Insurance Principles

Question 1

Define HAZARD

Answer 1

Some thing that increases the chance of loss from a peril

Question 2

Define: Indemnify

Answer 2

To make whole again financially, to put the insured back into the same financial position he or she was in before a loss occurred

Question 3

Define: Insurable Interest

Answer 3

A PROMISE

The potential for financial loss associated with damage or destruction of property.

In order for an insured to collect, they must have a monetary interest in subject being insured.

Does it necessarily have to be ownership

Question 4

Define: Insurance

Answer 4

A means of reducing risk by combining a sufficient number of exposure units to make their collective losses individually predictable.
—The losses of the few are shared among the premiums of the many
…Law of Large Numbers

A risk management technique—a means of budgeting a relatively small, known amount up-front (ie premium) in place of a large and possibly catastrophic unknown future event (ie possible loss).

Summary of basic requisites:

1. Transfer risk to 3rd party/insurer
2. $ fund to pay losses
3. Large pool of exposed insureds

Question 5

Define: Insured

Answer 5

The person who purchases insurance

Question 6

Define: Law of Large Numbers

Answer 6

The mathematical principle on which insurance is-based.

It says that the more exposure units in the mix, the easier it becomes to predict the groups losses.

Question 7

Define: Loss

Answer 7

The loss of money or things worth money

Question 8

Define: Peril

Answer 8

A cause of loss, such as fire or theft

Question 9

Define: Premium

Answer 9

The consideration paid by the insured in exchange for the insurers promise to indemnify

Question 10

Define: Risk

Answer 10

Chance of an economic or monetary loss.

Also…outside of this course
—a peril/cause of loss (eg fire)
—a hazard/something increases danger of a peril (eg storage of gas)
—the subject of insurance

Question 11

Define: Replacement Cost

Answer 11

May seem contrary to indemnity, but it pays to replace damaged property in “like kind & quality” regardless of ACV or worth.

Question 12

Other means of risk management?

Answer 12

Retention
Avoidance
Control
Non-Insurance Transfer

Question 13

Characteristics of insurable risk

Answer 13

CALMED
Catastrophic
Accidental
Large number
Monetary
Economically feasible premium Definite