Section I Flashcards
(66 cards)
Law of Large Numbers
The larger the number of separate risks of a like nature combined in one group, the more predictable the number of future losses of that group within a given time period
Insurance
Transfer risk from an individual to a group
What does the Law of Large Numbers need to operate?
A large number of exposure units be combined.
In P&C, it’s the car, home, or other item to be insured.
Insurance companies can only predict the number of losses expected for a group but..
not for each individual.
Insurable Interest is required
at the time of loss in order to recover on a policy.
Risk
chance or uncertainty of loss
Example: when you are driving a car, you may become involved in an accident.
Pure Risk
No chance of gain, only chance of loss.
Pure Risk can be insured.
Speculative Risk
You have a chance of gain or loss.
Example: Stock Market
Hazard
Something that increases the risk.
Example: Drinking while driving
There are 3 types of hazards: physical, moral, and morale.
Physical Hazard
Something you can see or touch.
Examples: ice on road, parking a car over a bed of dry leaves, and an oily rag left by the furnace
Moral Hazard
Circumstances of morals or habits that increase the probability of a loss from an insured peril.
Examples: An insured previously convicted of arson, and a dishonest person not paying their credit card bills timely.
Morale Hazard
Increase in the hazards presented by a risk arising from the insured’s indifference to loss because of the existence of insurance.
Example: Insured won’t fix faulty wiring because he believes it’s less expensive to pay insurance premiums than to pay an electrician. A careless person is a morale hazard.
Peril
Cause of Loss.
Example: Wind may damage your roof.
SFP
Standard File Policy. It’s a ‘named or specified perils’ meaning if whatever happens to the structure is not named as a peril in the policy, there is no coverage
‘All-Risk’ policies like the HO-3 means that
Whatever may happen is covered unless that peril is excluded.
All-Risk Policies
Open Peril Policies
Loss
Damage resulting to the structure caused by a peril, such as fire or lightning.
Direct Loss
A fire burns the house down. The burnt down house is a direct loss.
Indirect Loss
AKA a ‘consequential loss’ or ‘time-element loss’ since they occur over a period of time.
Loss of Rental Value (aka Loss of Use) is an indirect loss that is covered on some policy forms.
Actual Cash Value
Replacement Cost minus Depreciation
or
Current Value minus Depreciation
AKA Actual Cash Value
Replacement Cost
DP-2, DP -3 and all Homeowner Policies have R/C on the dwelling.
All covered property insurance losses to the building will be paid in full if the insured carries 80% of the full replacement cost of the structure as a policy limit at the time of the loss.
True or False: You can never recover more than the policy limit .
True
Market Value
Amount of money you could get for property in the market.
It may be higher or lower than the R/C of the property depending on the location of the property and the current market conditions.
Stated Value
Insured chooses a limit of coverage for the property .