Lesson 1 - General Flashcards
What is insurance?
Transfer of pure risk from one party to another for a price through a legal contract
What’s needed for insurance to be used? (Elements of insurable risks)
1) Loss must be unexpected and accidental
2) Coverage cost must be affordable to almost everyone
3) Risk must be calculable
4) Risk must be one of larger # of risks
Law of Large Numbers (Law of Averages)
Mathematical principle that states actual results have a tendency to equal expected or probable results.
What is risk?
Uncertainty of financial loss/chance of loss/probability of loss
Type of risk that is uninsurable and why?
Speculative risk; involves the chance for loss or gain
Multi step process used to control, prevent, reduce risk?
Risk management
Four step process of risk management?
1) Identify possible risks present
2) Determine what action to take to reduce risk
3) Implement specific action
4) Monitoring action taken to make changes as needed
Methods with which to handle risks?
1) Avoidance
2) Retention (most common method)
3) Transfer
4) Sharing
5) Reduction
What is hazard?
Condition that increases the chance of loss
Two class hazards?
Physical hazard : Gasoline, unsafe car brakes, cracked sidewalks
Moral/Morale hazard : Mental attitudes, carelessness, dishonest acts
Insurance transfer?
Risk transfer accomplished by individual purchasing insurance contract
Perils?
Events which cause a loss such as burglary, fire, flood damage etc.
Two ways loss can be classified?
Direct Loss Indirect Loss (Consequential Loss)
Indemnify?
Placing an insured in the same financial position following a loss that he existed in before the loss occurred
Insurable Interest?
Where individual may suffer economic loss if property is damaged/destroyed
Insurable Interest Requirements in property being insured?
1) Prevents/avoids gambling/wagering
2) Measures insured’s possible economic loss
3) Helps guard against moral hazards
Two basic loss valuation methods?
Replacement Cost & Actual Cash Value
Valued Policy/Form?
Contract which establishes value for items insured at the time the contract is written
Agreed Value/Optional Coverage?
Suspends co-insurance provision for 1 year, guaranteeing the insured will not suffer co-insurance penalty
Stated Amount?
Limits of coverage is fixed for certain types of eligible property (mostly auto)
Proximate Cause?
Broken chain of events led up to an occurrence. (Original cause of loss or damage)
Aggregate Limit?
Maximum amount an insurer will pay for a covered loss on a per location or per project basis
Restoration/NonReduction of Limits
Without aggregate limit, limits are applied to a single loss and restored in event of future occurrence WITHOUT reduction
Restoration with aggregate limit?
Coverage is reduced by amount paid for loss for duration of policy period…Full coverage amount is restored at policy renewal
Deductible?
Portion of loss that is the responsibility of insured
