Intro to insurance

Question 1

Insurance contract

Answer 1

a legal contract made between an insurance company and an individual, where the insurer collects a small a amount of money, called a premium, from the insured in exchange for the insurer’s promise to pay potential furture benefits in the event of covered losses

Question 2

What two important features must be present for insurance to operate properly

Answer 2

Risk pooling

Law of large numbers

Question 3

Risk Pooling

Answer 3

combines similar losses from many people so that the average loss over the entire group is realatively constant

Question 4

Law of large numbers

Answer 4

in order to have a general idea of how many losses will occur in a given year, insurers use the law of large numbers, which states that as the group increases insize, it is easier to predict the number of future losses over a certain period of time

Question 5

Actuaries

Answer 5

mathematicians employed by insuranc companies, who analyze statistical data to determine mortality and morbidity rates

Question 6

Mortalitity

Answer 6

is the rate at which people die

Question 7

Morbidity

Answer 7

rate at which people get sick, injured, or disabled

Question 8

Risk

Answer 8

the possibility of a loss occurring

Question 9

Pure Risk

Answer 9

only insurable risk. Risks that present a potential for loss such as injury, illness, and death

Question 10

Loss

Answer 10

unintentional decrease in value of an asset due to a peril

Question 11

Hazard

Answer 11

anything that increases the chance of a loss occurring from a particular peril.
There are 4 types of hazards

Question 12

Exposure

Answer 12

the condition of being prone to loss due to a hazard or uncertain event

Question 13

Peril

Answer 13

the cause of the loss and the event insured against

Question 14

4 types of hazards

Answer 14

Physical, raise the loss potential
Moral, predisposition, character, habits and values of a person
Morale, insured’s careless attitude, indifference or lack of responsibility
Legal, application of laws, regulations, and legal court rulings which increase the chance of loss

Question 15

Methods of handling risk

Answer 15

Avoidance, sharing, retention, reduction and transfer

Question 16

Adverse Selection

Answer 16

a demand for insurance coverage by people who are worse than average risks, and therefore more likely to need and use the coverage

Question 17

Reinsurance

Answer 17

Spreads risk from one insurer to one or more other insurers. Insurer that gives risk to the reinsurer is called the ceding company or primary insurer