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10 Cards in this Set
- Front
- Back
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Insurance |
- Based on the spreading of risk (risk pooling) and the law of large numbers - Insurance transfers risk from an individual or group to a company |
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Risk |
Uncertainty regarding financial loss -Pure risk-insurable because it involves a chance of loss only -Speculative risk-not insurable because it involves a chance of loss or gain, i.e. gambling |
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Exposure |
The financial amount or chance of a loss that one could incur |
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Hazard |
Gives rise to a peril, there are three kinds of hazards: - Physical - physical condition: medical history, blindness, deafness - Moral - a lie: filing a false claim or a lie on an application - Morale - an indifference to loss: driving recklessly, speeding |
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Peril |
The cause of a loss (fire, accident, flood) |
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Loss |
A reduction in the quantity, quality, or value of something |
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Methods of Handling Risk |
S.T.A.R.R. - Sharing - distributing risk among a similar group (condo owners) - Transfer - the loss is handled by another party. This is the most effective way of handling risk. - Avoidance - simply avoiding the risk (choose not to fly) - Reduction - lessen the possibility of loss, (install a smoke alarm - Retention - accepting the risk and confronting it when it occurs (self-insured) |
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Elements of Insurable Risk |
1.) Due to Chance - chance of loss beyond insured’s control 2.) Must be Definitive and Measurable - loss must have definite time, place and amount 3.) Must be Predictable - number of losses must be statistically predictable 4.) Loss Cannot be Catastrophic - there must be limits that the loss cannot exceed 5.) Exposure Must be Large - insurer must be able to predict losses based on the law of large numbers 6.) Exposure Must be Randomly Selected - insurer must have a fair proportion of both good and poor risks |
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Adverse Selection |
Less favorable insurance risk (Example: poor health) seek to continue insurance in greater numbers than other risks. |
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Law of Large Numbers |
- Predicts the number of deaths that should occur within a similar group of people (exposure) within a given period of time - The larger the number, the more accurate the prediction |
