Principles of insurance Flashcards
Define risk:
And exposure is a condition or situation that presents a possibility of loss. It is similar to risk. For example, a home that is built on a flood plane is exposed to the possibility of flood damage.
Risk is the chance or uncertainty of loss.
Risk is not the loss itself, but the uncertainty of loss.
There are some losses that are certain to occur eventually, such as when a rug finally wears out or a car runs out of gas. Such losses are not risks because they represent a certainty of loss.
Is a particular risk Insurable?
Is it speculative or pure?
Does Insurable interest exist?
Pure risks…involves only the possibility of a loss.
Insurance isn’t generally used to handle speculative risks. Speculative risks are risks where there exist both the possibility of gain and the possibility of loss.
Describe various methods to manage risk:
- Avoid risk
- Control Risk:
- risk control techniques that curtail loss frequency come under the heading of loss prevention.
- risk control techniques that limitless severity come under the heading of risk reduction. - Simply retain a risk, or a portion of a risk, ….that is pay for it themselves.
- Transfer risk. This option includes, but is not limited to insurance. One type of transfer of risk is a hold harmless agreement that shift liability from an owner or front contractor to a tenant or subcontractor.
What is the basic purpose of insurance?
To transfer risk.
The purpose of insurance is not to avoid or lemonade risk, but to transfer risk…. In exchange for a premium.
How is the law of large numbers used by the insurance industry?
The more examples used to develop any statistic, the more reliable the statistic will be.
Simply stated, the Lord of lords numbers tells us that the statistics will be more accurate in Fredericton what will happen in the future based on how many samples are examples it has statistics or information on.
What is the difference between a peril and a hazard?
Risk: The uncertainty of loss.
Peril: A peril is the cause of loss. Fire and collision are both examples of perils.
Hazard: anything that increases the chance of a loss.
What are the different types of hazards?
1: A physical hazard…arises from the condition, occupancy, or use of the property itself. An example is a skateboard left on the porch steps.
2: A morale hazard… Means that an individual, through carelessness or by irresponsible actions, can increase the possibility for a loss. An example is a person who drives a car carelessly.
3: A moral hazard… Means that a person might create a low situation on purpose just to collect from the insurance company.
What is Insurable risk?
You must have a chance of financial loss or a financial interest in the property to have an insurable interest.
Other elements of insurable risks.
- The risk of loss must be definite as to time and place and difficult to counterfeit or falsify. Death is probably the best example of a definite lost.
2 The risk must be unexpected. The risk that your shoes will wear out isn’t a risk it all and therefore not insurable. - The risk must be large enough to create a financial hardship.
- The loss must be calculable.
- The cost of the insurance must be affordable to the insured.
- Insurance companies like to use the con sept of spread of risk. To protect them from being exposed to a loss that happens to a large number of people at the same time.
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