General Insurance Principles - Risk and Loss Flashcards Preview

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Flashcards in General Insurance Principles - Risk and Loss Deck (34):
1

What is the main purpose of insurance?

The transference of financial risk associated with loss onto an insurance company.

2

Risk

The chance of loss

3

How one handles the chance of loss

Risk Management

4

Loss

Unplanned reduction in economic value

5

Pure Risk

Risk that can only result in loss, not gain. This type of risk is insurable.

6

Speculative Risk

Risk that can result in either loss or gain. This type of risk is uninsurable.

7

Direct Loss

An immediate result of the occurrence of an insured peril. (e.g., the death of a household's breadwinner)

8

Indirect Loss

A result of an insured loss that is not directly related to the peril. (e.g., loss of income due to the death of a household's breadwinner)

9

Loss Exposure

State of being exposed to a an insurable loss.

10

Exposure Units

Units assigned to measure loss exposure.

11

Peril

The event(s) that insurance protects against (e.g., death, disability)

12

Hazard

Condition that increases the chance of encountering a peril or the severity of a peril.

13

Three types of hazards

1.) Moral Hazards
2.) Morale Hazards
3.) Physical Hazards

14

Two Types of Risk

1.) Pure Risk
2.) Speculative Risk

15

Moral Hazard

An individual's character traits or habits that increase the likelihood of a loss. (e.g., alcoholism, drug abuse)

16

Morale Hazard

Individual tendency to take on more risk out of a state of mind, attitude or indifference to loss. (e.g., "I can drive fast in the snow because I have insurance.")

17

Physical Hazard

An individual's physical traits that increase the likelihood of loss. (e.g., obesity, high cholesterol)

18

The Five Risk Management Techniques

1.) Avoid the Risk
2.) Reduce the Risk
3.) Retain the Risk
4.) Share the Risk
5.) Transfer the Risk

19

Risk Avoidance

A way to reduce the likelihood of loss by avoiding situations that could result in loss. Risk avoidance is a good practice in general, but it especially is helpful in dealing with avoidable, dangerous risks. (e.g., don't drink and drive)

20

Risk Reduction

A ways to reduce the likelihood of loss by proactively reducing the chance of a loss. (e.g., exercising and eating healthy to prevent illness)

21

Risk Retention

The acceptance of risk and dealing with it through the use of personal funds should a loss occur. Great to use if financial loss is small and risk is remote. (e.g., self-insurance, deductible)

22

Sharing Risk

A ways to reduce the likelihood of financial loss whereby people who share a common risk band together and promise to "chip in" and compensate a member of the group who suffers a covered loss. The custom of risk sharing made sense for small groups facing relatively modest losses, but it is difficult to achieve in larger groups.

23

Risk Transference

A way to reduce the financial impact of a loss by transferring the loss to a third party.

24

Six Elements of Insurable Risk

1.) Loss must be definable;
2.) Loss must be measurable;
3.) The peril must be outside the insured's control;
4.) The risk must be part of a large group of similar risks;
5.) The risk must not be catastrophic (e.g., result of war);
6.) The risk must not be a stated exclusion.

25

Underwriting

Insurance companies use this process to determine if the risk proposed for insurance should be accepted or rejected. That is, it seeks to determine if the applicant represents an insurable risk using information from the application and the agent.

26

Law of Large Numbers

Based on the idea that predictions become more accurate as the number of exposures increase, this is the mathematical principle that insurance is based on.

27

Actuaries

Mathematicians hired by insurance companies to determine the morbidity and mortality of men and women at various ages.

28

Morbidity

The likelihood of serious illness. This information is used to determine premiums for health and disability insurance.

29

Mortality

The likelihood of death. This information is used to determine premiums for life insurance.

30

Adverse Selection ("Selection Against the Company")

The tendency of persons at greater risk of loss to seek out and maintain insurance.

31

Who is primarily responsible for regulating insurance?

State governments

32

Insurance Department

A division of a state government assigned the responsibility of regulating insurance companies, producers, and transactions within their jurisdiction.

33

Insurance Commissioner (Director)

The individual that heads a state's insurance department.

34

Regulatory associations that seek to promote uniformity among states regarding their insurance regulation policies and procedures.

National Association of Insurance Commissioners (NAIC);
National Conference of Insurance Legislators (NCOIL)