Unit 1 - General Insurance Flashcards
Risk
the uncertainty that a loss will occur
Speculative Risk
Involves the chance of loss or gain
NOT INSURABLE
Example: Gambling
Pure Risk
Involves the chance of loss only
IS INSURABLE
Loss
The reduction in the value of an asset
Exposure
Risk the insurance company will be liable for
Peril
What caused the loss.
Example: If your car is damaged by driving through a hail storm the peril is Hail.
What are the three types of Hazards?
- Physical
- Moral
- Morale
What is Hazard?
A hazard is anything that increases the chance that a loss will occur. Hazards do not cause the loss, they just make them more likely.
Insurance
Insurance is a contract that transfers the risk of financial loss from an individual or business to an insurer. In return the insurer agrees to cover the individual or business for certain losses if they occur
What are the two types of Risk?
Speculative Risk and Pure Risk
How do you determine the amount of Loss?
The value of the asset is measured before and after the loss.
Calculation for Insurance Premiums
The rate multiplied by the number of exposure units.
Example: if the life insurance rate is $32 per $1,000 of death benefit, the premium for a $100,000 policy would be $32 x $100 = $3,200
What is the Peril for Life Insurance?
Death
What is the Peril for Health Insurance?
Accidents or Illness
What is a Physical Hazard?
A hazard the can be identified physically.
Example: Heart condition, wet floor
What is a Moral Hazard?
It can arise from an individual’s character. Moral hazards are habits or lifestyle of applicants that could pose additional risk for the insurer.
Example: Dishonesty, faking a loss, excessive dieting
What is a Morale Hazard?
A state of mind or careless attitude.
Example: Carelessly leaving door unlocked when not at home.
What are the Methods of Handling Risk?
STARR
Sharing
Transfer
Avoidance
Reduction
Retention
What is the Sharing Method of Handling Risk?
Two or more individuals agree to pay a portion of any loss incurred by any member in the group.
Stockholders in a corporation share the risk of profit or loss.
What is the Transfer Method of Handling Risk?
Is what happens with insurance. The insurer agrees to pay if an individual or business has a loss.
What is the Avoidance Method of Handling Risk?
Risk avoidance means eliminating a particular risk by not engaging in a certain activity.
What is the Reduction Method of Handling Risk?
Risk reduction may refer to lessening the chance that a loss will occur or to lessening the extent of a lost that does occur.
Example: Wearing a seatbelt will not stop a car accident but can lessen the injuries that occur.
What is the Retention Method of Handling Risk?
Risk retention means the individual will pay for the loss if it occurs.
Without health insurance a person will have to pay the bill if they need hospitalization.
What is the Law of Large Numbers?
The larger the group, the more accurately losses can be predicted.
What are the Elements of Insurable Risk?
CANHAM
Calculable
Affordable
Non-Catastrophic
Homogeneous
Accidental
Measurable