liability.

Answer 35

Its when one person may become legally liable for the torts of another (e.g., parent/child, employer/employee)

Question 36

What is Strict liability?

Answer 36

Its liability hat may be imposed without proof of the defendant’s negligence or bad intent.