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219 Cards in this Set
- Front
- Back
What is uncertainty concerning the occurence of a loss?
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Risk
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What is defined as the relative variation of actual loss from expected loss?
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Objective risk
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What can be statistically calculated using a measure of dispersion, such as the standard deviation?
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Objective Risk
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What is defined as uncertainty based on a person's mental condition or state of mind?
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Subjective Risk
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What does high subjective risk often result in?
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Conservative behavior
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What is the probability that an event will occur?
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Chance of Loss
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What refers to the long-run relative frequency of an event assuming an infinite number of observations and no change in the underlying conditions?
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Objective Probability
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What can be determined by deductive or inductive reasoning?
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Objective Probability
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What is the individual's personal estimate of the chance of loss?
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Subjective Probability
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What is defined as the cause of the loss?
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Peril
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In an auto accident, what is the collision called?
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peril
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What is a condition that increases the chance of loss?
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A hazard
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What are physical conditions that increase the chance of loss (icy roads,defective wiring)?
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Physical hazards
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What is dishonesty or character defects in an individual that increase the chance of loss (faking accidents, inflating claim amounts)?
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Moral hazard
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What is carelessness or indifference to a loss because of the existence of insurance (leaving keys in an unlocked car)?
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Morale hazard
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What refers to characteristics of the legal system or regulatory environment that increase the chance of loss (large damage awards in liability lawsuits)?
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legal hazard
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What is one in which there are only the possibilities of loss or no loss (earthquake)?
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Pure Risk
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What is one in which both profit or loss are possible (gambling)?
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Speculative Risk
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What affects the entire economy or large numbers of persons or groups (hurricane)?
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Fundamental Risk
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What affects only the individual (car theft)?
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Particular Risk
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What encompasses all major risks faced by a business firm, which include: pure risk, speculative risk, strategic risk, operational risk, and financial risk?
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Enterprise Risk
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What involve the possibility of a loss or reduction in income, extra expenses or depletion of financial assets?
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Personal Risks
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What involve the possibility of losses associated with the destruction or theft of property?
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Property Risks
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What is a financial loss that results from the physical damage, destruction, or theft of the property, such as fire damage to a restaurant?
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Direct Loss
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What results indirectly from the occurrence of a direct physical damage or theft loss, such as lost profits due to inability to operate after a fire?
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Indirect Loss
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What involve the possibility of being held liable for bodily injury or property damage to someone else?
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Liability Risks
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The presence of risk results in three major burdens on society which are?
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In the absence of insurance, individuals would have to maintain large emergency funds. The risk of a liability lawsuit may discourage innovation, depriving society of certain goods and services. Risk causes worry and fear.
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What is a process that identifies loss exposures faced by an organization and selects the most appropriate techniques for treating such exposures?
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Risk Management
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What is any situation or circumstance in which a loss is possible, regardless of whether a loss occurs?
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Loss Exposure
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What is a plant that may be damaged by an earthquake or an automobile that may be damaged in a collision an example of?
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Loss Exposure
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What has objectives before and after a loss occurs?
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Risk Management
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What are pre-loss objectives?
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Prepare for potential losses in the most economical way. Reduce Anxiety. And meet any legal obligations.
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What are post-loss objectives?
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Ensure survival of the firm. Continue operations. Stabilize earnings. Maintain growth. Minimize the effects that a loss will have on others and society.
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What is the Risk Management process?
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Identify potential losses. Evaluate potential losses. Select the appropriate risk management technique. Implement and monitor the risk management program.
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What are pre-designed checklist that enable a business or individual to answer a series of questions regarding their assets and activities to determine potential exposure?
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Loss Exposure Questionaires/checklists
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What is an analysis of the firm's balance sheet and income statements to determine exposure?
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Financial Statement Analysis
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What helps to identify exposures related to the production process?
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Flowcharts
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What helps to identify exposure resulting from the involvement with other parties in a contractual agreement?
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Contract Analysis
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What is visiting the various business locations, observing and interviewing various employees regarding the activities taking place?
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On-Site Inspections
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What is when you use past losses to identify and project future losses?
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Statistical Analysis of Past Losses
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What refers to the probably number of losses that may occur during some given time period?
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Loss Frequency
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What refers to the probable size of the losses that may occur?
