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30 Cards in this Set
- Front
- Back
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4 categories of risk |
Pure and Speculative Risk Subjective and Objective Risk Fundamental and Particular Risk Non-financial and Financial Risk |
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Pure risk |
Chance of a loss or no loss occurring No chance of a gain Insurable |
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Speculative risks |
Chance of loss, no loss or a profit Buying a stock or starting a business Insurance not available |
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Subjective Risks |
Risk individual perceives based on their prior experience |
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Objective risks |
Difference between the expected and actual losses Loss exposure increases , objective risk is reduced Ex: insurance company expect to pay out 10%. They actually pay out 9%. The difference of that 1% is objective. |
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Fundamental risks |
Risk that can impact a large # of individuals at 1 time i.e. war or earthquake Some insurable, some aren’t |
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Particular risk |
Risk that can impact a particular individual such as death or inability to work bc of sickness or accident |
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Non-financial risks |
Risk that result in a loss other than a monetary loss Emotional distress person faces after death of loved one |
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Financial risks |
Loss of financial value, such as death of primary bread winner |
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Law of large #s |
The actual outcome will approach the mean probability as the sample size increases |
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Risk Mgt Process |
• Determining the objectives of the risk management program •Identifying the risks to which the individual is exposed • Evaluating the identified risks for the probability and severity of the loss • Determining the alternatives for managing the risks • Selecting the most appropriate alternative for each risk • Implementing the risk management plan selected • Periodically evaluating and reviewing the risk management program |
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Risk Reduction |
Reducing likelihood of a pure risk that is high in frequency and low in severity Ex: car door dings, common cold, damage household property |
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Risk Transfer |
Transferring low frequency & high severity risk to a 3rd party Insurance (disability, death, property) |
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Risk retention |
Accepting some or all of the potential loss exposure for risks that are low frequency and low severity Deductibles and Co-pays |
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Risk Avoidance |
Risks high in frequency and severity Smoking in bed, Driving drunk |
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Moral Hazard |
Potential for loss caused by the moral character of the insured such as filing of a false claim |
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Morale hazard |
Indifferent to risk due to the fact that insured has insurance. Ex: leaving a car running while going into the store |
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Physical Hazard |
Physical condition that increases likelihood of loss occurring Ex: wet floors, icy roads, roads with poor lighting |
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Law of insurance contracts |
Mutual Consent Offer and Acceptance Performance or Delivery Lawful Purpose Legal Competency of all Parties |
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Principle of indemnity |
Insurer will only compensate the insured to the extent the insured has suffered a financial loss |
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Life insurance…insurable interest? |
Only need to exist at the inception of the policy. Not an indemnity policy Often called “modified indemnity” or “agreed to value “ |
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3 legal doctrines throughout the application and life of policy |
•Representation: best of your knowledge •Warranty: promise, expect to be true •Concealment: not disclosing |
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Insurance contracts are of Adhesion which is… |
“Take it or leave it” contract Insured unable to negotiate terms of contract Since insured has no ability to negotiate terms of insurance policy, courts favor insured if ambiguities are found in contract |
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Insurance contracts are Aleatory meaning…. |
Dollar amounts exchanged between insured and insurer are unequal |
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Contracts are… Unilateral Conditional |
Unilateral only one promise made (insurer pay beneficiary in event of loss) Conditional in that insured must abide by all terms and conditions |
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Adverse Selection |
Tendency of those who need insurance the most to seek it out while those with the least perceived risk avoid paying the premiums by not buying insurance |
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National Association of insurance Commissioner (NAIC) goals |
Protect the public Promote competition Promote fair treatment of insurance consumers Promote the solvency of insurance companies Support and improve state regulation of insurance |
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4 insurance rate regulation laws… |
•Prior Approval- ins co files rate increase request with state ins commissioner office (approved, disapproved, or modified) •File & Use Law- ins co files it with state ins commissioner & immediately implement it Use & File Law- increase rate but have a certain time pd to file, varies by state •Open Competition Law- ins co sets their own rate & state presumes that supply & demand will determine appropriate rates |
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3 Laws of Agency |
•Express authority- given to agent formal written document •Implied authority- visual aids (business cards, letterhead, signs on the door) agency agreement exists •Apparent authority- visual aids as well but no agency agreement exists |
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Peril vs Hazard |
Peril: proximate cause of loss (fire, wind, hail, etc) Hazard: condition that creates or increases the likelihood of a loss occurring |
