Chapter 2 Flashcards
(37 cards)
what is insurance?
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
what are the basic characteristics of insurance?
pooling of losses
payment of fortuitous losses
risk transfer
indemnification
what is pooling of losses?
the spreading of losses incurred by a few over the entire group
what is the purpose of pooling of losses?
to reduce variation which reduces uncertainty
what is payment of fortuitous losses?
unforeseen and unexpected by the insured and occurs a result of chance
what is risk transfer ?
a pure risk is transferred from the insured to the insurer, who typically is in a stronger financial position
what is indemnification?
the insured is restored to its approximate financial position prior to the occurrence of the loss
what are the characteristics of an IDEALLY insurable risk?
- large number of exposure units
- loss must be accidental and unintentional
- loss must be determinable and measurable
- loss should not be catastrophic
- chance of loss must be calculable
- premium must be economically feasible
what is the law of large numbers?
the greater the number of exposures, the more closely will actual results approach the probable results expected from an infinite number of exposures
what does large number of exposure units enable?
enables the insurer to predict average loss based on the Law of Large Numbers
can an insurance company insure things that they do not insure a large number of?
yes they can but underwriters do not have that big based of knowledge
why should loss be outside on insured’s control?
law of large numbers is based on randomness
what question do you ask to establish if loss is determinable?
can you determine if a loss occurred?
what question do you ask to establish if a loss is measurable?
can you determine the amount of the loss?
when does the pooling technique work?
if loss should not be catastrophic
what are examples of catastrophe?
terrorism, hurricane, flood, earthquake
why is a catastrophic loss problematic?
it is so big they cannot absorb it
what are solutions for catastrophes for insurers?
reinsurance and diversification
what is adverse selection?
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
what is asymmetric information ?
occurs when one party has information that is relevant to a transaction that the other party does not have
what are the underwriting risks?
-process of selecting and classifying applicants for insurance
- standards met
-coverage terms
- rates
what are the types of insurance?
private and government
what are some types of private insurance?
life, health, property and casualty
what is life insurance?
pays a death benefit to beneficiaries when an insured dies