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Loss Severity
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What is the worst loss that could happen to the firm during its lifetime?
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Maximum Probable Loss
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What is the worst loss that is likely to happen?
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Maximum Probable Loss
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What refers to techniques that reduce the frequency and severity of loss?
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Risk Control
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What are methods of risk control?
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Avoidance, Loss Prevention, and Loss Reduction
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What means a certain loss exposure is never acquired, or an existing loss exposure is abandoned?
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Avoidance
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What refers to measures that reduce the frequency of a particular loss?
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Loss Prevention
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What refers to measures that reduce the severity of a loss after is occurs?
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Loss Reduction
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What refers to techniques that provide for the funding of losses?
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Risk Financing
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What are methods of risk financing?
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Retention, Non-Insurance Transfers, and Commercial Insurance
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What means that the firm retains part or all of the losses that can result from a given loss?
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Retention
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What is the dollar amount of losses that the firm will retain?
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Retention Level
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What is the deliberate choice to assume all or part of a loss exposure?
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Planned Retention
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What is the unconscious decision to assume all or part of a loss exposure; often results from ignorance or laziness?
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Unplanned Retention
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What is losses are treated as current expenses?
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Current Net Income
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What is losses are deducted from a bookkeeping account?
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Unfunded Reserve
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What is funds are borrowed to pay losses as they occur?
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Credit Line
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What is losses are deducted from a liquid fund?
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Funded Reserve
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What is a special form of planned retention?
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Self-Insurance
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What are advantages of retention?
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Save money, lower expenses, encourage loss prevention, increase cash flow
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What are disadvantages of retention?
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possible higher losses, possible higher expenses, possible higher taxes
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What is a method other than insurance by which a pure risk and its potential financial consequences are transferred to another party?
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Non-insurance Transfer
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What are advantages of Non-insurance Transfer?
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Can transfer some losses that are not insurable, save money, can transfer loss to someone who is in a better position to control losses
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What are disadvantages of Non-insurance Transfer?
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Contract language may be ambiguous, so transfer may fail. If the other party fails to pay, firm is still responsible for the loss. Insurers may not give credit for transfers.
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What is appropriate for loss exposures that have a low probability of loss but for which the severity of loss is high?
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Insurance
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What is a provision by which a specified amount is subtracted from the loss payment otherwise payable to the insured?
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Deductible
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What is one which the insurer doesn't participate in the loss until the actual loss exceeds the amount a firm has decided to retain?
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Excess Insurance Policy
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What are advantages of insurance?
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Firm is indemnified for losses. Uncertainty is reduced. Insurers may provide other risk management services. Premiums are tax-deductible.
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What are disadvantages of insurance?
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Premiums may be costly. Negotiation of contracts takes time and effort. The risk manager may become lax in exercising loss control.
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What should be periodically reviewed and evaluated to determine whether the objectives are being attained?
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Risk Management Program
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What refers to the identification of pure risks faced by an individual or family, and to the selection of the most appropriate technique for treating such risks?
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Personal Risk Management
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What is the pooling of fortuitous 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?
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Insurance
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What is spreading losses incurred by the few over the entire group?
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Pooling of losses
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Risk reduction is based on the what?
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Law of Large Numbers
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What is when insurance pays for losses that are unforseen, unexpected, and occur as a result of chance?
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payment of fortuitous losses
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What is transferred from the insured to the insurer, who typically is in a stronger financial position?
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pure risk
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What is when the insured is restored to his or her approximate financial position prior to the occurrence of the loss?
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Indemnification
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What is used to predict average loss?
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Large number of exposure units
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What is used to control moral hazard and to assure randomness?
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Accidental and unintentional loss
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What is used to facilitate loss adjustment?
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Determinable and measurable loss
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How can exposures to catastrophic loss be managed?
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dispersing coverage over a large geographic area
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What is calculable chance of loss used for?
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To establish an adequate premium
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What risks can mostly be insured?
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personal, property, and liability
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What risks are difficult to insure?
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market, financial, production and political risks
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What is the tendency of persons with a higher-than-average chance of loss to seek insurance at standard rates?
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Adverse Selection
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If not controlled, what result in higher-than-expected loss levels?
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Adverse Selection
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How can adverse selection be controlled?
