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Questions and Answers
What is a self-funded insurance plan?
What is a self-funded insurance plan?
- Employers do not pay any claims
- Only employees contribute
- Only health insurance claims are covered
- Employers pay all claims (correct)
The loss ratio compares which of the following?
The loss ratio compares which of the following?
- Premiums to company expenses
- Premiums to interest rates
- Premium income to losses (correct)
- Losses to interest rates
The growing tendency of individuals to file lawsuits and claim large amounts for damages is known as what?
The growing tendency of individuals to file lawsuits and claim large amounts for damages is known as what?
- Legal risk
- Legal hazard (correct)
- Legal peril
- Legal catalyst
A set of legal or regulatory conditions affecting an insurer's ability to collect premiums is known as what?
A set of legal or regulatory conditions affecting an insurer's ability to collect premiums is known as what?
A tornado that destroys property would be an example of which of the following?
A tornado that destroys property would be an example of which of the following?
The type of insurance that guarantees behavior and performance of contracts is known as...
The type of insurance that guarantees behavior and performance of contracts is known as...
Following a career change, an insured begins exercising and eating healthier. What method of dealing with risk does this represent?
Following a career change, an insured begins exercising and eating healthier. What method of dealing with risk does this represent?
Insurance is the transfer of what?
Insurance is the transfer of what?
What do individuals use to transfer their risk of loss to a larger group?
What do individuals use to transfer their risk of loss to a larger group?
A set of legal or regulatory conditions that affect an insurer's ability to collect premiums commensurate with the level of risk incurred would be considered a(n):
A set of legal or regulatory conditions that affect an insurer's ability to collect premiums commensurate with the level of risk incurred would be considered a(n):
A situation in which a person can only lose or have no change represents:
A situation in which a person can only lose or have no change represents:
Which one of the following is NOT an element of insurability?
Which one of the following is NOT an element of insurability?
A tornado that destroys property would be an example of which of the following?
A tornado that destroys property would be an example of which of the following?
In what type of plan would the employer pay all of the claims?
In what type of plan would the employer pay all of the claims?
Which of the following is the most common way to transfer risk?
Which of the following is the most common way to transfer risk?
The process an insurer uses to evaluate applications and determine if a policy should be issued and on what terms, conditions, and rates is known as:
The process an insurer uses to evaluate applications and determine if a policy should be issued and on what terms, conditions, and rates is known as:
Following a career change, an insured is no longer required to perform many physical activities. The insured has also eliminated most fatty foods from his diet. Which method of dealing with risk does this scenario describe?
Following a career change, an insured is no longer required to perform many physical activities. The insured has also eliminated most fatty foods from his diet. Which method of dealing with risk does this scenario describe?
Adverse selection is a concept best described as:
Adverse selection is a concept best described as:
Which type of insurance guarantees or indemnifies owners of real or personal property or the holders of liens or other interested parties against loss or damage suffered to said property?
Which type of insurance guarantees or indemnifies owners of real or personal property or the holders of liens or other interested parties against loss or damage suffered to said property?
Which of the following is NOT a goal of risk retention?
Which of the following is NOT a goal of risk retention?
What do individuals use to transfer their risk of loss to a larger group?
What do individuals use to transfer their risk of loss to a larger group?
The risk management technique that is used to prevent a specific loss by not exposing yourself to that activity is called:
The risk management technique that is used to prevent a specific loss by not exposing yourself to that activity is called:
The risk of loss may be classified as:
The risk of loss may be classified as:
With respect to the business of insurance, a hazard is:
With respect to the business of insurance, a hazard is:
Loss potentials that are the basis for setting rates are:
Loss potentials that are the basis for setting rates are:
The loss ratio compares:
The loss ratio compares:
Events or conditions that increase the chances of an insured loss occurring are referred to as:
Events or conditions that increase the chances of an insured loss occurring are referred to as:
When an individual purchases insurance, what risk management technique is he or she practicing?
When an individual purchases insurance, what risk management technique is he or she practicing?
For the reported losses of an insured group to become more likely to equal the statistical probability of loss for that particular class, the insured group must become:
For the reported losses of an insured group to become more likely to equal the statistical probability of loss for that particular class, the insured group must become:
The growing tendency of individuals to file lawsuits and to claim tremendous amounts for alleged damages is known as:
The growing tendency of individuals to file lawsuits and to claim tremendous amounts for alleged damages is known as:
Which of the following insurance providers would be considered a risk sharing arrangement?
Which of the following insurance providers would be considered a risk sharing arrangement?
A contract which one party undertakes to indemnify another against loss is called:
A contract which one party undertakes to indemnify another against loss is called:
Peril is most easily defined as:
Peril is most easily defined as:
The type of insurance that guarantees the behavior of persons and the performance of contracts other than insurance policies is known as:
The type of insurance that guarantees the behavior of persons and the performance of contracts other than insurance policies is known as:
According to California Insurance Code, which of the following can be classified as an insurable event?
