Insurance Lesson 1 Flashcards
Types of Risk:
Pure
Speculative
Subjective
Onjective
Pure risk:
Loss or no loss
Death, accident, fire
Speculative risk:
Profit, loss, no loss
Entrepreneurs, voluntary, not insurable
Subjective risk:
Individual’s perception of risk
Objective risk:
Measurable & quantifiable
Measures variation of actual loss from expected loss
Example Exam Question:
Which is an insurance risk?
A. Objective
B. Pure
C. Subjective
D. Objective
B
Probability of loss:
Chance of loss occurring
Useful for insurer to quantify cost of claims
Higher probability may result in decline of coverage
Severity:
Actual dollar amount of loss
More important than probabiltiy
Law of Large Numbers:
More units exposed to similar loss, predictability of loss to entire pool increases
Helps to reduce objective risk
Perils:
Actual cause of loss
Ex: fire, wind, tornado, earthquake, burglary, collision
Hazards:
3 Types
Condition that increases likelihood of loss occurring
Moral
Morale
Physical
Moral Hazard:
Character flaw, lead to false claim
Morale Hazard:
Indifference by insured person
Physical Hazard:
Tangible condition that increase probability of peril occurring
Ex: icy/wet roads, poor lighting, defective equipment
Adverse Selection:
Tendency of person with __ than average risks to purchase/renew insurance?
Premiums are dependent upon balance between __ & __ risks in the pool?
Managed through __, __, & __?
Higher
Favorable & unfavorable
Underwriting, denying insurance on front end, raising premiums on back end
Example Exam Question:
Underwriter responsibility of achieving profit within risk parameters of company. What is greatest challenge?
A. Setting premiums
B. Motivating salespeople
C. Making sure profit margins are correct
D. Managing adverse selection
D
Requisites for insurable risk:
CHAD not Catastrophic for insurer Homogenous (large number of similar exposure units) Accidental measurable & Determinable
Example Exam Question:
Which is not a requisite for insurable risk from insurer’s perspective?
A. Law of large numbers
B. Accidental, measurable, determinable
C. Not catastrophic for insured
D. Premiums must be affordable
C
Elements of a Valid Contract:
COALL Competence Offer & Acceptance Legal consideration Lawful purpose
Example Exam Question:
Signs life insurance contract & gives first month’s premium. Hit by bus leaving office. Will wife be able to collect?
A. Yes, as long as Eric was insurance (no terminal illnesses or life threatening pre-existing conditions)
B. No, policy was not delivered
C. Yes, regardless of whether Eric was insurable
D. No, signing & paying not considered offer & acceptance
A
Principle of Indemnity:
Insured only entitled to compensation to extent of loss; cannot make a profit
Subrogation Clause:
Cannot receive compensation for same claim from insurer & third party
Principle of Insurable Interest:
Must have emotional or financial hardship resulting from damage, loss, or destruction
Insurable Interest:
Property & Liability:
Life:
P&L @ inception & time of loss
Life @ inception
Example Exam Question:
Mike injured by Tim. Mike collects from insurance & sues Tim. Tim’s insurance also pays Mike for same injuries. Which has been violated?
A. Subrogation
B. Subjective Risk
C. Adverse Selection
D. Adhesion
A
Void vs Voidable
Void: never valid, not enforceable
Voidable: allows cancelation by one of the parties while other is bound by agreement
Warranty
Promise by insured to insurer
Breach of warranty is grounds for avoidance
Representation
Must be material misrepresentation to void insurance contract
Concealment
When insured is silent about fact material to the risk
Example Exam Question:
42 applying for life insurance. To receive lower premium, says age 34. What will insurance company likely do?
A. Avoid the contract
B. Void the contract
C. Refund premiums & rent claim be beneficiaries
D. Pay beneficiaries lesser face value based on premiums paid & actual age
D
Adhesion
Take it or leave it; no negotiations; ambiguities in favor of insured
Aleatory
Money exchanged may be unequal
Unilateral
Only one promise is made by insurer (pay in event of loss)
Insured not obligated to pay premiums - if not paid, no promise by insurer
Conditional
Insured must abide by terms & conditions of insurance contract