Kaplan - Unit 1- General Insurance - Definitions Flashcards
Life & Health Certification
Annuity
An annuity is a written contract typically between you and a life insurance company in which the insurance company makes a series of regularly spaced payments to you in return for a premium or premiums you have paid. An annuity is not life insurance. A life insurance policy provides benefits to your family if you die.
Insurance
A contract that transfers the risk of financial loss from an individual or business to an insurer. In return the insurer agrees to cover the individual or business for certain losses if they occur.
Risk
Uncertainty about whether a loss will occur. If a loss is certain to occur, it does not involve risk. In regard to life insurance, although death is certain to occur to everyone, the timing of that loss is uncertain.
Speculative Risk
A possibility of a loss and also a possibility of making a gain (gambling or investments for example). Loss is NOT INSURABLE
Pure Risk
Only loss can occur (car accident for example). Loss IS INSURABLE.
Loss
A reduction in the value of an asset. To determine the amount of a loss, the value of the asset is measured before and after the loss. Value Before Loss - Value After Loss = Total amount of loss
Exposure
The risk assumed by an insurer and the amount that the insurer is responsible to pay out at any given time. Exposure is the risks for which the insurance company would be liable.
Peril
Cause of loss. The insurer agrees to cover losses caused by a specified peril. For life insurance, the peril is death. For health insurance, the perils are accidents or illness. For property & casualty, the peril is fire, lightning, hail, etc.
Hazard
Anything that increases the chance that a loss will occur. The three types of hazards are:
Physical - can be seen or determined
Moral - intentionally causing a loss
Morale - carelessness (like leaving the doors and windows unlocked)
Methods of Handling Risk
STARR
Sharing
Transfer
Avoidance
Retention
Reduction
Methods of Handling Risk - SHARING
Two or more individuals agree to pay a portion of any loss incurred by any member in the group. Stockholders in a corporation share the risk of profit and loss.
Methods of Handling Risk - TRANSFER
The insurer agrees to pay an if individual or business has a loss. The large number of insureds who do not have an accident will be paying for the losses of the few who do have an accident. This is the only way that insurance can work.
Methods of Handling Risk - AVOIDANCE
Eliminating a particular risk by not engaging in a certain activity. For example, work from home if the roads are covered in ice.
Methods of Handling Risk - REDUCTION
Lessening the chance that a loss will occur or lessening the extent of a loss that does occur. For example seatbelts or smoke alarms.
Methods of Handling Risk - RETENTION
Risk retention means the individual will pay for the loss if it occurs. Paying for a hospital bill without health insurance for example.
Law of Large Numbers
The larger the group - the more accurate losses can be predicted.
Elements of Insurable Risk
CANHAM
Calculable
Affordable
Non-catastrophic
Homogeneous
Accidental
Measurable
Calcuable
Premiums must be calculable based upon prior loss statistics for that particular risk in order to predict future losses.
Affordable
The premium for transferring the risk should be affordable for the average consumer.
Non-catastrophic
Insurance cannot insure events that cause widespread losses to large numbers of insureds at the same time. That is why the peril of war is excluded.
Homogenous
The individual risks that the insurer covers must all be similar, or homogeneous, in regard to factors that affect the chance of loss.
Accidental
Insurance is a method of handling risk. If a loss is certain to occur, there is no risk.
Measurable
It must be possible to estimate the loss as a dollar amount. Insurance covers the financial loss of unexpected death or medical bills from sickness.
Adverse Selection
The tendency for higher-risk individuals to get and keep insurance more than individuals who represent an average level of risk. To avoid adverse selection, insurers make an extensive evaluation of information related to a particular risk - a process called underwriting.
Risks that have a greater than average chance of loss.
Reinsurance
Protects insurance company from catastrophic losses in certain geographical areas.
An insurance company (the ceding company) paying another insurance company (reinsurer) to take some of the company’s risk of catastrophic loss.
Facultative
The reinsurer evaluates each risk before allowing the transfer to be made from the ceding company.
Treaty
The reinsurer accepts all risks of a certain type from the ceding company.