Study 1: The Insurance Industry in Canada Flashcards
What is the basic function of Insurance? (1)
Insurance is a promise to indemnify the consumer against the possibility of a loss.
What are the two fundamental principles of Insurance? (2)
- The premiums of the many are used to pay the losses of the few. The premiums paid by policyholders who have not made a claim fund the losses of others less fortunate.
- The premium shall be commensurate with the risk. The risk must be priced in such a way that ensures sufficient capital enters the pool to fund any losses. (If there are too many losses in a pool with insufficient funds, the risk management system would fail)
Define Law of Large numbers (1)
Mathematical premise that states the degree of uncertainty is reduced as the number of events increases.
Define Adverse Selection (2)
- Occurs when those with higher risks may purchase insurance in greater amounts than those with lower risks.
- Insurers try to protect themselves from adverse selection by attempting to measure risk and either charging more for higher risks or by refusing to cover them at all.
What is Reinsurance (1) and what are its 4 basic functions? (4)
-Insurance for Insurers.
Its 4 basic functions are:
–Financing - insurance companies might require financing to commence or expand operations.
–Stabilization - Reinsurance can be used to stabalize insurers and keep operational results within reasonable parameters.
–Capacity - Provides capacity to insurers and helps them write business which they may not have been able to write themselves.
–Resource protection against catastrophes
What is the investment department for insurers? (3)
- Manages insurers investment portfolio
- Achieving profit allows company to pay dividends to shareholders and provides capital needed to finance growth
- Common for insurers to outsource the management of their investment portfolio
What are some examples of the effects insurance has on society and the economy? (6)
- Banks are willing to issue mortgages on buildings that are insured.
- Developers are willing to advance funds to contractors on projects guaranteed by surety bonds.
- Retailers are more accepting of business operations when able to purchase liability insurance.
- Lawyers, doctors, etc. are more willing to provide their services when they are able to insurance against the risk of liability for malpractice.
- Manufacturers are more willing to accept risk associated with shipping goods when the goods are insured against transportation risks.
- Members of society are more willing to sanction the use of vehicles as long as motorists carry Third party insurance.
What impact does insurance have on the economy? (4)
- Have interdependent relationship, growth of one leads to the growth of the other.
- Without insurance, the economy would be a far riskier proposition.
- Insurance industry contributes to the economy by providing employment, and many insurers hold billions of dollars in investments, which are used to help finance governments and businesses.
- Insurers pay billions of dollars each year for medical treatment, rehab, lost wages, etc. Local economies benefit continually from these injections of cash.
How do consumers view the insurance industry? (1)
Consumers do not rate the insurance industry highly. Premium rises are met with harsh criticism.
What are some things that can be done to improve the insurance industries image in front of consumers? (4)
Can provide them more info about insurance including the following:
- What constitutes a good/bad risk
- What considerations must be factored into pricing a risk
- Why rates go up, even if a claim wasn’t file
- Why a healthy/profitable insurance industry benefits everyone.
What is one of the major factors that have benefited insurers when it comes to communication with consumers? (1)
Plain Language policies - clear wording that can be easily understood by the public.
