RMI 3011: Chapter 2
How is adverse selection controlled?
Underwriting
What is reinsurance
An arrangement by which the primary insurer that initially writes the insurance transfers to another insurer all of the losses
What is health insurance?
Overspecialized and controlled by 35 main comapanies
How does property/liability insurance work?
P.I. Indemnifies property owners Liability- Covers insured legal liability
What is life insurance?
Pays death benefits to designated beneficiaries when the insured dies
What is casualty insurance?
Insurance tht covers what is not covered by fire, marine and life insurance
What is indemnification?
Insured is restored to his appozimate financial psotions prior to the occurence of the loss
What is underwriting
The process of selecting and classifiying applicants for insurance. Applicants who meet standards have preferred rates If standards are not met, insurance is denied or you must pay more
What are the two main differences between insurance and hedging?
1.An insurance transaction involves the transfer of pure risk, whereas hedging is a technique to handle speculative risk. 2.Hedging only involves risk transfer, not risk reduction
Two main differences between gambling and insurance
Although confused as interchangeable Gambling 1. creates a speculative risk, while insurance is a techniwue used to handle pure risk 2. Is typically socially unproductive because the success is won at the cost of another
What are 5 benefits of Insurance to Society?
Indemnification for Loss ( ALlows businesses to remain open) Reduction of worry and fear ( Less likelty to worry about premature financial obligations) Source of Investment Funds Loss Prevention ( Programs that employ loss prevention; high way safety, reduction of work injuries) Enhancement of credit
What is a fortutious loss?
One that is unseen and unexpected by the insrued resulting by chance
What form of risk transfer is used in insurance?
Pure risk is transfered from insured to insruer
What is fovernment insurance
Social programs that are typically financed in large part by emplotees, are compulsort and required by law Social Security Medicare
What is the defintition of insurance?
The *pooling* of *fortutious losses* by *transfer of such risks* to insurers who agree to *idemnift* insured for such losses (to provide other pecuniart benefits on their occurence)
What is adverse selection?
The tendency of persons with a higher than average chance of aloss seek insurance, at standard rates
What are some characteristics of an ideally insurable risk (6)
1. Large # of exposure units 2. Accidental loss 3. Measurable Loss 4. Not catasroophic (Everyone cant experience same loss) 5. Calculable Chance of Loss (Able to calc. frequenct and severity) 6. Economically Feasible Premium
What are commercial lines?
Coverage of the government and non profits (fire, multiple peril, gen. liability)
What are some types of private insurance?
Life Insurance Health Insurance Property
What is pooling of losses?
Sharing of losses of the frew over an entire group Primary purpose is to reduce the variation in possible outcomes
What are 3 costs of insurance to society
Cost of Doing Business ( Insurers consume scarce economic resources) Fraudulent Claims (Faked accidnets) Inflated Claims (Padded Claims) Cost to society (Fraud costs over $30billion a year)
What are personal line?
Coverage that insure the real estate and personal property of individuals and provide them with protection against legal liability (Homeowners, earthquake, federal floods)