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Careful Underwriting and Policy Provisions in Contract
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What is a technique for handling an already existing pure risk?
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Insurance
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What is socially productive: Both parties have an interest in the prevention of a loss?
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Insurance
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What creates a new speculative risk?
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Gambling
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What is not socially productive: The winner's gain comes at the expense of a loss?
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Gambling
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What is when risk is transferred by a contract, involves risks that are typically uninsurable, and does not result in reduced risk?
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Hedging
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What type of insurance is life and health or property and liability?
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Private insurance
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What type of insurance is social insurance and other governmental insurance?
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Government Insurance
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What pays death benefits to beneficiaries when the insured dies?
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Life Insurance
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What covers medical expense because of sickness or injury?
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Health Insurance
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What pay income benefits?
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Disability Plans
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What indemnifies property owners against the loss or damage of real or personal property?
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Property Insurance
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What covers the insured's legal liability arising out of property damage or bodily injury to others?
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Liability Insurance
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What are coverages that insure the real estate and personal property of individuals and families or provide protection against legal liability?
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Personal lines
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What coverages for business firms, nonprofit organizations and government agencies?
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Commercial Lines
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What is the amount needed to pay all expenses, including commissions, general administrative expenses, state premium taxes, acquisition expenses, and an allowance for contingencies and profit?
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Expense Loading
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What results in higher premiums to all insureds, thus reducing disposable income and consumption of other goods and services?
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Payment of Fraudulent claims or inflated claims
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What is the long-run relative frequency of the event, given an infinite number of trials with no changes in the underlying conditions?
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probability of an event
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What are summarized through a probability distribution?
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Events and Probabilities
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What are probability distributions characterized by?
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The measure of central tendency and dispersion
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What is found by multiplying each outcome by the probability of occurrence, and then summing the resulting products?
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Mean or expected value
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What is the sum of the squared differences between the possible outcomes and the expected value, weighted by the probability of the outcomes?
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Standard deviation
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What are average losses from a random sample of n exposure units will follow a normal distribution?
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Central Limit Theorum
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Who agrees to pay no more than the actual amount of loss?
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The Insurer (the company)
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What principle states that the insurer agrees to pay no more than the actual amount of the loss?
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Principle of indemnity
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What is the purpose of the principle of indemnity?
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to prevent the insured from profiting from a loss and to reduce moral hazard
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In property insurance, what is based on the actual cash value of the property at the time of loss?
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Actual cash value
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What are the three main methods to determine actual cash value?
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Replacement cost less depreciation, Fair market value, and Broad evidence Rule
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What is the price a willing buyer would pay a willing seller in a free market?
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Fair Market Value
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What means that the determination of ACV should include all relevant factors an expert would use to determine the value of the property?
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Broad Evidence Rule
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What pays the face amount of insurance if a total loss occurs?
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A value policy
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Somes states have what that requires payment of the face amount of insurance to the insured if a total loss to real property occurs from a peril specified in the law?
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Valued Policy Law
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What means there is no deduction for depreciation in determining the amount paid for a loss?
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Replacement Cost Insurance
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What is a valued policy that pays a stated sum to the beneficiary upon the insured's death?
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Life Insurance Contract
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What is when you could put money in pocket instead of building a new house?
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Actual Cash Value
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What is the purpose of the insured must stand to lose financially if a loss occurs?
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To prevent gambling, to reduce moral hazard, and to measure the amount of loss
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When must insurable interest exist in property insurance?
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at the time of the loss
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When must insurable interest exist in life insurance?
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only at inception of the policy (no at time of loss)
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What principle states the substitution of the insurer in place of the insured for the purpose of claiming indemnity from a third person for a loss covered by insurance?
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Principle of Subrogation
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What are the purposes for the principle of subrogation?
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To prevent the insured from collecting twice for the same loss, to hold the negligent person responsible for the loss, to hold down insurance rates and also to get money promptly
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Who is entitled only to the amount it has paid under the policy?
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Insurer
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What does not apply to life insurance and to most individual health insurance contracts?
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Subrogation
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If money is recovered from the liable party under the subrogation proces what are the three things that happen?
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First, Insurer pays its legal fee Second, Insured is fully indemnified and Third, the insurer is reimbursed for losses paid to insured
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What principle states a higher degree of honesty is imposed on both parties to an insurance contract than is imposed on parties to other contracts?
