Principles of Insurance Flashcards
Law of Large Numbers
The law of large numbers specifies that when more units are exposed to a similar loss the predictability of such a loss to the entire pool increases.
helps to reduce objective risk
Perils
actual cause of a loss
Types of hazards
Moral, Morale, and physical
Moral Hazard
a character flaw
what type of hazard is shown in this example - A famous running back for Ohio State claimed his car was broken into and $10,000 worth of CDs were stolen. There certainly wasn’t $10,000 worth of CDs in his car and thus is an example of a moral hazard.
Moral Hazard
Morale Hazard
the indifference created because a person is insured
what type of hazard is shown in this example - what type of hazard is shown in this example - A famous running back for Ohio State claimed his car was broken into and $10,000 worth of CDs were stolen. There certainly wasn’t $10,000 worth of CDs in his car and thus is an example of a moral hazard.
Morale Hazard
What is Adverse selection
Tendency of persons with higher-than-average risks to purchase or renew insurance policies
Requisites for an insurable loss
CHAD
not Catastrophic - not pose catastrophic risk for the insurer
Homogenous exposure
Accidental
measurable & Determinable
Elements of a Valid contract
COALL! ->
Competent parties, Offer and Acceptance, Legal consideration, and Lawful purpose
Principle of Indemnity
entitled to compensation to the extent of the insured’s financial loss. Also, insured cant make a profit from an insurance contract
Subrogation Clause
cannot receive compensation from both the insurer and a third party for the same claim.
Principle of Insurable Interest
must have an emotional or financial hardship resulting from damage, loss, or destruction.
Principle of Insurable Interest - Property and Liability Insurance
the insured must have insurable interest at time of policy inception and at time of loss.
Principle of Insurable Interest - Life Insurance
the insured only needs an insurable interest at the time of policy inception
Characteristics of Insurance Contracts
Adhesion
Aleatory
Unilateral
Conditional
Characteristics of Insurance Contracts - Adhesion
no negotiations over terms and condition
Characteristics of Insurance Contracts -Aleatory
money exchanged may be unequal.
Characteristics of Insurance Contracts -Unilateral
Only one promise is made by the insurer which is to pay in the event of a loss. (Insured not required to pay premiums)
Characteristics of Insurance Contracts - Conditional
insured must abide by the terms and conditions of the insurance contract.
Types of Authority
Express
Implied
Types of Authority - Express
e insured must abide by the terms and conditions of the insurance contract.
Types of Authority -Implied Authority
- Authority that the public perceives, and a valid agency agreement exists.
ex: Delivering an insuracne contract and accepting premiums
Apparent Authority
insured believes that agent has authority to act on behalf of the insurer when no authority exists.
Brandon purchased a home theater system for $10,000 two years ago. The replacement cost is $8,000. The home theater system was destroyed in a fire. Brandon’s insurance company esti-mates that the home theater system was 40% depreciated. How much will Brandon receive if the home theater system is covered under actual cash value?
a) $2,000.
b) $2,700.
c) $3,200.
d) $4,800
Answer - D
$8,000 - (.40 x $8,000) = 8,000 - 3,200 = $4,800
formula for if coverage is less than coinsurance value
(Face Value / Coinsurance) * Loss - Deductible
Coinsurance = 80% * replacement cost
