Topic 7 - Risk Flashcards
What are the two insurance coverages we discussed in class that are not insurable and require government involvement?
Flood and Terrorism
What are the big differences between those two government-involved insurance
programs (terrorism and flood insurance)?
a. Terrorism has never cost the taxpayers money
b. Terrorism requires the private insurance market to accept some risk
c. Neither of the above are true for flood
If you fell down the steps at your friends house and broke you ankle, then went to
the hospital. The cost of the emergency room visit was $15,000. Your medical
insurance only paid for $10,000 of the visit? How much would the insance
company request from your friend during subrogation? How much of that
amount would you get to keep?
a. The hospital would request $15,000
b. You would keep the first $5,000
c. Insurance can keep anything above 5,000 – which in this case would be
$10,000
What are the five characteristics of an insurable risk?
1) A large number of similar objects
2) Losses are accidental or unintentional
3) Losses can be determined and measured
4) Losses not catastrophic to insurer
5) Large loss principle
What is the large number of similar objects?
The nature of objects similar so reliable statistics can be formed is a key
Ex) Life insurance, automobiles
What does losses are accidental or unintentional mean?
- There must be some uncertainty or no risk
- Insured should have no control over increasing frequency or severity
- Must be accidental
What does losses can be determined and measured mean?
Losses should be easily determined and measured
Ex) Pain and suffering are hard to measure so they don’t make for a good insurable risk
What does losses not catastrophic to insurers mean?
Insurers try to avoid insuring things that could result in a lot of loss and is not predictable
Ex) Natural disasters (hurricanes, floods, earthquakes)
What does the large loss principle mean?
- Maximum loss needs to be sufficient
- Administrative/loading costs too high for it to be affordable
*Small losses are better off paid through savings
Ex) Never buy cell phone insurance
What is a homogenous risk pool?
Risks that have similar characteristics either in the description of risk itself or in claims
What is income/wealth transfer?
Transfer of money from those who do not have a loss to those who do have a loss
What is a heterogeneous risk pool?
A group of entities that are exposed to different types of risks
Why do firms/individuals buy insurance?
- Peace of mind
- Serve other contracts
- Enhance credit worthiness/protect assets
- Regulation/compliance with the law
What is risk or loss sharing?
Trade an unknown/uncertain loss without insurance for an unknown/certain loss with insurance
What is indemnification?
- Indemnify means to compensate
