LOMA 281 Module 1 Lesson 1

Moral hazard

A characteristic that exists when the reputation, financial position, or criminal record of an applicant or a proposed insured indicates that the person may act dishonestly in the insurance transaction

Risk class

A grouping of insureds who represent a similar level of risk to an insurer

Preferred premium rate

A lower-than-standard premium rate charged insureds who are classified as preferred risks

Law of large numbers

A mathematical theory which states that, typically, the more times we observe a particular event, the more likely it is that our observed results will approximate the true probability that the event will occur

Insurance

A method for transferring risk from an individual to an insurance company

Standard premium rate

A premium rate charged insureds who are classified as standard risks

Life insurance

A promise to pay money (a policy benefit) when the person named in the policy dies

Standard risk

A proposed insured who has a likelihood of loss that is not significantly greater than average

Substandard risk

A proposed insured who has a significantly greater-than-average likelihood of loss but is still found to be insurable

Declined risk

A proposed insured who is considered to present a risk that is too great for the insurer to cover

Preferred risks

A proposed insured who presents a significantly lower-than-average likelihood of loss

Retrocessionaire

A reinsurance company that accepts risks transferred from another reinsurer in a reinsurance transaction

Speculative risk

A risk that involves three possible outcomes: loss, gain, or no change.

Reinsurer

An insurance company that accepts risks transferred from another insurer in a reinsurance transaction

Valued contracts

An insurance policy that specifies the amount of the policy benefit that will be payable when a covered loss occurs, regardless of the actual amount of the loss that was incurred (typically life insurance)

Contract of Indemnity

An insurance policy under which the amount of the policy benefit payable for a covered loss is based on the actual amount of financial loss that results from the covered event, as determined at the time of the event (not typically life insurance)

Risk pooling

People who face the risk of a particular loss, like financial loss associated with death, transfer this risk to an insurance company

Face amount

The amount of the policy benefit that is payable if the insured dies while the policy is in force. Also known as face value

Loss rate

The frequency of losses (must be predictable)

Risk

The possibility of an unexpected result. This could be a gain or loss.

Underwriting

The process of identifying and classifying the degree of risk represented by a proposed insured

Anti-selection

The tendency of individuals who believe they have a greater-than-average likelihood of loss to seek insurance protection to a greater extent than do other individuals

Third-party policy

a policy purchased by one person or business on the life of another person

Pure Risk

a risk that presents the chance of loss but no opportunity for gain

Annuities

allow you to transfer the risk of outliving your assets by receiving periodic payments for a set period or for life

insurable risks:

are pure risks, occur by chance, are definite in time & amount, are significant, predictable, cannot be catastrophic

Reinsurance

insurance for insurance companies

Retention limit

the maximum amount of risk an insurer can accept on a policy

Direct writer (ceding company)

transfers risk above its retention limit to a reinsurer