Week #3 ISR 130

Describe the property coverage provided by a home-owners policy.

Policy that covers most of the property and liability loss exposures that arise out of residential property ownership and occupancy, as well as property and liability loss exposures that individuals and families may have while they are away from their residences.

What are the primary sources of income for insurers?

Premiums and investment income.

Identify the fundamental purpose of an annuity.

The fundamental purpose of an annuity is to provide periodic income that an individual cannot outlive.

Explain why an ideally insurable loss exposure must be one of a large number of similar exposure units.

There is a chance that 'x' can happen to every 'x', but 'x' will only happen to a certain number of 'x's. For example, fire damage. There is a chance that each house will catch on fire, but an insurer knows that it will only happen to an 'x' amount of homes. The insurer can then spread the risk of fire loss over its entire pool of insured homes and thereby maintain manageable premium levels.

Explain why loss exposures involving only small losses and loss exposures involving a high probability of loss are generally considered uninsurable.

Writing insurance to cover small losses may not make sense when the expense of providing the insurance probably exceeds the amount of potential losses. It also may not make sense to write insurance to cover losses that are almost certain to occur. The premiums would probably be as high as or higher than the potential amount of the loss.

Distinguish between pure risk and speculative risk.

Pure risk- chance of loss or no loss, but NO chance of gain. Speculative risk- possibility of loss, no loss, or a gain- not insurable.

Provide seven examples of an insurer's operating costs.

Salaries, producers' commissions, advertising, building expenses, equipment, taxes, licensing fees, and profits.

Identify the mechanism through which individuals or businesses exchange the possibility of a large loss for the certainty of a much smaller, periodic payment.

Transferring the costs of losses

Describe two typical personal liability loss exposures and how a personal umbrella liability policy could provide needed protection.

1-Provides for payment on behalf of the insured for injury to others or 2-damage to others' property for which the insured is legally responsible. With a personal umbrella liability policy, you are covered if limits under your primary policy are used up. Your current insurance will protect you under simple every day happenings, but probably wouldn't cover you under something tragic and major.

Explain how fraudulent claims increase costs for insureds

Fradulent claims increase costs for insureds because the insurer has to pay for the fraudulent claims and has costs of investigating and resisting fraud.

Identify the distinguishing characteristics of an independent loss exposure.

Independent means that a loss suffered by one insured does not affect any other insured or group of insureds. It is not subject to a loss that would simultaneously affect many other similar loss exposures. It is not catastrophic. Catastrophic involves numerous exposure units suffering the same type of loss simultaneously, with significant financial consequences for the insurer.

List the ways insurance benefits individuals, organizations, and society.

Pay for losses, Manage cash flow uncertainty, Meeting legal requirements, Promoting risk control, Enabling efficient use of resources, Providing support for insured's credit, Providing source of investment funds, and Reducing social burdens.

Identify the general categories of risk management techniques

loss prevention, loss reduction

What is claim buildup?

A prevalent form of insurance fraud that is the intentional exaggeration of a loss in an otherwise-legitimate claim

Explain how the law of large numbers enables insurers to make predictions about losses.

As the number of similar but independent exposure units increases, the relative accuracy of predictions about future outcomes (losses) also increases. Exposure units are independent to the extent that they are not generally subject to the same loss-causing event.

Identify the purpose of environmental liability insurance.

It offers business owners protection against environmental damage that may occur as a result of business operations.

Explain how the resources used in the operations of the insurance industry represent opportunity costs.

Capital and labor being used in the insurance industry could be used elsewhere and could create other productive contributions to society. Therefore, the resources used in the operations of the insurance industry represent lost opportunities in other areas.

Distinguish between the two main categories of life insurance.

Term life insurance is life insurance that provides coverage for a specified period, such as ten or twenty years, with no cash value. Permanent life insurance is coverage until death.

Explain why the additional losses that result from insureds' carelessness increase the cost of insurance for everyone.

The additional losses that result from insureds' carelessness increase the cost of insurance for everyone, because insurers often pay for injuries and damage that insureds could have prevented.

Identify the purpose of commercial package policies and business owner policies.

Both of these policies provide business owners with the necessary property, crime, and liability coverages in one policy.

Identify three prevalent examples of property-casualty insurance.

Homeowner's insurance, automobile insurance, and commercial general liability insurance

Identify the three components required for an insurer to consider a loss exposure to be definite in the context of ideally insurable loss exposures.

Time, cause, and location.

Identify four common causes of loss covered by auto physical damage coverage.

1- Bodily injury liability to another person. 2- Property damage liability to property of others. 3- Damage to your insured vehicle. 4- Collision coverage.

Explain how an organization can achieve risk financing goals through the use of insurance.

In exchange for a relatively small premium, organizations can free up additional funds. As a result, the money that would otherwise be set aside to pay for possible losses can be used to contribute to the growth of an organization.

Explain how insurance functions as a system of both transferring and sharing the costs of losses.

Insurance is a system that enables a person, a family, or an organization to transfer the costs of losses (the potential financial consequences of certain loss exposures) to an insurer. The insurer, in turn, pays for covered losses and, in effect, distributes the costs of losses among all insureds (that is, all insureds share the cost of a loss). Insurance is a system of both transferring and sharing the costs of losses.

List risk-sharing mechanisms an insurer may use to promote risk control

Insurers provide this incentive through risk-sharing mechanisms such as deductibles, premium credit incentives and contractual requirements.

Describe the coverage provided by workers compensation insurance.

It is insurance that provides coverage for benefits an employer is obligated to pay under worker's compensation laws. It pays the cost of medical care, lost wages, and other state-mandated benefits when employees are injured on the job or acquire a job-related illness.

Identify the distinguishing characteristics of a fortuitous loss.

Occurs by chance from an insured's standpoint. For a loss to be fortuitous, the insured cannot have control over whether or when a loss will occur. If the insured has control, the insured might have an incentive to cause a loss. This is known as a moral hazard.