Life Insurance - Chapter 1: Basic Insurance Concepts and Principles

A legal definition of "person" would include the following

1. Individual human beings 2. Associations 3. Organizations 4. Corporations 5. Partnerships 6. Trusts

Insurable risks

1. Must involve a loss that is definite as to cause, time, place, and amount 2. Insurance cannot be mandatory 3. The insurable risk needs to be statistically predictable

Examples of Risk Retention

1. Self-insurance 2. Deductibles 3. Copayments

What are risk retention goals?

1. To reduce expenses and improve cash flow 2. To increase control of claim reserving and claims settlements 3. To fund losses that cannot be insured

What do individuals use to transfer their risk of loss to a larger group?

Insurance

The insurer may suspect that a moral hazard exists if the policyholder

Is not honest about his health on an application for insurance. Moral hazards refer to those applicants that may lie on an application for insurance, or in the past, have submitted fraud claims against an insurer.

Which law is the foundation of the statistical prediction of less upon which rates for insurance are calculated?

Law of large numbers

Insurance is a contract by which one seeks to protect another from

Loss

What are characteristics of pure risk?

Loss must be due to chance, definite, measurable, and predictable

What is the most common way to transfer risk?

Purchase insurance

A situation in which a person can only lose or have no change represents

Pure Risk

What is the only type of risk insurance companies are willing to accpet

Pure Risks

Following a career change, an insured is no longer required to perform many physical activities, so he has implemented a program where he walks and jogs for 45 minutes each morning. The insured has also eliminated most fatty foods from his diet. Which method of dealing with risk does this scenario describe?

Reduction

Installing deadbolt locks on the doors of a home is an example of which method of handling risk?

Risk Reduction

Adverse selection is a concept best described as?

Risks with higher probability of loss seeking insurance more often than other risks

Hazard is best defined as

Something that increases the risk of loss

Events in which a person has both the chance of winning or losing are classified as

Speculative Risk

Peril is most easily defined as

The cause of loss insured against in an insurance policy

For the purpose of insurance, risk is defined as

The uncertainty or chance of loss

When an individual purchases insurance, what risk management technique is he or she practicing?

Transfer

If an applicant for a life insurance policy and person to be insured by the policy are two different people, the underwriter would be concerned about?

Whether an insurable interest exists between the two

The growing tendency of individuals to file lawsuits and to claim tremendous amounts for alleged damages is known as?

legal hazard