introduction to insurance Flashcards
What is an insurance policy
it is a legal contract
define (risk) in insurance
possibility that a loss will occur
define (insurance)
is a contract that transfers the risk of financial loss from and individual or business to an insurance company.
define (speculative) risks
a possibility of a loss and also the possibility of a gain. EXPAMPLE : Insurance companies will not insure you to go to Las Vegas to gamble in case you loose money
define (pure) risk
involve the possibility of experiencing a loss, not a gain. EXAMPLE: the chance of being in a car accident is a pure risk. Pure risks can be covered by insurance.
define (exposer)
the potential for accidents and other losses also which the insurance company would be held liable.
the higher exposer to risk, the higher the premium
define (peril)
the cause of a loss
Example: hail storm, house burns down, lightning
A peril id basically what causes the loss.
direct loss
physical loss to property with no intervening cause.
Example: lightning striking a house and and automobile hitting a tree
indirect loss
is a consequential loss as the result from a direct loss.
Example: loss of rental income due to a house fire which cause a loss of profits for the landlord. indirect loss is always consequential of the direct loss.
NEEDS TO HAVE DIRECT LOSS
define hazard
is anything that increases the chance that a loss will occur
What are the 3 types of hazards
physical,moral,morale
Physical hazard
are physically identifiable factors that increase the chance of loss. tires on a car are slick with little to no tread. Possibility of a tree falling. The wet floor is a physical hazard
Moral hazard
arise from individual character. Dishonesty is a moral hazard because it may increase the chance that an individual lies on an insurance application or fakes a loss.
Morale hazard
are a state of mind or careless behavior. carelessly leaving the doors and windows unlocked when not home, leaving a car running and unlocked while running into a store for a quick item.
STARR
S(sharing)-Share Cost
T(transfer)-Insurance co pays
A(avoidance)-get rid of risk- sell car
R(retention)- business pays loss
R(reduction)-lessening the extent of loss
Sharing
two or more individuals or businesses agree to pay a portion of any loss incurred by any member of the group. stockholders in a corporation share the risk.
Transfer
the insurer(insurance company) agrees to pay if an insured (customer) has a loss.
Avoidance
eliminating a particular risk by not engaging in a certain activity. Example: an individual who does not drive avoids the risk of injuring someone in and automobile collision and being held liable for those damages
Retention
the individual or business will pay for the loss if it occurs. If you do not have car insurance to pay for the damages you cause to another person in an accident, you have retained that risk.
Reduction
refers to lessening the chance that a loss will occur. Example : sprinkler system in a building to eliminate the damage caused by a fire.
Parties to an insurance contract
1st party is the insured
2nd is the insurance company, or insurer
contract(policy)
an agreement between the insurer and the insured
Quiz question #1: An individual applied for auto insurance and obtained coverage from ABC insurance company. Who is the first party in the contract?
a. the insured
b. the insurer
c. the agent
d. the insured and the agent
A. The insured(customer)
Quiz question #2: Which statement describes a peril?
a. gas cans in the insured’s garage are leaking and increasing the likelihood of a fire
b. a tornado damaged the insured home
c. commuting to work exposes the insured to loss
d. smoking caused the insured to pay a higher premium for life insurance.
B. a tornado damaged the insured home
Quiz question #3: the best example of reduction as a risk management technique is?
a. choosing to to go sky diving
b. buying an insurance policy
c. wearing a seatbelt in a car
d. increasing a deductible
C. wearing a seatbelt in a car
Quiz question #4: Tiffany leaves her car unlocked when she goes shopping. She figures her car and its contents are insured, so there is no reason to worry. which type of hazard is this an example of?
a. morale
b. careless
c. moral
A. morale
Quiz question #5: A flood is an example of ?
a. peril
b. a moral hazard
c. a speculative risk
d. a physical hazard
A. peril
The Law of Large Numbers
is the principle that makes insurance possible. The larger the group the more accurately the losses can be predicted.
30|60|25
30-person
60-accurancy
25-property
CANHAM
Calculable
Affordable
Non-catastrophic
Homogeneous
Accidental
Measurable
Calculatable
particular risk in order to predict future losses
Affordable
affordable for the average consumer
non catastrophic
floods, riots, wars, and earthquakes. The peril for war is excluded from most policies
Homogeneous
a wood frame house would suffer a fire in California, the actuary would not include brick houses in the sample
Accidental
intentional losses caused by the insured are not covered by insurance.
Measurable
definite (time and place) and a measurable loss means that the proof of loss must be established with numbers and dollar amounts, not just casual references.
define Adverse Selection
tendency for higher risk individuals to get and keep insurance as compared to individuals that represent the average level of risk.
how to avoid adverse selection
insurers make an extensive evaluation of information related to particular risk. Process is called underwriting. The insurer will charge a higher rate to insure the risk, refuse the application for insurance altogether.
Reinsurance
insurance for insurers. The company assuming the risk is called the reinsurer.
facultative reinsurance
transfer from the ceding company
treaty reinsurance
accepts all risks of a certain type from the ceding company
Stock insurer
