Intro to General Insurance, Chapter 1 Flashcards
What is the basic idea of insurance?
A mechanism for sharing the losses of the few among the many.
Define Risk
Risk is the chance of financial loss as a result of loss or damage to the object of insurance or some other happening.
Name and describe three types of risk exposures.
Personal Risk- the risk of dying, becoming seriously ill, disabled, or unemployed
Property Risk- the risk of loss or damage to property owned, rented or leased.
Liability risk- the risk of being held financially responsible for bodily injury or property damage caused to others.
In situations of risk, there are two kinds. Name and define both kinds of risk.
Speculative Risk: provides people with the chance to either make a profit or a loss
Pure Risk: provides only the potential for financial loss with no chance of gain or profit. Insurance is provided for Pure risk only.
Name the four risk management techniques.
Risk Avoidance
Risk Retention
Risk Control
Risk Transfer
Define Risk Avoidance
Risk avoidance: avoid all chances of financial loss by not owning certain property or by not engaging in certain activities. This option is generally not a practical way to deal with risk, in most cases the risk is substituted for another risk.
Define Risk Retention
Risk Retention: self-insurance- paying for ones own loss. May be practical when small amount of loss. Required by insurers in the form of a deductible on insured loss. Also may be best choice for large Corporations when doing so is cheaper than other coverage options
Define Risk Control
Risk control involves taking whatever steps are needed to eliminate or reduce the frequency and severity of losses. i.e. smoke alarms, fire extinguishers, burglar alarms
Define Risk Transfer
Risk Transfer: transferring the responsibility for financial loss to those who are better able to pay for them. Insurance.
Most common and practical way to deal with risk.
Define Insurance
The undertaking by one party to indemnify another party against loss or liability for loss in respect of a certain risk or peril to which the object of insurance may be exposed or to pay a sum of money or other thig of value upon the happening of a certain event,
Name three key factors that make a loss eligible for payment by insurer in a policy.
Loss must be from an insured peril
The loss must be by a fortuitous event, that being by chance or accident, was not intentionally caused by insured, and could not be prevented
The loss is something that may occur at a future date
What is the primary function of insurance?
To spread risk- to create a pool where the losses of the few are shared among the many.
What are three ways insurance companies can increase their spread of risk?
writing insurance for as many risks (volume) as possible
writing insurance for a variety of risks (homes, automobiles, commercial businesses, farms etc.
writing insurance in a a variety of locations
Name three types of insurance companies and briefly describe their differences.
Stock Insurance Company- owned by shareholders, their main goal is to produce a profit for their shareholders. Policy holders pay a fixed premium, have no financial interest unless are also shareholders.
Mutual Insurance Company-100% owned by their policy holders. Their main goal is to provide insurance at cost. Premiums are not a fixed amount and may be subject to assessment.
Government Insurer- incorporated by specific legislation. Provincial insurers provide basic compulsory automobile insurance to residents, as well as medical plans and worker’s compensation. Federal governments cover and require employers and employees pay for Employment Insurance (EI) and Canada Pension Plan (CPP)
Three ways Insurance is distributed
1- Direct writers, insurance companies that sell their products directly to the public
2-Independent Brokers, licensed to sell the products of many insurers, own their own books of business
3-Captive or Exclusive Agents, sells insurance products from one company only, not employees of the insurer but insurer owns all policies and records.
