Insurance fundamentals

law of numbers

A fairly accurate predictions of what will happen to a large group of similar individuals over a given time period

insurance

A method of handling pure risk by spreading it over a large number of people

Morale hazard

And attention and disregard for one's life, health or property by engaging in behaviors that increase the frequency or severity of a loss

Risk is best to find as

And uncertainty of loss

Adverse selection occurs when

Applicants are excepted by their ensure with no attention given to underwriting

And example of a risk retention

Canceling my health insurance after never getting sick

Examples of physical hazards

Defective building materials exposure to toxic chemicals or slippery sidewalks are all physical hazards

When must liability insurance exist

During time of loss

Risk reduction

Employing loss prevention methods such as installing a sprinkler in a building or losing weight for health reasons

Placing gasoline next to a fire

Hazard

What is a moral hazard

Hazards that increase the probability that a person would intentionally cause create or inflate a loss

What is reinsurance

Insurance purchased by an insurance company from another insurance company

What is over insurance

Insured purchasing more coverage than needed , insured purchasing more than one policy

Adverse Selection

Insurers must carefully underwrite all risks to avoid being a victim of adverse selection. Adverse selection is the tendency of injuries with a greater than average chance of loss to purchase insurance insurance agencies are confronted with the possibility of loss due to risk factors that would not factor in at the time the policy was sold

Risk pools

Large group of similar individuals

What is physical hazards

Material structure environmental or operational features of an insured risk that may create or increase the opportunity for injury or damage

Embezzlement is an example of

Moral hazard

Fabricating a claim so it would appear legitimate is an example of

Moral hazard

A recent purchaser of auto insurance drives less carefully knowing that the insurance will cover any losses that occur. what type of hazard is this?

Morale hazard

Are all risks insurable?

No

Are all seven elements in insurable risk required?

No

Pure Risk

Only loss. no financial gain

Self insurance

Paying for risk at your own expense without insurance

Slippery floor is an example of

Physical hazard

Speculative risk

Possibility of financial gain or profit. Speculative risk is not insurable

What violates the principles of indemnity

Profit from loss, over insurance

Example of over insurance

Purchasing more than one health insurance policy

The only possibility is loss

Pure risk

What are the two categories of risk?

Pure risk and speculative risk

Examples of morale hazard

Purposely driving without a seatbelt because you know insurance will cover the cost

Insurable interest

Refers to the financial interest one might have in a property, a liability or a person being insured ( you can have insurance on your house, but not your neighbors house)

Installing a sprinkler system in a flammable house

Risk reduction

What is dynamic risk? provide an example. Are they insurable?

Risks associated with change. An example would be if a fatal virus erupted into society or technological advances that may cause a business to lose market share. these risks are not insurable

What is fundamental risks? provide an exampl. are they insurable?

Risks that Affect entire groups of people or properties within society. this includes floods earthquake terrorism and economic collapse

Sharing a risk. provide an example

Sharing risk with an insurance company such as Paying premiums and deductibles.

Actuaries

Someone who makes Mathematical predictions of how many people will be affected in the risk pool

Four types Of risks

Static risk, dynamic risk, Fundamental risk and particular risk

What is static risk. provide an example. Are they insurable?

Static risks are historical factors that do not frequently fluctuate. they result from a static or unchanging environment. An example of static risk is an area that may only flood every 100 years. They are insurable

What is the primary source of information use my insurance companies during the underwriting process

The application for insurance

Principle of indemnity

The insured must only be restored to the approximate financial condition that existed prior to loss. No better or worse

What is risk

The possibility that a loss may occur

What is underwriting

The process of selecting certain types of risks that have historically produce a profit and rejecting those risk that do not fit the underwriting criteria for the insurer. This results in profit produced for the insurer

Your computer gets stolen what is the peril

The theft of the computer

Spreading the risk

This can be achieved by insuring (during the same underwriting period) Either a very large number of similar risk, multiple insured locations or activities with this similar risk. insurance can avoid adverse selection by pulling a risk

What is Risk avoidance. Provide an example

To avoid the hazard completely. To avoid a car accident you were just simply not drive a car

Why do insurance companies use "the law of numbers"

To calculate their probably loses and establish an accurate premium

Why do companies use reinsurance

To reduce their loss exposure on a particular risk

Transfer of risk. Provide example

Transferring a risk to an insurance company in exchange for paying a regular premium

Peril versus hazard

Underlying causes of a loss may result from physical hazard, moral hazard or moral hazard

What is particular risk? providing an example. are they insurable?

Where is the only affect one individual or family. Does not affect entire community or a society. These risks arise from situations occur simultaneously with another specific event that increases the chance of loss.

Could someone purchase a life insurance policy on their business partners life and why

Yes because they would have insurable interest in their business partners life

What is underwriting

risk selection and classification process

What are the sources of underwriting information used by insurance companies

• consumer reports • Inspection reports •Credit reports •Insurance map •Insurance company records •Insurance industry statistics and reports

List the seven characteristics of an insurable risk

• definite loss •Accidental loss • Chance of loss must be calculable •Law of large numbers must apply • Lost must create economic hardship • Insurance must be at a reasonable cost • Los must not be catastrophic in nature

What are the five methods of risk management

• risk avoidance • Transfer of risk • sharing a risk • self insurance / assumption of risk • risk reduction/risk control