intro Flashcards
A flood is an example of:
A. physical hazard
B. a speculative risk
C. a moral hazard
D. a peril
D. peril
An individual applied for auto insurance and obtained coverage from ABC insurance company. Who is the first party in the contract?
A. the insured (customer)
B. The agent
C. The insured and agent
D. The insurer (insurance company)
A. The insured
If a fire causes damage to a building, the fire is:
A. a risk
B. a peril
C. an exposure
D. a hazard
B. A peril
Elements of Insurable Risk: CANHAM
Calculable: Premiums must be calculable based upon prior loss statistics for that particular risk in order to predict future losses.
Affordable: The premium for transferring the risk should be affordable for the average consumer.
Non-catastrophic: The risk must be non-catastrophic for the insurance company. National or area disasters, such as floods, riots, hurricanes, and wildfires, will often have coverage limitations in insurance policies. These events cause widespread simultaneous losses to many insured properties. The peril of war is excluded from most policies. If the insurer were to cover theses types of risk, the risk could be detrimental (or catastrophic) to the insurer.
Homogenous: The risk must be similar in nature so the same factors affect the chance of loss. For example, if an actuary was going to predict the likelihood that a wood frame house would suffer a fire in California, the actuary would not include brick houses in the sample.
Accidental: The loss must have been caused due to chance (accident). Intentional losses caused by the insured are not covered by insurance.
Measurable: A definite (time and place) and measurable loss mean that proof of loss must be established with numbers and dollar amounts, not just casual references.
What is adverse selection?
Adverse selection is the tendency for higher-risk individuals to get and keep insurance as compared to individuals that represent an average level of risk. The statistics insurers use to predict their losses are based on average risks. To insurers, adverse selection is a bad thing because it causes more losses than predicted. Therefore, the premiums collected may not be enough and could cause the insurance company to lose money.
To avoid adverse selection, insurers make an extensive evaluation of information related to a particular risk–a process called underwriting. If an underwriter determines that a risk is higher than average, the insurer may charge a higher rate to insure the risk, limit the amount of coverage it will issue on the risk, or refuse the application for insurance altogether.
Adverse Selection Summed Up
Adverse Selection:
- Risks that have a greater-than-average chance of loss
- Not wanted by insurers
- Tendency for high-risk individuals to get and keep insurance
- Why insurers go through the underwriting process
- High risk=higher rate to insure or refusal
Which of the following is considered a hazard?
A. Fire
B. Lightning
C. Trash
D. Explosion
C. Trash
A hazard is a situation or factor that increases the possibility of a loss.
A condition or situation that presents a possibility of loss is
A. a peril
B. a hazard
C. an exposure
D. risk
C. An exposure.
A condition or situation that presents a possibility of loss is an exposure. For example, a house that is built in a floodplain is exposed to the possibility of flood damage. Insurance policies are designed to cover loss–either a direct loss or an indirect loss.
The actual cause of a loss is called a ?
peril
Fire, wind, hail, a collision are examples of a ?
peril
A discount for premiums paid in advance may not exceed___ for premiums paid six months in advance or __ for premiums paid in 12 months in advance. Premiums may not be collected for more than __months in advance
5%
10%
12 months
