Intro to Insurance Unit 1 Flashcards
What is Risk?
- The possibility that a loss will occur.
- Uncertainty, possibility of loss.
What is Insurance?
A contract that transfers the risk of financial loss from an individual or business to an insurance company.
Insurance is designed to cover only losses that involve ____?
Risk
It is the ____ of a risk from a person or a business to an insurer.
Transfer
Name the Two Types of Risk:
1) Speculative
2) Pure
What is Speculative Risk?
Risks that have a possibility of a loss and also the possibility of a gain.
Ex: Gambling, Investing.
What is Pure Risk?
Risks only involve the possibility of experiencing a loss, not a gain.
Ex:Chance of being in a car accident.
What type of risk can be covered by insurance?
Pure
What is Exposure?
- The potential for accidents and other losses.
- Risks for which the insurance company would be liable.
What is a Peril?
-The cause of loss
Ex: House burns down - peril is the fire.
What is Loss?
- The unintended, unforeseen damage to property
- Injury
- Amount Paid
Name the Two Types if Loss:
1) Direct loss
2) Indirect Loss
What is Direct Loss?
- Is physical loss to property with no intervening cause.
- Physical loss
Ex: Lightning striking a house and an automobile hitting tree
what is Indirect loss?
- Is a Consequential loss as the result from a direct loss.
- Consequence of physical loss.
Ex: loss of rental income due to a house fire, which cause a loss of profit for the landlord.
What is a Hazard?
- Anything that increases the chance that a loss will occur.
- Increases the chance of loss.
Name the Three Types of Hazards:
1) Physical
2) Moral
3) Morale
What is a Physical Hazard?
- The hazard can be seen
Ex: A dead tree increases the possibility of a tree falling on the house.
What is a Moral Hazard?
- Dishonesty that intentionally causing a loss is acceptable.
- Arise from individuals Character.
What is a Morale Hazard?
-A state of mind or careless attitude, Carelessness
Methods of handling Risk?
-S.T.A.R.R
- Sharing
- Transfer
- Avoidance
- Retention
- Reduction
Methods of handling Risk explain Sharing?
Two or more individuals or businesses agree to pay a portion of any loss incurred by any member of the group.
Methods of handling Risk explain Transfer?
The insurer (Ins. comp) agrees to pay if an insured (customer) has loss-the insured no longer bears the risk.
Methods of handling Risk explain Avoidance?
-eliminating a particular risk by not engaging in a certain activity.
Ex: doesn’t drive avoids the risk of injuring someone in an automobile accident.
Methods of handling Risk explain Retention?
-The individual or business will pay for the loss it it occurs, or a portion of the loss via deductible.
Methods of handling Risk explain Reduction?
-Refers to lessening the chance that a loss will occur, or lessening the extent of a loss if it occurs.
Insurance uses the risk management method of _____ to spread the risk of loss among thousands.
Transfer
What are the Two Parties to an Insurance Contract?
1) The 1st party is the insured
2) Second Party is the company, or insurer.
What does a legally enforceable contract define?
-The limits of coverage provided to the insured and the risk of loss being transferred, and identifies under what circumstances the insurer will pay for a loss.
What is a Contract?
-An agreement between the insured and the insurer.
What is Law of Large Numbers?
- The principal that makes insurance possible.
- The larger the group, the more accurately losses can be predicted.
Elements of Insurable Risk:
C.A.N.H.A.M
- Calculable
- Affordable
- Non-catastrophic
- Homogeneous
- Accidental
- Measurable
Elements of Insurable Risk explain Calculable?
-Premiums must be calculable based upon prior loss statistics for that particular risk in order to predict future losses.
Elements of Insurable Risk explain Affordable?
-The premium for transferring the risk should be affordable for the average consumer.
Elements of Insurable Risk explain Non-Catastrophic?
-The risk must not be non-catastrophic for the insurance company.
Ex: floods, earthquakes have limited coverage, war is excluded from most policies.
Elements of Insurable Risk explain Homogeneous?
- The risk must be similar in nature so the same factors affect the chance of loss.
Ex: The actuary predicts the likelihood of a wood house burning in Cali, the actuary would not include brick houses in the sample.
Elements of Insurable Risk explain Accidental?
-The loss must have been caused due to chance (accident). Intentional losses lost by the insured are not covered by the insurer.
Elements of Insurable Risk explain Measurable?
-A definite ( time and place) and a measurable loss means that proof of loss must be established w/ numbers and dollar amounts, not just casual references.
What is Adverse Selection?
-Is the Tendency for higher-risk individuals to get and keep insurance as compared to individuals that represent an average level risk.
- Risks that have a greater-than-average chance of loss
- Not wanted by insurers
- Tendency for higher-risk individuals to get and keep insurance.
- Why insurer go through the underwriting process.
- High Risk= Higher rate to insure or refusal.
What is Underwriting?
The process when Insurers make an extensive evaluation of information related to a particular risk.
What is Reinsurance?
- An insurance company’s insurance company.
- Transfers risk from one insurer to another insurer.
- Helps insurers spread their risk.
Ceding Insurer
-The company reducing its risk
What is Facultative Reinsurance?
-When the reinsurer considers each risk before allowing the transfer from the ceding company.
What is the Reinsurer?
-The company assuming the risk
What is Stock Insurer?
- Owned by stockholders
- Dividend is not guaranteed
- Dividend is paid to policyholder
- Dividend is non taxable; considered refund of premium
- Issue participating policies.
What is Fraternal Benefit Societies?
- Provides insurance and other benefits
- Must be a member to get the benefits
what is Reciprocal Insurers?
- Unincorporated
- Members are assessed if a loss occurs to any member of the group
- Managed by an attorney-in-fact
What does a Attorney-in-Fact do ?
-Handles Administration , underwriting, sales promotion, and claims handling for the reciprocal insurance.
