Property and Casualty

Question 1

Insurance

Answer 1

is a plan of spreading the risk of possible loss over a large number of people.

Question 2

Law of Large Numbers

Answer 2

• Mathematical principle in which the insurance is based
• it possible to predict future losses based upon prior experience

Question 3

Insurance Protects against

Answer 3

the uncertainty (risk) of when a financial loss might occur.

Question 4

Speculative risk

Answer 4

is when there is a chance of gain as well as a chance of loss.

Question 5

Example of speculative risk

Answer 5

buying a stock or gambling.

Question 6

Pure risk

Answer 6

is when there is a chance of loss only.

Question 7

Is all Pure risk Insurable?

Answer 7

not all pure risk is insurable

Question 8

Insurable risk

Answer 8

is one that an insurance company is willing to accept.

Question 9

Insurable risks must include:

Answer 9

-low probability of loss occurring.

-les than catastrophic results.

-The loss must be measurable.

-The loss must be significant.

-The loss must be accidental and unintended.

Question 10

Probability

Answer 10

measures the chance of an event occurring.

Question 11

What measures the uncertainty?

Answer 11

the probability

Question 12

The law of large number stated

Answer 12

as a large number of events are included, the difference between actual and expected results becomes smaller.

Question 13

Insurance use to determining rates

Answer 13

Probability and the law of large numbers.

Question 14

The insurance relies on to predict futures loss experiences.

Answer 14

on the past results of a large population of similar people.

Question 15

Spread of risk (Geographic dispersion)

Answer 15

involves spreading the company’s policies over a broad geographical area in order to avoid large losses in the event of a catastrophic event.

Question 16

Spread of risk (Geographic dispersion) is used to?

Answer 16

to decrease loss probability.

Question 17

How insurers attempt to prevent adverse selection?

Answer 17

by carefully underwriting each and every applicant for insurance.

Question 18

Adverse selection occurs

Answer 18

when insureds with high risk of loss attempt to purchase insurance and are successful in obtaining insurance.

Question 19

Adverse selection

Answer 19

removes the randomness from the probability of a loss occurring and increase the likelihood of a loss occurring from the insurance company’s perspective.

Question 20

Retention

Answer 20

is when liability for a loss is maintained by an individual by not purchasing insurance.

Question 21

Deductible

Answer 21

in an insurance policy is another example of retention in that an individual retains that portion of covered loss.

Question 22

Transfer

Answer 22

is to shift the responsibility for a loss to an insurance company though the purchase of insurance.

Question 23

Control or reduction

Answer 23

is an attempt to prevent a loss or to reduce the amount of the loss.

Question 24

What is an example of control or reduction?

Answer 24

the construction of an earthquake resistant building to prevent loss or the installation of sprinkler system to reduce the amount of loss.

Question 25

Perils

Answer 25

are the actual cause of loss such as a fire, theft, wind, hail etc.

Question 26

Hazards

Answer 26

increase the probability of a peril occurring.

Question 27

Example of Peril and Hazard

Answer 27

bald tires on an automobile increase the chance of a wreck happening. The tires are the hazard, the wreck is the peril.

Question 28

The purpose of insurance

Answer 28

to restore the insured to the original financial position that was enjoyed before a loss but without gain.

Question 29

Principle of indemnity

Answer 29

All insurance, except life insurance, attempts to pay the insured only what has been lost.

Question 30

Property insurance

Answer 30

indemnifies (repays) a person or business with an interest in the physical integrity of tangible property for its loss or the loss of income produced by the property.

Question 31

Casualty insurance

Answer 31

provides protection to meet the unexpected costs imposed by law due to acts that have caused bodily injury or property damage to another individual.

Question 32

Casualty (liability) included

Answer 32

Automobile insurance, crime and surety bonds.

Question 33

Private or voluntary insurance

Answer 33

-The portion of the insurance industry where individuals seek coverage to meet recognized needs. -These coverages are neither required nor made available by government.

Question 34

Example of Private or voluntary insurance

Answer 34

collision insurance in a personal automobile insurance policy.

Question 35

Social insurance

Answer 35

programs either required or made available by government.

