Intro Flashcards
Insurance
Transfer of risk from a person or a business to an insurer
Risk
The possibility that a loss will occur
The two types of risk
Speculative= a possibility of a gain or a loss (gambling) not insurable.
Pure= a risk only involving the possibility of a loss. These are insurable.
Exposure
Possibility that a loss will occur Examples: Auto accident Lost luggage on a trip Pet biting mailman Employee hurt on job House fire
Peril
The cause of a loss
Loss
The unintended unforeseen damage to property
Two kinds of loss
Direct - physical loss
Indirect - consequence of physical loss
Hazard
Anything that increases the chance that a loss will occur
Three types of hazards
Physical - the hazard can be seen
Moral - arising from an individuals character (dishonesty)
Morale - carelessness
Methods of handling risk
STARR Sharing Transfer - insurance Avoidance Retention - maintaining the risk Reduction - lessening the chance of loss or lessening the extent of a loss of it occurs
Contract (policy)
An agreement between the insured and the insurer
1st party = insured
2nd party = insurer (insurance company)
The law of large numbers
The larger the group, the more accurately losses can be predicted
Elements of insurable risk
CANHAM
Calculable - premiums are calculable based on prior loss statistics
Affordable - premiums are affordable to the average consumer
Non-catastrophic - risk must be non catastrophic for the insurer
Homogeneous - the risks must be similar in nature so the same factors affect the chance of loss
Accidental - the loss must have been caused due to chance
Measurable - a divinities time and place
Adverse selection
Risks that have a greater than average chance of loss. Why underwriting exists
Reinsurance
Insurance for insurers
Ceding insurer
In reinsurance, the company reducing its risk
Reinsurer
The company assuming another insurance companies risk
2 ways to reinsure
Facultative - the reinsurer considers each risk before allowing the ceding company to transfer its risk over
Treaty - the reinsurer accepts all risks of a certain type from the ceding company
Stock insurers
Owned by stockholders Dividend is not guaranteed Dividend is paid to stockholders Dividend is taxable to stack holders Issue non-participation policies
Mutual insurer
Owned by policyholders Dividend is not guaranteed Dividend is paid to policyholders Dividend not taxable. Is a refund of overpaid premium They issue participating policies
Fraternal benefit societies
Provides insurance and other benefits
Must be a member to get benefits
Frat policies = certificates
Reciprocal insurers
Unincorporated
Members pay if a loss occurs to any member of the group
Managed by attorney-in-fact
Lloyd’s associations
Insurance provided by individual underwriters, not companies
Insure unusual risks
Risk retention groups
Liability insurance for policyholders
All in the same industry
Risk purchasing groups
A group of businesses in the same industry that join together to buy liability insurance from insurance companies
Self insurers
Retention
A business that pays its own claims
May have reserve funds to cover losses
