Insurance - Chapter 1 - ? Flashcards
What is insurance?
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
What is risk?
Risk is a condition where there is a possibility of an adverse deviation from the desired outcome
What is a peril?
A peril is the cause of the financial loss (e.g., flood or illness)
What does a hazard do?
It increases the probability of a peril
Describe a physical hazard.
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)
Describe a moral hazard.
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)
Describe a morale hazard.
acts of carelessness that increases the chance of loss (e.g., failure to lock the door)
What are some common exclusions from insurance contracts? (3)
wars, earthquakes, and floods
Riders and endorsements are two terms used interchangeably by insurance companies, what are they?
written additions to insurance contracts
Static risk are the losses that are….
caused by factors other than a change in the economy, risk that are always present (e.g. natural disaster, earthquake, death, or flood)
Dynamic risk are the results of….
the economy changing (e.g., changes in business cycles, inflation). Insurance doesn’t typically cover these risk
Fundamental risk is a risk that affects….
large groups of people (e.g. recession or an earthquake)
Particular risk is a risk that affects…
individuals in nature or affects a small group of people
What does pure risk involve?
it involves only the chance of loss or no loss and is insurable
Personal risk is the loss of….
income or asset resulting from the loss of ability to earn income caused by a disability
What is property risk?
its the direct or indirect loss to the property itself from theft or destruction (e.g., fire or accident)
What is liability risk?
intentional or unintentional injury to property or others (e.g., tort liability or civil suit)
Describe risk from failure of others.
its the failure to meet or follow through on an obligation (e.g., breach of contract)
Speculative risk involves the….
chance of both loss or gain (e.g., gambling) and is not insurable
What are the different risk management methods? (5)
- Risk avoidance
- Risk retention
- Risk Transfer
- Risk sharing
- Risk reduction
Describe risk avoidance.
risk that may be avoided if the person refuses to engage in an action that creates risk (e.g. refusal to fly or drive)
Describe risk retention.
risk may be retained; therefore no action is taken to avoid, transfer or reduce risk
What is risk transfer?
Its when we transfer the risk through an individual or insurance contact
Describe risk shared
It risks that is shared (e.g., entity sharing using a corporation/limited partnership/suborganization or a hold harmless agreement)
Describe risk reduction.
risk that may be reduced through loss prevention methods and/or safety improvements
For example, installing hand rails, fire sprinklers, or a security system
What methods can be used to reduce insurance premiums? (7)
- Increase the deductible (property, casualty, or health)
- Increase the length of the elimination period (disability or long term care)
- Install an alarm (property)
- Improve health and diet (life and health insurance)
- Avoid tobacco or smoking (life and health)
- Choose a safer occupation (disability)
- Reduce the number of years of coverage (long-term care or disability)
What are the 4 elements of insurable risk?
- there must be a large and similar sample of individuals to make the losses reasonably predictable
- The loss must be measurable and definite
- The loss must be accidental
- The loss cannot be catastrophic to society (must be able to spread the risk)
Adverse selection is the likelihood…
that people will highest risk of loss are also the most likely to purchase insurance
What is Social insurance?
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
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?
- Federal Deposit Insurance Corp. (FDIC)
- Pension Benefit Guaranty Corp. (PBGC)
- Securities Investor Protection Corp. (SIPC)
To be legally binding, an insurance contract must contain what five elements?
- offer and acceptance
- consideration
- legal object
- legal capacity
- legal form
Describe legal object for an insurance company.
It refers to the subject of the insurance contract must be for a legal business or a legal purpose to make it enforceable
What is a tort?
It is an infringement on the rights of another
Describe unintentional torts.
an act or failure to act in a reasonably prudent manner which causes harm to another.
Describe vicarious liability.
Its when one person may become legally liable for the torts of another (e.g., parent/child, employer/employee)
What is Strict liability?
Its liability hat may be imposed without proof of the defendant’s negligence or bad intent.
