Basic Insurance Concepts And Principles

Question 1

What does insurance do?

Answer 1

It transfers the risk of loss from and individual or business entity to an insurance company. Which in turn spreads the costs of unexpected losses to many individuals.

Question 2

What is a person according to the law?

Answer 2

A legal entity which acts on behalf of itself, accepting legal and civil responsibility for the actions it performs and making contracts in it’s own name.

Question 3

What are persons according to the law?

Answer 3

Individual human beings, associates, organizations, corporations, partnerships, and trusts.

Question 4

What is insurance?

Answer 4

Is a contract whereby one undertakes to indemnify another against loss, damage, or liability arising from a contingent or unknown event.

Is the legal agreemant, or contract, where by the two parties involved agree to the limits of the indemnification, the circumstances under which it will occur and what things of value will be exchanged by the parties to the contract.

Question 5

Policyowner

Answer 5

Pays premium to insurance company.

Question 6

Insurance Company

Answer 6

Issues policy to policy owner

Pays benefit to beneficiary

Question 7

Beneficiary

Answer 7

Receives benefit upon insured’s death

Question 8

Risk

Answer 8

Is the uncertainty or chance of loss occurring.

Question 9

Pure Risk

Answer 9

Refers to the situations that can only result in loss or no change. There is no opportunity for financial gain.

Question 10

Speculative Risk

Answer 10

Involves the opportunity for either loss or gain.

Question 11

Is pure risk insurable?

Answer 11

Pure risk is the only type of risk that insurance companies are willing to accept.

Question 12

Perils

Answer 12

The causes of loss insured against in an insurance policy.

Question 13

What does life insurance insure against?

Answer 13

The financial loss caused by the premature death of the insured.

Question 14

What does health insurance insure against?

Answer 14

The medical expenses and/or loss of income caused by the insured’s sickness or accidental injury.

Question 15

What does property insurance insure against?

Answer 15

Insures against the loss of physical property or the loss of its income producing abilities.

Question 16

What does casualty insurance insure against?

Answer 16

Insures against the loss and/or damage of property and resulting liabilities.

Question 17

What are hazards?

Answer 17

Are conditions or situations that increase the probability of an insured loss occurring.

Question 18

How many hazard classifications are their?

Answer 18

3

Question 19

What are hazards classified as?

Answer 19

Physical, moral, and morale hazards.

Question 20

What is a physical hazard?

Answer 20

Individual characteristics that increase the chances of the case of loss.

Question 21

Why do physical hazards exist?

Answer 21

Physical hazards exist because of a physical condition, past medical history, or a condition at birth.

Question 22

What is a moral hazard?

Answer 22

Are tendencies towards increased risk.

Question 23

What do morale hazards involve and refer to?

Answer 23

Involve evaluating the character and reputation of the proposed insured. It refers to those applicants who may lie on an application for insurance, or in the past, have submitted fraudulent claims against an insurer.

Question 24

What does a legal hazard describe?

Answer 24

Describes a set of legal or regulatory conditions that affect an insurer’s ability to collect premiums that are commensurate with (equal to in value) the exposure to loss that the insurer must bear.

Question 25

What is the basis of insurance?

Answer 25

Is sharing the risk among a large pool of people with similar exposure to loss. (A homogeneous group)

Question 26

What does the law of large numbers state?

Answer 26

That the larger the number of people with a similar exposure to loss, the more predictable actual losses will be.

Question 27

What are insurance rates calculated on?

Answer 27

Insurance rates are based on the law of large numbers. That form the basis for statistical prediction of loss.

Question 28

What is loss exposure?

Answer 28

Is a unit of measure used to determine rates charged for insurance coverage.

Question 29

What are the factors that are considered in determining life insurance rates?

Answer 29

The age of the insured, medical history, occupation and sex.

Question 30

What is homogeneous exposure?

Answer 30

When a large number of units having the same or similar exposure to loss.

Question 31

What is the process for an insurance claim?

Answer 31

It starts with a hazard. Leading to a peril and causing a loss.

Question 32

What is a distribution of exposures?

Answer 32

Exists when poor risks are balanced with preferred risks, with "average" or "standard " risks in the middle.

