Chapter 2 Flashcards
the pooling of fortuitous losses by transfer of such risks to insurers, who agree to indemnify insureds for such losses, to provide other pecuniary benefits on their occurrence, or to render services connected with the risk.
insurance
an insurance plan or arrangement typically includes the following characteristics: pooling of losses payment of fortuitous losses risk transfer \_\_\_\_\_\_\_
indemnification
the spreading of losses incurred by the few over the entire group, so that in the process, average loss is substituted for actual loss.
pooling
pooling implies the sharing of losses by the entire group and the prediction of future losses with some accuracy based on the ___________
law of large numbers.
the primary purpose of pooling, or the sharing of losses, is to reduce the variation in possible outcomes as measured by the ______, which reduces risk
standard deviation or some other measure of dispersion
states that the greater the number of exposures, the more closely will the actual results approach the probable results that are expected from an infinite number of exposures.
law of large numbers.
loss that is unforeseen and unexpected by the insured and occurs as a result of chance. in other words, the loss must be accidental.
fortuitous loss
means that a pure risk is transferred from the insured to the insurer, who typically is in a stronger financial position to pay the loss than the insured.
risk transfer
means that the insured is restored to his or her approximate financial position prior to the occurrence of the loss.
indemnification
six characteristics of an insurable risk:
- there must be a large number of exposure units
- the loss must be accidental and unintentional
- the loss must be determinable and measurable
- the loss should not be catastrophic
- the chance of loss must be calculable
- ____________
the premium must be economically feasible.
the purpose of a large number of exposure units to be insured is to predict losses based on
the law of large numbers.
under the second requirement of insured risk, the loss must be accidental and unintentional, the law of large numbers is based on ______, making this important.
random occurrence of events.
an arrangement by which the primary insurer that initially writes the insurance transfers to another insurer part or all of the potential losses associated with such insurance.
Reinsurance.
Three ways companies can meet the problem of a catastrophic loss;
- reinsurance
- can avoid concentration of risk by ___________
- financial instruments are now available for dealing with catastrophic losses.
dispersing their coverage over a large geographical area
for the insurance to be an attractive purchase, the premiums paid should be substantially ___ than the face amount of insurance or policy limit.
less
based on the preceding requirements, most personal, property, and ___ risks can be privately insured because the ideal characteristics of an insurable risk generally can be met.
liability.
in contrast, most market, ___, production and ____ risks are difficult to insure by private insurers
financial, political
the tendency of persons with a higher than average chance of loss to seek insurance at standard (average) rates, which, if not controlled by underwriting and policy provisions, results in higher than expected loss levels and unprofitable business.
adverse selection
refers to the process of selecting and classifying applicants for insurance.
underwriting
two important differences between insurance and gambling;
- gambling creates a new speculative risk, whereas insurance is a technique for handling an already existing pure risk.
- gambling can be ____ ___ because the winner’s gain comes at the expense of the loser.
socially unproductive
insurance is always socially productive because
the insurer and the insured have a common interest in the prevention of a loss.
differences between transferring contracts and hedging;
- an insurance transaction typically involves transfer of pure risks because characteristic of insurable risk generally can be met.
- moral hazard and ____ ____ are more severe problems for insurers than for speculators who buy or sell future contracts.
adverse selection
insurance can be classified as either private or government insurance. private insurance includes __ and __ as well as liability insurance.
life and health
government insurance includes ___ insurance programs and other government insurance plans.
social