Question 36

Examples of social insurance

Answer 36

The North Carolina Motor Vehicle Reinsurance Facility, Workers Compensation and Flood Insurance

Question 37

Reinsurance

Answer 37

- A field of the industry where insurers sell portions of their individual contracts of insurance to other companies. -This activity helps with the spread of risk and/or improves cash position by lowering reserve requirements for these contracts.

Question 38

Capital Stock Companies

Answer 38

- Proprietary companies that are in business to make a profit for their stockholders. - These companies are owned by the stockholders who retain management responsibility through the election of a Board of Directors. - Profits are paid to the stockholders in the form of a commercial stock dividend that is fully taxable to the stockholder.

Question 39

Mutual Insurance Companies

Answer 39

- owned by policyholders; each policyholder "owns" a part of the company proportionate to their share - elects a board of directors who appoint officers - surplus returned to policyholders in the form of non-taxable policy dividend

Question 40

Reciprocal (Assessment) Companies

Answer 40

-Non incorporated associations of individuals or businesses called (subscribers), engage in cooperative insurance programs. -Each policyholder is insured by all others, & each insures the others. - The company is managed by an attorney-in-fact who can assess the policyholders for additional premiums if underwriting losses have been too high.

Question 41

Domestic Companies

Answer 41

are those companies organized in this state.

Question 42

Foreign companies

Answer 42

are organized in another state.

Question 43

Alien companies

Answer 43

are organized in another country.

Question 44

The independent Agency System

Answer 44

-is a system in which an agent may represent more than one insurance company in the marketing of property and liability insurance products. - independent agents own the business and they retain all rights to the accounts they have placed with a company.

Question 45

Direct Writers

Answer 45

-use captive or exclusive agents or employees in the sale of property and liability insurance products, that is, the agents or employees can only represent that particular insurance company. -the agents or employees may be compensated by salary, commission or both. -the insurance company retains ownership rights to the accounts that the agent or employee has established.

Question 46

Agents

Answer 46

-are representatives of the insurer. agents must be licensed with the state to legally conduct insurance transactions. -agents receive their authority to operate on behalf of the company by the agency contract and by an appointment. -the state requires that all licensed agents have an appointment from accompany before any transaction may be conducted. - in the field of property, casualty and personal lines insurance, agents may be given "binding" authority.

Question 47

Brokers

Answer 47

-are representatives of the insured. they "shop the market" on behalf of their clients and obtain the coverage that best fills the client's needs. -Brokers obtain this coverage through a licensed agent of the company issuing the policy. -in order to obtain a broker's license, the individual must have a valid agent's license and post a bond of not less than 15, 000 in favor of the state of North Carolina.

Question 48

A binding premium receipt (binder)

Answer 48

-is temporary evidence that insurance is in effect without condition. -the coverage will stay in effect until terminated by either the company or the policyholder. - binder may be written or oral. -Oral binders must be replaced by a written binder as soon as possible. -the binder provides coverage until the policy arrives.

Question 49

A fiduciary relationship

Answer 49

-develops when an individual places trust in someone else to perform certain duties or actions. -this is particularly true in the insurance business when an agent accepts money from the client to purchase or pay for a policy.

Question 50

An agent can be liable for a contract when

Answer 50

-the agent has breached their authority -the agent represents an incompetent principal. -the agent commits a civil tort or crime.

Question 51

An agent duty to the principal includes

Answer 51

-loyalty -obedience -use of reasonable care -accurate accounting -communication of information help by the agent to the company.

Question 52

Underwriting

Answer 52

-the quality control department of the insurance company. -they select those applications that the company wishes to insure using standards established by the company.

Question 53

How to determine loss ratios?

Answer 53

are determined by dividing the losses (claims) of the company by the premiums collected.

Question 54

What determine loss ratios in conjunction with expenses?

Answer 54

determine whether a company has had an underwriting loss or profit.

Question 55

What elements make a contract legally binding?

Answer 55

- Offer and acceptance (agreement) -Consideration -Legal object -Competent parties

Question 56

Offer and acceptance (agreement)

Answer 56

-the offer is made by the proposed insured. -the acceptance occurs when the policy is issued.

Question 57

Consideration

Answer 57

-this is the exchange of something of value by both parties. -the applicant submits premium in exchange for the company's promise to pay if a particular peril occurs. -information provided by the applicant is legally considered to be a part of the consideration.

Question 58

Legal object

Answer 58

Contracts must fulfill a legal purpose in order to be enforced.