Principles of Insurance and Insurance Needs Analysis

Question 2

Define Risk

Answer 2

Condition in which there is a possibility of an adverse result from the expected desired outcome. Not subjective.

Question 3

Define Spculative Risk

Answer 3

Canot be evaluated or measured, thus insurance companies will not insure against speculative risk

Question 4

Define a Peril

Answer 4

The cause of a financial loss. This is the actual event for which an individual purchases insurance. Example Fire that destroys home.

Question 5

Define a hazard

Answer 5

A condition that increases the probability that a peril will in fat occur. There are 3 types of hazards (Physical, Moral and Morale)

Question 6

Give and example of a physical hazard

Answer 6

Building a house in a flood plane, or leaving oily rags in a garage.

Question 7

Give and example of a Moral hazard

Answer 7

An employee embezzels from his employer

Question 8

Give and example or a Morale hazard

Answer 8

Failure to lock the house foors at night increasing the probability of theft.

Question 9

Explain the law of large numbers

Answer 9

Theory asserts that the larger the number of members of a group, the greater the probability that the actual loss experience will equal the expected loss experience.

Question 10

Define Adverse selection

Answer 10

Concept which is bradly illustrated by the fact that people with the highest risk of loss will be the most likely to purchase insurance thereby causing the insurer the greatest cost.

Question 11

Self Insurance

Answer 11

insuring individuals or entities by setting aside money to comver losser rather than purchaseing an insurance policy.

Question 12

Defiine a Static Risk

Answer 12

Risk such as earthquakes and floods that result from factors other than a change in the economy. Death is also an example of a Static risk.

Question 13

Define a Dynamic risk

Answer 13

Risks that are the result of changes in the Economy, such as changes in the business cycle or inflation

Question 14

Define a Fundamental risk

Answer 14

Risks that are risks that affect a large group of people. Example include recessions and earthquakes

Question 15

Define a particular risk

Answer 15

Risks that affect individuals or small groups of people.

Question 16

Define Pure Risk

Answer 16

Involves only the chance of loss or no loss. Example would be the possibility tha ones home may burn down. Pure risks are insurable.

Question 17

Speculative risks

Answer 17

Risk that involves both the chance of loss and gain is a speculative risk. Gambling is an example of a speculative risk. Speculative risks are not insurable.

Question 18

Name the 5 steps in the Risk Management process

Answer 18

1. Clarify Objectives 2. Identify the risk 3. Measure the risk 4. Manage the risk 5. Monitor the risk

Question 19

What are the different methods of Risk Control

Answer 19

Risk Avoidance - Walking to work instead of driving, Risk Diversification - Investing in several types of stocks and bonds to minimize risk, Risk Reduction - Installing an alarm system in a house, Risk Retention - Increasing the deductible on the collision coverage in a personal auto policy, Risk Transfer - Insurance policy is purchased resulting in the transfer of the risk of loss to the insurance company.

Question 20

What are the 4 necessary elements of insurable risk

Answer 20

1. There must be a sufficiently large and similar sample of individuas or events to make the losses reasonable certain. 2. The loss produced by the risk must be measurable and definite. 3. The loss must be accidental and not intentional. 4. The loss cannot be catastrophic.

Question 21

Define Insurable Interest

Answer 21

This means that the must be a relationship in which the person applying for the insurance will incur a loss (financial/emotional) from the destruction, damage, or death of the insured subject. For property and casualty insurance, and insurable interest must exist when bothe the policy is written and when the loss is claimed. For life insurance to be inderwriten and issued the insurable interest need exist only when the policy is written.

Question 22

Define Social Insurance

Answer 22

Mandatory insurance issued by the government with benefits mandated by law. Purpose is to protect people from large fundamental risk.

Question 23

Define Public Insurance

Answer 23

Designed to enhance the public trist in financial institutions. Usually mandatory and administered by the government. Examples - FDIC, PBGC, SIPC

Question 24

Define Private Insurance

Answer 24

Insurance marketed by private insurance companies. Examples of private insurance include life, health and property insurance. Some may be mandatory like auto insurance.

Question 25

Define a Tort

Answer 25

A tort is a private wrong. A tort occurs when a person infringes on the rights of another person in a way that gives the injured person the right to sue for damages.

Question 26

Define Negligence

Answer 26

An unintentional tort that occurs when somone fails to act in a reasonably prudent manner and causes harm to someone.

Question 27

Define Vicarious liability

Answer 27

When a person is liable for torst committed by someone else. Example: Parents are responsible for there childrens actions.

Question 28

Define Special Damages

Answer 28

Damages designed to compensate the injured person for measurable losses such as doctor bills and auto repairs.

Question 29

Define General Damages

Answer 29

Compensate the injured person for intangible losses such as pain and suffering that cannot be measured in dollars and cents

Question 30

Define Punitivie Damages

Answer 30

Not designed to compensate the victim but to punsih the wrongdoer.

Question 31

Define Express authority

Answer 31

The actual authority the insurance company gives to its agents. Typical spelled out in writing.

Question 32

Define applied authority

Answer 32

Authority the insurance company does not expressly give to agents but that agents normally possess. This authoriity is reasonable necessary for agents to carry out their duties.

Question 33

Define Apparent authority

Answer 33

An Agents act may bind the insurance company even when the agent does not have express or implied authroty if the insured is led to believe that the agent has authority

Question 34

What is the NAIC

Answer 34

The National Association of Insurance Commissioners. The NAIC promulgates model legislation that the organization encourages the states to adopt, although the organization has no formal legislative role in any state.

Question 35

What are the 2 major types of insurance companies

Answer 35

Mutual Companies - owned by policy holders and offer participaitng policies that share in the profits of the company though the payment of policy dividends. Stock Companies - Owned by stockholders an usually offer nonparticipating policies.

Question 36

What are the 3 different types of methods for determining life insurance needs

Answer 36

Human Life Method - Uses and individuals income earning ability as the basis for determining the amount of life insurance that is needed. Financial Needs Analysis Method - Analyzes all recurring expenses of the dependent survivors and any unusual expenses that may result from the death of the insured. Then we compare these needs with the existing assets that are avaiabled at the death of the insured and fund for the difference.