Introduction to Insurance Flashcards
What is insurance?
A financial mechanism that provides protection against financial losses arising from unexpected events such as accidents, illnesses, or natural disasters.
Insurance is based on risk-sharing among policyholders who pay premiums to an insurance company.
What is risk in the context of insurance?
The possibility of a financial loss due to uncertain future events.
What are the key components of the business model of insurance?
- Pooling of Risk
- Risk Transfer
- Premium Collection
- Claim Settlement
Define perils in insurance.
The causes of loss (e.g., fire, theft, accident).
What are hazards in insurance?
Factors that increase the chance of loss.
What is a physical hazard?
Physical conditions increasing risk (e.g., old wiring in a building increases fire risk).
What is a moral hazard?
Dishonest behavior increasing risk (e.g., faking an accident for an insurance claim).
What is a morale hazard?
Careless behavior due to having insurance (e.g., reckless driving knowing car insurance will pay for damages).
What is the principle of utmost good faith in insurance contracts?
Both the insurer and the insured must disclose all material facts truthfully.
What does the law of contra proferentem state?
If contract terms are ambiguous, they will be interpreted against the insurer.
What is insurable interest?
The insured must have a financial stake in the insured object or person.
How does indemnity apply to general insurance?
The insured is compensated for actual losses only (no profit).
What happens in the case of underinsurance?
If the insured sum is less than the actual value, the claim is paid proportionally.
What is the average clause calculation?
Claim Amount = (Actual Value / Sum Insured) × Loss Incurred
What is proximate cause in insurance?
The nearest or most direct cause of loss determines claim eligibility.
What is subrogation?
After paying a claim, the insurer gains the right to sue third parties responsible for the loss.
What does contribution mean in insurance?
If multiple policies cover the same asset, all insurers share the loss proportionally.
What is the mitigation of loss principle?
The insured must take reasonable steps to minimize damage.
In life insurance, what is the principle of utmost good faith?
Full disclosure of health conditions.
In general insurance, what is the principle of utmost good faith?
Full disclosure of property or business risks.
In life insurance, what does insurable interest refer to?
Exists in family members, business partners.
In general insurance, what does insurable interest refer to?
Exists in owned property or vehicles.
Is indemnity applicable to life insurance?
Not applicable (life is invaluable).
Is indemnity applicable to general insurance?
Compensation is limited to actual loss.
