Section 1

Insurable Interest

Any financial interest in life or property such that, if the life or property were lost or harmed, the insured would suffer financially.

Loss

Any reduction in the quality, quantity or value of something. Loss can mean bodily injury, property damage, death, loss of income

Physical Hazard

Anything that poses a risk and can be seen, heard, touched, tasted, or smelled e.g. weak tree limbs, worn-out brakes

Risk Managment Strategies

By minimizing your loss exposure by reducing the frequency and severity of losses

Sharing

No single insurer would be responsible for the total claim

3major types of Loss exposure

Personal, property and liability

Reinsurance

The transfer of insurance risk from one insurer to another through a contractual agreement under which one insurer (the reinsurer) agrees, in return for a reinsurance premium, to indemnify another insurer (the primary insurer) for some or all of the financial consequences of certain loss exposures covered by the primary's insurance policies. Normally for catastrophic loss

Retain/Retention

When a person or entity has the money to cover a loss and therefore doesn't buy insurance

Transfer

When the risk is shifted to another

Loss Ratio Formula

incurred losses + loss adjusting expense/earned premium = loss ratio.

Speculative Risk

involves the opportunity for either loss or gain. These are not insurable

Dimensions of a Loss Exposure

loss frequency; loss severity; total dollar losses; timing

Unilateral Contract

promise in exchange for an act (premium)

Moral Hazard

the actions people take after they have entered into a transaction that make the other party to the transaction worse off

Personal Contract

the contract is between the insured and the insurer. Company has a right to decide who they will do business with

Contract of Adhesion

the insured must accept the entire contract with all of its terms and conditions. Take it or leave it terms

Underwriting

the process of selecting, classifying, and pricing applicants for insurance

exposure unit

the unit of measurement used in insurance pricing

Elements of enforceable contract

Agreement, Consideration, Competent Patties, legal Purpose

Reinsurance Treaty

Also know as automatic transfers the agreed portion of the policy liability automatically on every policy

22 Classes of Insurance

Also known as lines of insurance. Casualty is not a class

aleatory

An insurance contract. Uncertain future

Insurable Events

Any contingent or unknown event whether last or future which may cause injury to a person having insurable interest

Law of Large Numbers

A principle stating that the larger the number of similar exposure units considered, the more closely the losses reported will equal the underlying probability of loss.

insurance

A substition exchange of a small certain loss (premium) for a large uncertain loss (claim)

STARR

5 methods of handling risk

Morale Hazard

A condition of carelessness or indifference that increases the frequency or severity of loss.

Legal Hazard

A condition of the legal environment that increases loss frequency or severity.

Adverse Selection

A high-risk person benefits more from insurance, so is more likely to purchase it.

Words for insurance company

Entity, company, principal, underwriter, insurer, carrier, we/us/our

miscellaneous insurance

Insurance that is not included in a specific class of insurance. Example: tornado, earthquake

Reduce/Reduction

Insured takes steps to prevent or minimize the chance of a loss example fire sprinklers

Named Peril Policy

Insures only against perils specifically listed in the policy

Tort Law

Involving a wrongful act that brings harm to a person or damage to property. This does not include crime.

Ideally Insurable Risk

Refers to risk that is financially within reason and is, therefore reasonable to insure. The loss must be an accident, create economic hardship, predictable, definite and measurable, cannot be catastrophic and the insured person must fit a category to which a company can apply the law of large numbers.

Avoid/Avoidance

Removing the hazard or object that causes the risk

Risk = Peril = Hazard =

Risk = chance Peril = cause Hazard = increase cause

Peril

The actual cause of a loss. Example: fire wind hail

conditional

The contract conditions must be met before the insurers promise is fullfilled

contract

a binding agreement between two or more persons that is enforceable by law.

Pure Risk

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

Deductibles

a specified amount of money that the insured must pay before an insurance company will pay a claim

Open Peril

all perils except those specifically excluded.

Loss Exposure

any situation or circumstance in which a loss is possible, regardless of whether a loss occurs

hazard

anything that increases the likelihood of loss through peril