Term
| What are the two kinds of Risk? |
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Definition
| Speculative and Pure. Speculative involves possible outcomes of loss, gain or no change. Pure involves no possiblity of gain; either a loss occurs or no loss occurs. Pure Risk is the only kind of risk that can be insured. |
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Term
| There are four types of risk management: |
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Definition
1. Avoid the risk
2. Control the risk
3. Accept the risk
4. Transfer the risk |
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Term
Avoid Risk
Control Risk
Accept Risk
Transfer Risk
Defined: |
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Definition
| To avoid a risk, one simply does not take the risk. To avoid being in a plane crash, one does not fly. To control the risk, one takes steps of prevention like banning smoking in a building will reduce the risk of fire. Accepting the risk is when people assume the cost themselves like by not having to purchase insurance coverage to cover a disability, they decide to reduce their debt to avoid a big financial loss if a disability occurs. Tranferring risk is when people purchase ins. coverage. |
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Term
| There are insurance policies to cover three types of risk: |
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Definition
Personal Risk - death, economic loss.
Property Damage Risk
Liability Risk - being held responsible for the damage to someone else's things. |
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Term
| Characteristics of Insurable Risk |
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Definition
1. Loss must occur by chance
2. Loss must be definite
3. Loss must be significant
4. Loss rate must be predicable
5. Loss must not be catastrophic to insurer. |
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Term
| The differences between the Characteristics of Insurable Risk |
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Definition
| Occur by chance means an unexpected event. Be Definite means that the insurer must be able to determine when to pay benefits and how much it should be. To be a significant loss, it must show financial hardship. To be predictable, the insurer must be able to predict the loss rate. Probability means to be able to predict how often the event would occur in the future. It must not be Catastrophic to the insurer by causing financial damage to the insurer. |
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Term
| What is a valued contract? |
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Definition
| It specifies the amount of the policy benefit that will be payable when a covered loss occurs. A life insurance policy is a valued contract. |
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Term
| What is a Contract of Indemnity? |
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Definition
| An Insurance policy under which the amount of the policy benefit payable for a covered loss is based on the actual amount of financial loss that results from the loss, as determined at the time of the loss. |
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Term
| What does Law of Large Numbers mean? |
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Definition
| The more times we observe a particular event, the more likely it is that our observed results will approximate the "true" probability that the event will occur. |
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Term
| What are Mortality Tables and What are they used for? |
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Definition
| They are charts used by insurance companies that indicate with great accuracy the number of people in a large group who are likely to die at each age. |
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Term
| What are Morbidity Tables and how do they differ from Mortality tables? |
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Definition
| Morbidity tables display the incidence of sickness and accidents by age that occur among a given group of people. These can be used to establish premium rates that will be adequate to pay claims. |
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Term
| Underwriting consists of two primary stages: |
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Definition
| 1. Identifying the risks that a proposed insured present and 2. classifying the degree of risk that a proposed insured represents. |
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Term
| The most important two factors used in identifying risks are physical hazards and moral hazards - define the differences |
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Definition
| Physical risk is known to be things like medical history and health problems. Moral risk exists when the reputation, financial position or criminal record of an applicant is evident. |
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Term
| There are four risk classes - Standard, Preferred, Substandard, and Declined - what are the differences: |
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Definition
| Standard is when the likelihood of loss is not significantly greater than average. Preferred is signficantly less than average likelihood of loss. Substandard is the likelihood of a greater than average risk of loss and declined is when they are too risky to insure. |
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Term
| There is an insurable interest requirement when purchasing a policy - what is this? |
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Definition
| This is when the policyowner must have an insurable interest in the risk that is insured. In other words, he stands to suffer a genuine loss if a loss occurs. One cannot insure a building that does not belong to them. |
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Term
| There are two possible situations that are required to meet the insurable interest definition: |
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Definition
| 1. an individual purchases insurance on her own life and 2. an individual purchases insurance on another's life. In both cases, the applicant for life insurance must name a beneficiary. |
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Term
| Does the beneficiary have to have insurable interest? |
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Definition
| Yes, most underwriting guidelines mandate this. |
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