Chapter 2

Question 1

what is insurance?

Answer 1

The pooling of accidental losses by transfer of such risks to insurers, who agree to compensate insureds for such losses, to provide other monetary benefits on their occurrence, or to render services connected with the risk

Question 2

what are the basic characteristics of insurance?

Answer 2

pooling of losses
payment of fortuitous losses
risk transfer
indemnification

Question 3

what is pooling of losses?

Answer 3

the spreading of losses incurred by a few over the entire group

Question 4

what is the purpose of pooling of losses?

Answer 4

to reduce variation which reduces uncertainty

Question 5

what is payment of fortuitous losses?

Answer 5

unforeseen and unexpected by the insured and occurs a result of chance

Question 6

what is risk transfer ?

Answer 6

a pure risk is transferred from the insured to the insurer, who typically is in a stronger financial position

Question 7

what is indemnification?

Answer 7

the insured is restored to its approximate financial position prior to the occurrence of the loss

Question 8

what are the characteristics of an IDEALLY insurable risk?

Answer 8

1. large number of exposure units
2. loss must be accidental and unintentional
3. loss must be determinable and measurable
4. loss should not be catastrophic
5. chance of loss must be calculable
6. premium must be economically feasible

Question 9

what is the law of large numbers?

Answer 9

the greater the number of exposures, the more closely will actual results approach the probable results expected from an infinite number of exposures

Question 10

what does large number of exposure units enable?

Answer 10

enables the insurer to predict average loss based on the Law of Large Numbers

Question 11

can an insurance company insure things that they do not insure a large number of?

Answer 11

yes they can but underwriters do not have that big based of knowledge

Question 12

why should loss be outside on insured’s control?

Answer 12

law of large numbers is based on randomness

Question 13

what question do you ask to establish if loss is determinable?

Answer 13

can you determine if a loss occurred?

Question 14

what question do you ask to establish if a loss is measurable?

Answer 14

can you determine the amount of the loss?

Question 15

when does the pooling technique work?

Answer 15

if loss should not be catastrophic

Question 16

what are examples of catastrophe?

Answer 16

terrorism, hurricane, flood, earthquake

Question 17

why is a catastrophic loss problematic?

Answer 17

it is so big they cannot absorb it

Question 18

what are solutions for catastrophes for insurers?

Answer 18

reinsurance and diversification

Question 19

what is adverse selection?

Answer 19

the tendency of persons with a higher-than-average chance of loss to see insurance at standard (average) rates, which, if not controlled by underwriting, results in higher than expected loss levels

Question 20

what is asymmetric information ?

Answer 20

occurs when one party has information that is relevant to a transaction that the other party does not have

Question 21

what are the underwriting risks?

Answer 21

-process of selecting and classifying applicants for insurance
- standards met
-coverage terms
- rates

Question 22

what are the types of insurance?

Answer 22

private and government

Question 23

what are some types of private insurance?

Answer 23

life, health, property and casualty

Question 24

what is life insurance?

Answer 24

pays a death benefit to beneficiaries when an insured dies

Question 25

what is health insurance?

Answer 25

pays medical expenses because of sickness or injury (non work related)

Question 26

what is property insurance?

Answer 26

indemnifies property owners against the loss of damage of real or personal property

Question 27

what is liability insurance?

Answer 27

covers the insured’s legal liability arising out of property damage or bodily injury to others

Question 28

what is casualty insurance?

Answer 28

broad term that refers to insurance that covers whatever is not covered by fire, marine and life insurance

Question 29

what does casualty insurance frequently include?

Answer 29

auto and workers compensation

Question 30

what is government insurance?

Answer 30

social insurance programs

Question 31

what are the categories of property and liability insurance?

Answer 31

personal liens and commercial liens

Question 32

what are examples of personal liens?

Answer 32

personal auto
homeowners package
personal articles
flood
earthquake
coastal windstorm

Question 33

what is under commercial liens?

Answer 33

commercial auto
workers comp
commercial general liability
crime
cyber
etc

Question 34

what is financed entirely or in large part by contributions from employers and/or employees?

Answer 34

government insurance

Question 35

what is found at both federal and state level?

Answer 35

government insurance

Question 36

for government insurance, benefits are heavily weighted in favor of?

Answer 36

low income groups

Question 37

who prescribes the eligibility and benefits of government insurance?

Answer 37

statue