Module 2 Flashcards
(57 cards)
is 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
BASIC CHARACTERISTICS OF INSURANCE
- Pooling of losses
- Payment of fortuitous losses
- Risk Transfer
- Indemnification
is the heart of Insurance. Few over the entire group, so that in the process, average loss is substituted for actual loss.
In addition, pooling involves the grouping of a large
number of exposure units so that the law of large
numbers can operate to provide a substantially
accurate prediction of future losses.
pooling
is one that is unforeseen
and unexpected by the insured and occurs because 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. From the viewpoint of theindividual, pure risks that are typically transferred to insurers include the risk of premature death, excessive longevity, poor health, disability,destruction and theft of property, and personal liability lawsuits.
risk transfer
It means that the insured is restored to his or her approximate financial position prior to the occurrence of the loss.
indemnification
CHARACTERISTICS OF IDEALLY 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.
there should be a large group of roughly similar, but not necessarily identical,
exposure units that are subject to the same peril or
group of perils.
large number of exposure units
This means the loss should be definite as to cause, time, place, and amount. Life insurance in most cases meets this requirement easily. The cause and time of death can be readily determined in most cases, and if the person is
insured, the face amount of the life insurance policy
is the amount paid.
determinable and memorable loss
A large proportion of exposure units should not incur losses at the same time. As we stated earlier, pooling is the essence of insurance. If most or all of the exposure units in a certain class simultaneously incur a loss, then the pooling technique breaks down and becomes unworkable. Insurers ideally wish to avoid all catastrophic losses. In reality, however, that is impossible, because catastrophic losses periodically result from floods, hurricanes, tornadoes, earthquakes, forest fires, and other natural disasters. Catastrophic losses can also result from acts of terrorism.
no catastrophic loss
The insurer must be able to calculate both the average frequency and the average severity of future losses with some accuracy. This requirement is necessary so that a proper premium can be
charged that is sufficient to pay all claims and expenses and yields a profit during the policy
period.
calculable chance of loss
The insured must be able to afford the premium. In addition, for the insurance to be an attractive purchase, the premiums paid must be
substantially less than the face value, or amount, of
the policy.
economically feasible premium
is 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, results in higher-than-expected loss levels.
adverse selection
is a financial strategy used to offset potential losses or gains in an investment or asset. It involves taking a position
in a related asset or derivative that moves in the opposite direction to the asset being hedged.
hedging
Types of Insurance
Private Insurance
Property and Liability Insurance
pays death benefits to designated beneficiaries when the insured dies.
life insurance
although many life insurers
escribed above also sell some type of individual or group health insurance plan, the health insurance Industry overall is highly specialized and controlled by a relatively small number of insurers.
health insurance
indemnifies Property owners
against the loss or damage of real or personal property caused by various perils, such as fire, lightning, windstorm, or tornado.
property insurance
covers the insured’s legal
liability arising out of property damage or bodily
liability insurance
Property and liability insurance is also called
property and casualty insurance
is a broad field of insurance that covers whatever is not covered by fire, marine, and life
insurance; casualty lines include auto, liability, burglary and theft, workers compensation, and health insurance.
casualty insurance
Two major categories of insurance
Personal Lines
Commercial Lines
refer to coverages that insure the real estate and personal property of individuals and
families or provide them with Protection against
legal liability.
personal lines
Major personal Lines include the following:
Private passenger auto insurance
Homeowners insurance
Personal umbrella liability insurance
Earthquake Insurance
Federal Flood Insurance
