Introduction to Insurance - Unit One

Question 1

What is Insurance?

Answer 1

The transfer of risk from a person or business to an insurer.

Question 2

What are the two types of risk?

Answer 2

Speculative and Pure.

Question 3

What is speculative risk?

Answer 3

Chance of loss or gain; not insurable.

Question 4

What is pure risk?

Answer 4

Chance of loss only.

Question 5

What is risk?

Answer 5

Uncertainty, possibility of loss.

Question 6

What is exposure?

Answer 6

Risks for which the insurer would be liable.

Question 7

What is a peril?

Answer 7

The cause of a loss.

Question 8

What is a loss?

Answer 8

The unintended, unforeseen damage to property or injury.

Question 9

What are the two types of loss?

Answer 9

Direct and Indirect.

Question 10

What is a direct loss?

Answer 10

Physical loss.

Question 11

What is an indirect loss?

Answer 11

Consequence of physical loss.

Question 12

What is a hazard?

Answer 12

Anything that increases the chance that a loss will occur.

Question 13

What are the three types of hazards?

Answer 13

Physical, Moral, and Morale.

Question 14

What is a physical hazard?

Answer 14

One that can be seen.

Question 15

What is a moral hazard?

Answer 15

One that arises from an individuals character.

Question 16

What is a morale hazard?

Answer 16

One that arises from a state of mind or careless attitude.

Question 17

What are the methods of handling risk?

Answer 17

STARR
Sharing
Transfer
Avoidance
Retention
Reduction

Question 18

What is risk sharing?

Answer 18

Two or more individuals or businesses agree to pay a portion of any loss incurred.

Question 19

What is risk transfer?

Answer 19

The insurer agrees to pay if an insured has a loss; the insured no longer bears that risk.

Question 20

What is risk avoidance?

Answer 20

Eliminating a particular risk by not engaging in a certain activity.

Question 21

What is risk retention?

Answer 21

The individual or business will pay for the loss if it occurs, or a portion of the loss via a deductible.

Question 22

What is risk reduction?

Answer 22

Lessening the chance that a loss will occur, or lessening the extent of a loss if it occurs.

Question 23

How many parties are there in an insurance contract?

Answer 23

Two.
1st party - Insured.
2nd party - Insurer.

Question 24

What is the law of large numbers?

Answer 24

The larger the group, the more accurately losses can be predicted.

Question 25

What are the elements of insurable risk?

Answer 25

``` CANHAM Calculable Affordable Non-catastrophic Homogeneous Accidental Measurable ```

Question 26

Elements of Insurable Risk - Calculable

Answer 26

The insurer must be able to calculate both the average frequency and the average severity of future losses with some accuracy.

Question 27

Elements of Insurable Risk - Affordable

Answer 27

The average consumer must be able to afford the premium.

Question 28

Elements of Insurable Risk - Non-Catastrophic

Answer 28

A large proportion of exposure units should not incur losses at the same time.

Question 29

Elements of Insurable Risk - Homogeneous

Answer 29

The risk should be similar in nature so that the same factors affect the chance of loss.

Question 30

Elements of Insurable Risk - Accidental

Answer 30

The loss must have been caused due to chance.

Question 31

Elements of Insurable Risk - Measurable

Answer 31

The loss should be both determinable and measurable. This means the loss should be definite as to the cause, time, place and amount.

Question 32

What is adverse selection?

Answer 32

The tendency for high-risk individuals to get and keep insurance as compared to individuals that represent an average level of risk. It is also the reasons insurers go through the underwriting process.

Question 33

What is reinsurance?

Answer 33

An insurance company's insurance company. Helps insurers spread their risk.

Question 34

What is a stock insurer?

Answer 34

A business formed as a corporation and owned by it's stockholders.

Question 35

What is a mutual insurer?

Answer 35

It does not have stock or stockholders. It is owned by its policyholders.