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Principle of Utmost Good Faith
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What three legal doctrines support the principle of utmost good faith?
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Representations, Concealment and Warranty
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What are statements made by the applicant?
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Representations
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What is intentional failure of the applicant for insurance to reveal a material fact to the insurer?
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Concealment
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What is a statement that becomes part of the insurance contract and is guaranteed by the maker to be true in all respects?
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Warranty
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To be legally enforceable, what are the four requirements an insurance contract must meet?
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Offer and Acceptance of the terms of the contract. Consideration-the values that each party exchange. Legal Competent parties, with legal capacity to enter into a binding contract. And the contract must exist for a Legal Purpose.
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What are values exchanged are not equal?
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Aleatory
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What is only the insurer makes a legall enforceable promise?
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Unilateral
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What is a policyowner must comply with all policy provisions to collect for a covered loss?
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Conditional
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What is property insurance policy cannot be validly assigned to another party without the insurer's consent?
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Personal
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What is since the insured must accept the entire contract as it is written, any ambiguities are construed against the insurer?
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Contract of Adhesion
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What are statements that provide information about the particular property or activity to be insured (cover page)?
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Declarations
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In what does the declaration contain name of the insured, location of property, period of protection, amount of insurance, premium and deductible information?
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In property Insurance
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Insurance contracts typically contain a page or section of what?
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definitions
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What summarizes the major promises of the insurer?
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Insuring agreement
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What are the two basic forms of an insuring agreement in property insurance?
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Named Perils Policy and All-Risks Policy
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What policy states where only those perils specifically named in the policy are covered?
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Named perils Policy
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What policy states where all losses are covered except those losses specifically excluded?
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All-Risks policy
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What has fewer gaps, and the burden of proof is placed on the insurer to deny a claim?
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All-risk coverage
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Insurance contracts contain three major types of what?
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Exclusions
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What is an example of flood or intentional act?
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Excluded Perils
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What is a professional liability loss that is excluded in the homeowners policy?
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Excluded Losses
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What is pets are not covered as personal property in the homeowners policy?
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Excluded Policy
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What are provisions in the policy that qualify or place limitations on the insuer's promise to perform?
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Conditions
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What contain a variety of miscellaneous provisions (cancellation, subrogation, grace period, misstatement of age)?
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Insurance Policies
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What is the person or persons named in the declarations section of the policy?
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Named Insured
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In property insurance, what is a written provision that adds to, deletes from, or modifies the provisions in the original contract?
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An Endorsement
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In life and health insurance, what is a provision that amends or changes the original policy?
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A Rider
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What is a provision by which a specified amount is subtracted from the total loss payment that otherwise would be payable?
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Deductible
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What is the purpose of a deductibile?
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Eliminate small claims that are expensive to handle and process, Reduce premiums paid by the insured and Reduce moral and morale hazard
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Under what is the insurance should pay for high severity losses; small losses can be budgeted out of the person's income?
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Large Loss Principle
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With what the insured must pay a certain amount before the insure makes a loss payment?
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Straight Deductible
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What means that all losses that occur during a specified time period are accumulated to satisfy the deductible amount?
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Aggregate Deductible
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What is a type of aggregate deductible that is found in basic medical expense and major medical insurance contracts?
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Calendar-Year Deductible
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What is a deductible that can be used to integrate a basic medical expense plan with a supplemental major medical expense plan?
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Corridor Deductible
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What is a stated period of time at the beginning of a loss during which no insurance benefits are paid?
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Elimination (Waiting) Period
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What in a property insurance contract encourages the insured to insure the property to a stated percentage of its insurable value?
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Coinsurance Clause
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What is the purpose of coinsurance?
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to achieve equity in rating
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What do health insurance policies frequently contain?
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Percentage participation clause
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The purpose of what is to prevent profiting from insurance and violation of the principle of indemnity?
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Other-insurance Provisions
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Under what provision is each insurer's share of the loss is based on the proportion that its insurance bears to the total amount of insurance on the property?
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Pro Rata Liability
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Under what, is each insurer shares equally in the loss until the share paid by each insurer equals the lowest limit of liability under any policy, or until the full amount of the loss is paid?