Question 33

What is distribution of exposure also known as?

Answer 33

Spread of risk

Question 34

What is the purpose behind the distribution of risk?

Answer 34

Is to protect the insurer from adverse selection.

Question 35

What is adverse selection?

Answer 35

The insuring of risks that are more prone to losses than the average risks.

Question 36

What do financial companies do to protect themselves from adverse selection?

Answer 36

Insurance companies have an option to refuse or restrict coverage for bad risk, or change them a higher rate for insurance coverage.

Question 37

What must an insured first do before establishing an insurance program?

Answer 37

They must first identify their exposure to losses, along with the probability of how likely it is that a loss will occur and how big the loss might be.

Question 38

What are the classifications of exposure to losses?

Answer 38

Critical risks, important risks and unimportant risks.

Question 39

What is a critical risk?

Answer 39

Include all exposures in which the possible losses are of the magnitude that would result in financial ruin to the insured, his or her family, and/or to his or her business.

Question 40

What are important risks?

Answer 40

Include those exposures in which the possible losses would lead to major changes in the person's desired lifestyle or profession

Question 41

What are unimportant risks?

Answer 41

Include those exposures in which the possible losses could be met out of current assets or current income without imposing undue financial strain or lifestyle changes

Question 42

What are the common sense principles to establishing an insurance program?

Answer 42

Consider the odds, don't risk more than you can afford to lose, and don't risk a lot for a little

Question 43

What are the methods of managing risk?

Answer 43

Avoidance, retention, sharing, reduction, and transferring

Question 44

What is sharing?

Answer 44

Is a method of dealing with risk for a group of individual persons or businesses with the same or similar exposure to loss to share the losses that occur within that group.

Question 45

What is transfer?

Answer 45

The most effective way of handle risks is to transfer it so that the loss is borne by another party.

Question 46

What is avoidance?

Answer 46

Eliminating exposure to a loss.

Question 47

What is retention?

Answer 47

Is the planned assumption of risk by an insured through the use of deductibles, co payments, or self insurance.

Question 48

What is retention also known as?

Answer 48

Self insurance.

Question 49

What is self insurance?

Answer 49

When the insured accepts the responsibility for the loss before the insurance company pays.

Question 50

What is the purpose of retention?

Answer 50

To reduce expenses and improve cash flow, to increase control of claim reserving and claims settlements, and to fund for losses that cannot be insured

Question 51

What is reduction?

Answer 51

The attempt to lessen the possibility or severity of a loss.

Question 52

Are all pure risks insurable?

Answer 52

No. Not all pure risks are insurable.

Question 53

What are the factors that must be present before a pure risk can be insured?

Answer 53

The loss must be due to chance. The loss must be definite and measurable. The loss must be statistically predictable. The loss cannot be catastrophic. The loss exposure to be insured must involve large homogeneous exposure units. The insurance must not be mandatory.

Question 54

Meaning of the loss must be accidental

Answer 54

In order to be insurable, a risk must involve the chance of loss that is outside the insured's control.

Question 55

Meaning of the loss must definite and measurable

Answer 55

An insurable risk must involve a loss that is definite as to cause, time, place and amount.

Question 56

Meaning of the loss must be statistically predictable?

Answer 56

This enables insurers to estimate the average frequency and severity of future losses and to set appropriate premium rates.

Question 57

Meaning of the loss cannot be catastrophic (war nuclear events)

Answer 57

Insurers typically will not insure risks that will expose them to catastrophic losses. Insurers need to be reasonably certain that the losses will not exceed certain limits.

Question 58

Meaning of the loss exposure to be insured must involve large homogeneous exposure units.

Answer 58

There must be a sufficient large pool to be insured and those in the pool must be grouped into classes with similar risks so the insurer is able to predict losses based upon the law of large numbers.

Question 59

Meaning of the insurance must not be mandatory

Answer 59

An insurer must not be required to issue a policy to each applicant applying for coverage.

Question 60

What underwriting guidelines must the insurer require to be met?

Answer 60

Be able to identify the definition of insurable events. Be able to identify and apply the definition of insurable interest, the principle of indemnity, and utmost good faith.