Chapter 1 Flashcards
(9 cards)
Define insurable interest
An interest the insured must have in the subject matter of the insurance purchased so that if the event insured against occurs, the insured will suffer an economic loss
What is the first fundamental principal of insurance
The premiums of the many are used to pay the losses of the few
-insurance protection is intangible in that it promises to indemnify another person against the possibility of a loss or liability for a loss
What is the second fundamental principal of insurance
The premiums shall be commensurate with the risk
-insurance relies on the law of large numbers
-the degree of certainty in probabilities increases as the number of events increases
Explain adverse selection
Occurs when those with higher risks may purchase insurance in greater amounts than those with lower risks. Much of insurance law and practice is designed to control adverse selection.
Insurers protect themselves from adverse selection by attempting to measure risk and either charging more for the higher risks of refusing to cover them at all
Explain long tail and short tail
Long tail business is a class of business for which specific losses may take a long time to be known
Short tail lines are those where the injury or other harm becomes known quite quickly
What are the insurance contract principles
Utmost good faith- a principle that requires all parties to a contract to be honest and disclose all relevant information
Proximate cause- a term refers to an event that is directly linked to an injury or harm
insurable interest
Indemnity-obligates one party to compensate another party for any losses
Subrogation- a process that allows a person to recover from those who are legally liable
Contribution- a principle that if multiple policies cover the same loss, each insurer contributes a portion of the total payment
Loss minimization (mitigation)-prevent further loss to their property
What are the four basic functions of reinsurance?
Financing- the reinsurance transaction frees up capital that would otherwise be tied up to meet obligations
Stabilization- can be used to keep operational results within reasonable parameters without fluctuating dramatically. Stable results can maintain the confidence of existing shareholders and attract new capital
Capacity- insurance companies might require ability to insurer businesses that ar beyond their resources
Resource protection against catastrophes- insurers look to protect resources such as their capital and surplus, their loss ratio, and their investment position against catastrophic loss
What does insurance do for society and the economy?
Facilitates economic growth and social development-underpins economy, peace of mind, growth of industry
Provides employment- insurers, construction, adjusters
Claim payments boost local economy- medical treatments and rehabilitation, replacement of lost or damaged property
What information can be conveyed to consumers
What constitutes a good risk and a bad risk
What considerations must be factored into pricing risks
Why rates go up, even when one has not filed a claim
Why a healthy, profitable insurance industry benefits everyone
