Chapter 1

Question 1

Agent/Producer

Answer 1

a legal representative of an insurance company; the classification of producer usually includes agents and brokers;
agents are the agents of the insurer

Question 2

Applicant or proposed insured

Answer 2

a person applying for insurance

Question 3

Beneficiary

Answer 3

a person who receives the benefits of an insurance policy

Question 4

Broker

Answer 4

an insurance producer not appointed by an insurer and is deemed to represent the client

Question 5

Indemnity

Answer 5

main principle of insurance, meaning that the insured cannot recover more than their loss; the purpose of insurance is to restore the insured to the same position as before the loss

Question 6

Insurance policy

Answer 6

a contract between a policyowner (and/or insured) and an insurance company which agrees to pay the insured or the beneficiary for loss caused by specific events

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

Question 7

Insured

Answer 7

the person covered by the insurance policy. This person may or may not be the policyowner

Question 8

Insurer (principal)

Answer 8

the company who issues an insurance policy

Question 9

Law of large numbers

Answer 9

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

Question 10

Policyowner

Answer 10

the person entitled to exercise the rights and privileges in the policy

Question 11

Premium

Answer 11

the money paid to the insurance company for the insurance policy

Question 12

Reciprocity/Reciprocal

Answer 12

a mutual interchange of rights and privileges

Question 13

Insurance

Answer 13

is a transfer of risk of loss from an individual or a business entity to an insurance company, which, in turn, spreads the costs of unexpected losses to many individuals. If there were no insurance mechanism, the cost of a loss would have to be borne solely by the individual who suffered the loss.

Question 14

Risk

Answer 14

is the uncertainty or chance of a loss occurring. The two types of risks are pure and speculative, only one of which is insurable.

Question 15

Pure risk

Answer 15

refers to situations that can only result in a loss or no change. There is no opportunity for financial gain. Pure risk is the only type of risk that insurance companies are willing to accept.

Only Pure Risk is Insurable

Question 16

Speculative risk

Answer 16

involves the opportunity for either loss or gain. An example of speculative risk is gambling. These types of risks are not insurable.

Question 17

Perils

Answer 17

are the causes of loss insured against in an insurance policy
Life insurance insures against the financial loss caused by the premature death of the insured;
* Health insurance insures against the medical expenses and / or loss of income caused by the insured’s sickness or accidental injury;
* Property insurance insures against the loss of physical property or the loss of its income-producing abilities;
* Casualty insurance insures against the loss and or damage of property and resulting liabilities.

Question 18

Hazards

Answer 18

are conditions or situations that increase the probability of an insured loss occurring. Hazards are classified as physical hazards, moral hazards, or morale hazards. Conditions such as lifestyle and existing health, or activities such as scuba diving, are hazards and may increase the chance of a loss occurring.

Question 19

Physical

Answer 19

hazards are individual characteristics that increase the chances of the cause of loss. Physical hazards exist because of a physical condition, past medical history, or a condition at birth, such as blindness.

Question 20

Moral

Answer 20

hazards are tendencies towards increased risk. Moral hazards involve evaluating the character and reputation of the proposed insurec Moral hazards refer to those applicants who may lie on an application for insurance, or in the past, have submitted fraudulent claims against an insurer.

Question 21

Morale

Answer 21

hazards are similar to moral hazards, except that they arise from a state of mind that causes indifference to loss, such as carelessness. Actions taken without a forethought may cause physical injuries.

Question 22

A legal hazard

Answer 22

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 23

law of large numbers

Answer 23

states that the larger the number of people with a similar exposure to loss, the more predictable actual losses will be. This law form. the basis for statistical prediction of loss upon which insurance rates are calculated.
As the number of people in a risk pool increases, future losses become more predictable.

Question 24

Exposure

Answer 24

is a unit of measure used to determine rates charged for insurance coverage. In life insurance, all of the following factors are considered in determining rates:
* The age of the insured;
* Medical history;
* Occupation; and
* Sex.

Question 25

Homogeneous

Answer 25

A large number of units having the same or similar exposure to loss. The basis of insurance is sharing risk among the members of a large homogeneous group with similar exposure to loss.

Question 26

Chance VS Hazard VS Peril

Answer 26

A risk is a chance that a loss will occur; a hazard increases the probability of loss; a peril is the cause of loss.

Question 27

Profitable distribution of exposures (or spread of risk)

Answer 27

exists when poor risks are balanced with preferred risks, with "average" or "standard" risks in the middle. The purpose behind distributing risks in this manner is to protect the insurer from adverse selection. This is one of the key principles of insurance.

Question 28

Adverse Selection

Answer 28

Insurance companies strive to protect themselves from adverse selection, the insuring of risks that are more prone to losses than the average risk. Poorer risks tend to seek insurance or file claims to a greater extent than better risks. To protect themselves from adverse selection, insurance companies have an option to refuse or restrict coverage for bad risks, or charge them a higher rate for insurance coverage.

Question 29

Critical risks

Answer 29

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 30

Important risks

Answer 30

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

Question 31

Unimportant risks

Answer 31

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 32

Sharing

Answer 32

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. A reciprocal insurance exchange is a formal risk-sharing arrangement.

Question 33

Transfer

Answer 33

The most effective way to handle risk is to transfer it so that the loss is borne by another party. Insurance is the most common method of transferring risk from an individual or group to an insurance company. Though the purchasing of insurance will not eliminate the risk of death or illness, it relieves the insured of the financial losses these risks bring hold harmless agreements and other contractual agreements, but the safest and most common method is to purchase insurance coverage.

Question 34

Avoidance

Answer 34

One of the methods of dealing with risk is avoidance, which means eliminating exposure to a loss. For example, if a person wanted to avoid the risk of being killed in an airplane crash, he/she might choose never to fly in an airplane. Risk avoidance is effective, but seldom practical.

Question 35

Retention

Answer 35

is the planned assumption of risk by an insured through the use of deductibles, co-payments, or self-insurance. It is also known as self-insurance when the insured accepts the responsibility for the loss before the insurance company pays. The purpose of retention is 1. To reduce expenses and improve cash flow; 2. To increase control of claim reserving and claims settlements; and 3. To fund for losses that cannot be insured.

Question 36

Reduction

Answer 36

Since we usually cannot avoid risk entirely, we often attempt to lessen the possibility or severity of a loss. Reduction would include actions such as installing smoke detectors in our homes, having an annual physical to detect health problems early, or perhaps making a change in our lifestyles.

Question 37

Indemnity (sometimes referred to as reimbursement)

Answer 37

is a provision in an insurance policy that states that in the event of loss, an insured or a beneficiary is permitted to collect only to the extent of the financial loss, and is not allowed to gain financially because of the existence of an insurance contract. The purpose of insurance is to restore, but not let an insured or a beneficiary profit from the loss.

Question 38

The principle of utmost good faith

Answer 38

implies that there will be no fraud, misrepresentation or concealment between the parties. As it pertains to insurance policies, both the insurer and insured must be able to rely on the other for relevant information. The insured is expected to provide accurate information on the application for insurance, and the insurer must clearly and truthfully describe policy features and benefits, and must not conceal or mislead the insured.