Section 1: Basic Insurance

Question 1

Insurance is based on two principles:

Answer 1

-Risk transference (pooling, sharing,spread)

-Law of large numbers

Question 2

Insurance=

Answer 2

Written contract that indemnifies an event of contingent or unknown events.

Question 3

Insurance=

Answer 3

Social device that transfers risk from an individual to a group.

Question 4

Insurance=

Answer 4

Substitution/Exchange of a small certain loss (premium) for a large uncertain loss (claim).

Question 5

Risk=

Answer 5

Chance, possibility or uncertainty about a loss occurring.
-2 Types of risk
*Pure
*Speculative

Question 6

Two types of Risk:

Answer 6

Pure- loss only, no chance of gain. Only pure risk can be insured.

Speculative-chance of loss or gain (we do not insure speculative risk).

Question 7

Peril=

Answer 7

Cause of loss. Example: death was caused by cancer or car accident.

Question 8

Hazard=

Answer 8

Condition that leads to our increases chance/likelihood/severity of loss.

There are 4 types:
Moral, Morale, physical, legal

Question 9

4 Types of Hazards

Answer 9

Moral
Morale
Physical
Legal

Question 10

Moral Hazard

Answer 10

Dishonest, bad ethics or habits. (alcoholic, drug addiction, fraud)

Question 11

Morale Hazard

Answer 11

Irresponsible or careless (reckless driving).

Question 12

Physical Hazard

Answer 12

Height, weight, health, occupation, hobbies.

Question 13

Legal Hazard

Answer 13

Court decisions.

Question 14

Law of large numbers

Answer 14

Large the number more predictable the loss. Used to establish rates.

Question 15

Loss exposure

Answer 15

Possibility of loss.

Question 16

Types of Loss Exposures

Answer 16

Personal-(Individual and families) death, resignation, disability, retirement.

Personnel-(employee) death, resignation, disability, retirement.

Human-human loss exposure can be either personal or personnel depending on the scenario. However, if they just say “human loss” they are referring to personal.

Question 17

Risk management techniques

Answer 17

Risk sharing, Risk transfer (insurance), risk avoidance (eliminating the exposure), risk reduction (wearing seat belts), and risk retention (self-insuring)= TARR test can also includes risk sharing.

Question 18

Ideally insurable risk-requires the risk to be:

Answer 18

-Definite and definable as to time, place,cause. Also requires the cause to be measurable in financial terms.
-loss must be accidental (unintentional) from insureds point of view.
-must be able to calculate frequency (The number of times a loss occurs in a given period of time) and severity (The financial impact of the loss).
-must create the insured economic hardship.
-must exclude catastrophic losses.
-must be based on the law of large numbers.