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Contribution by Equal Shares
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Under what, is the primary insurer pays first, and the excess insurer pays only after the policy limits under the primary policy are exhausted?
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Primary and Excess Insurance Provision
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What in group health insurance is designed to prevent over insurance and the duplication of benefits if one person is covered under more than one group health insurance plan?
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Coordination of Benefits Provision
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What refers to the pricing of insurance?
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Rate Making
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Rates and premiums are determined by what, using the company's past loss experience and industry statistics?
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Actuary
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What is the price per unit of insurance?
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Rate
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What is the unit of measurement used in insurance pricing (a car-year)?
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Exposure unit
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What is the portion of the rate needed to pay losses and loss adjustment expenses?
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Pure Premium
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What is the amount that must be added to the pure premium for other expenses, profit, and a margin for contingencies?
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Loading
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What consists of the pure premium and loading?
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Gross Rate
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What paid by the insured consists of the gross rate multiplied by the number of exposure units?
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Gross Premium (We pay)
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What are the three basic rate making methods in property and casualty insurance?
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Judgement Rating, Manual Rating, and Merit Rating
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What means that each exposure is individually evaluated, and the rate is determined largely by the judgement of the underwriter?
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Judgement Rating
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What means that exposures with similar characteristics are placed in the same underwriting class, and each is charged the same rate?
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Manual Rating
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What is a rating plan by which class rates are adjusted upward or downward based on individual loss experience?
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Merit Rating
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Under what, there is an adjustment to the manual rate for insureds who meet certain requirements?
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Special Rating classes
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What is a discounted premium?
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Preferred Risk
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What is a substandard risk?
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Extra Premium
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What is determined for each exposure, which is then modified by debits or credits depending on the physical characteristics of the exposure?
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A basic rate
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Under what, the class or manual rate is adjusted upward or downward based on past loss experience?
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Experience Rating
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Under what plan, the insured's loss expericne during the current policy period determines the actual premium paid for that period?
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Retrospective Rating
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What is paid at beginning of the policy period; the final of this is calculated at the end of the policy period?
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A provisional premium
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What use a mortality table or individual company experience to determine the probability of death at each attained age?
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Life Insurance Actuaries
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What refers to the process of selecting, classifying, and pricing applicants for insurance?
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Underwriting
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What establishes policies that are consistent with the company's objectives such as acceptable classes of business and amounts of insurance that can be written?
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Statement of Underwriting Policy
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What makes daily decisions concerning the acceptance or rejection of business?
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Line Underwriter
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Where does information for underwriting comes from?
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The application, the agent's report, an inspection report, physical inspection, a physical examination and attending physician's report, and MIB report
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What refers to the sales and marketing activities of insurers?
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Production
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What are agents often referred to as?
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Producers
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Who have an agency or sales department?
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Life Insurers
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Who have marketing departments?
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Property and Liability insurers
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Who determines if a covered loss has occurred and the amount of the loss?
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A claim's adjuster
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Who decides if the claim should be paid or denied?
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The adjuster
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What is 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?
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Reinsurance
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What is the primary insurer called?
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Ceding company
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Who is the insurer that accepts the insurance form the ceding company is?
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Reinsurer
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What is the amount of insurance retained by the ceding company?
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Retention limit
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What is the amount of insurance ceded to the reinsurer called?
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Cession
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What are two principle forms of reinsurance?
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Facultative and Treaty Reinsurance
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What is an optional, case by case method that is used when the ceding company receives an application for insurance that exceeds its retention limit?
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Facultative Reinsurance
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What means the primary insurer has agreed to cede insurance to the reinsurer, and the reinsurer has agreed to accept the business?
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Treaty Reinsurance
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What is extremely important in reducing the cost of insurance to policy owners and offsetting unfavorable underwriting experience?
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Investment Income
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What contracts are long-term; thus, safety of principal is a primary consideration?
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Life Insurance Contract
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What contracts are short-term in nature, and claim payments can vary widely depending on catastrophic losses, inflation, medical costs, etc...?
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Property Insurance
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What area maintains information on premiums, claim, loss ratios, investments, and underwriting results?
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Electronic data processing
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What department prepares financial statements and develops budgets?
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accounting
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In what department, attorneys are used in advanced underwriting and estate planning?
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Legal department
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Property and liability insurers provide numerous what services?
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Loss Control Services
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