Principles of Insurance and Insurance Needs Analysis Flashcards
Define Risk
Condition in which there is a possibility of an adverse result from the expected desired outcome. Not subjective.
Define Spculative Risk
Canot be evaluated or measured, thus insurance companies will not insure against speculative risk
Define a Peril
The cause of a financial loss. This is the actual event for which an individual purchases insurance. Example Fire that destroys home.
Define a hazard
A condition that increases the probability that a peril will in fat occur. There are 3 types of hazards (Physical, Moral and Morale)
Give and example of a physical hazard
Building a house in a flood plane, or leaving oily rags in a garage.
Give and example of a Moral hazard
An employee embezzels from his employer
Give and example or a Morale hazard
Failure to lock the house foors at night increasing the probability of theft.
Explain the law of large numbers
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.
Define Adverse selection
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.
Self Insurance
insuring individuals or entities by setting aside money to comver losser rather than purchaseing an insurance policy.
Defiine a Static Risk
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.
Define a Dynamic risk
Risks that are the result of changes in the Economy, such as changes in the business cycle or inflation
Define a Fundamental risk
Risks that are risks that affect a large group of people. Example include recessions and earthquakes
Define a particular risk
Risks that affect individuals or small groups of people.
Define Pure Risk
Involves only the chance of loss or no loss. Example would be the possibility tha ones home may burn down. Pure risks are insurable.
Speculative risks
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.
Name the 5 steps in the Risk Management process
- Clarify Objectives 2. Identify the risk 3. Measure the risk 4. Manage the risk 5. Monitor the risk
What are the different methods of Risk Control
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.
What are the 4 necessary elements of insurable risk
- 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.
Define Insurable Interest
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.
Define Social Insurance
Mandatory insurance issued by the government with benefits mandated by law. Purpose is to protect people from large fundamental risk.
Define Public Insurance
Designed to enhance the public trist in financial institutions. Usually mandatory and administered by the government. Examples - FDIC, PBGC, SIPC
Define Private Insurance
Insurance marketed by private insurance companies. Examples of private insurance include life, health and property insurance. Some may be mandatory like auto insurance.
Define a Tort
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.
Define Negligence
An unintentional tort that occurs when somone fails to act in a reasonably prudent manner and causes harm to someone.
Define Vicarious liability
When a person is liable for torst committed by someone else. Example: Parents are responsible for there childrens actions.
Define Special Damages
Damages designed to compensate the injured person for measurable losses such as doctor bills and auto repairs.
Define General Damages
Compensate the injured person for intangible losses such as pain and suffering that cannot be measured in dollars and cents
Define Punitivie Damages
Not designed to compensate the victim but to punsih the wrongdoer.
Define Express authority
The actual authority the insurance company gives to its agents. Typical spelled out in writing.
Define applied authority
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.
Define Apparent authority
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
What is the NAIC
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.
What are the 2 major types of insurance companies
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.
What are the 3 different types of methods for determining life insurance needs
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.