According to California Insurance Code, which of the following can be classified as an insurable event?
Which law is the foundation of the statistical prediction of loss upon which rates for insurance are calculated?
Which law is the foundation of the statistical prediction of loss upon which rates for insurance are calculated?
Insurance is a contract by which one seeks to protect another from:
Insurance is a contract by which one seeks to protect another from:
For the purpose of insurance, risk is defined as:
For the purpose of insurance, risk is defined as:
All of the following are examples of risk retention EXCEPT:
All of the following are examples of risk retention EXCEPT:
Which rating method provides an insurer with that portion of a rate that does not include provisions of expenses (other than adjusting expense) or profit and is based on historical aggregate loss and loss adjustment expenses projected through development to their ultimate value and through trending to a future point in time?
Which rating method provides an insurer with that portion of a rate that does not include provisions of expenses (other than adjusting expense) or profit and is based on historical aggregate loss and loss adjustment expenses projected through development to their ultimate value and through trending to a future point in time?
Taking a defensive driving course or installing deadbolt locks on the doors of a home are examples of which of the following?
Taking a defensive driving course or installing deadbolt locks on the doors of a home are examples of which of the following?
All of the following actions by a person could be described as risk avoidance EXCEPT:
All of the following actions by a person could be described as risk avoidance EXCEPT:
An employer has decided to implement a self-funded plan. The company will pay the claims, but an insurer will administer the actual plan. What kind of contract is this?
An employer has decided to implement a self-funded plan. The company will pay the claims, but an insurer will administer the actual plan. What kind of contract is this?
The causes of loss insured against in an insurance policy are known as:
The causes of loss insured against in an insurance policy are known as:
What is Legal insurance?
What is Legal insurance?
Which of the following is the most common way to transfer risk?
Which of the following is the most common way to transfer risk?
The protection of the insurer from adverse selection is provided in part by?
The protection of the insurer from adverse selection is provided in part by?
In property and casualty insurance, what is the term for the amount of a loss that the insured must cover out of pocket?
In property and casualty insurance, what is the term for the amount of a loss that the insured must cover out of pocket?
Which rating method provides an insurer with the portion of a rate that does not include provisions for profit?
Which rating method provides an insurer with the portion of a rate that does not include provisions for profit?
Insurance is a contract by which one seeks to protect another from?
Insurance is a contract by which one seeks to protect another from?
A tornado that destroys property would be an example of which of the following?
A tornado that destroys property would be an example of which of the following?
The causes of loss insured against in an insurance policy are known as?
The causes of loss insured against in an insurance policy are known as?
The type of insurance that guarantees the behavior of persons and performance of contracts is known as?
The type of insurance that guarantees the behavior of persons and performance of contracts is known as?
Events or conditions that increase the chances of an insured loss occurring are referred to as?
Events or conditions that increase the chances of an insured loss occurring are referred to as?
An individual avoiding all exposure to driving to prevent car accidents exemplifies which method of risk management?
An individual avoiding all exposure to driving to prevent car accidents exemplifies which method of risk management?
With respect to the business of insurance, a hazard is?
With respect to the business of insurance, a hazard is?
Which of the following individuals would probably NOT have insurable interest in insured property?
Which of the following individuals would probably NOT have insurable interest in insured property?
Peril is most easily defined as?
Peril is most easily defined as?
A set of legal or regulatory conditions that affect an insurer's ability to collect premiums would be considered a?
A set of legal or regulatory conditions that affect an insurer's ability to collect premiums would be considered a?
Events in which a person has both the chance of winning or losing are classified as?
Events in which a person has both the chance of winning or losing are classified as?
Profitable distribution of exposures serves the purpose of?
Profitable distribution of exposures serves the purpose of?
Insurance is the transfer of?
Insurance is the transfer of?
For the reported losses of an insured group to equal the statistical probability of loss, the group must become?
For the reported losses of an insured group to equal the statistical probability of loss, the group must become?
For the purpose of insurance, risk is defined as?
For the purpose of insurance, risk is defined as?
Which of the following is NOT a goal of risk retention?
Which of the following is NOT a goal of risk retention?
Taking a defensive driving course is an example of which of the following?
Taking a defensive driving course is an example of which of the following?
Which one of the following is NOT an element of insurability?
Which one of the following is NOT an element of insurability?
Which type of insurance guarantees or indemnifies owners of real property against loss or damage?
Which type of insurance guarantees or indemnifies owners of real property against loss or damage?
The legal definition of 'person' would NOT include which of the following?
The legal definition of 'person' would NOT include which of the following?
Which of the following is an insurable risk?
Which of the following is an insurable risk?
The growing tendency of individuals to file lawsuits and claim large amounts for damages is known as?
The growing tendency of individuals to file lawsuits and claim large amounts for damages is known as?
What describes a situation when poor risks are balanced with preferred risks, and average risks are in the middle?
What describes a situation when poor risks are balanced with preferred risks, and average risks are in the middle?
The loss ratio compares?
The loss ratio compares?
When an individual purchases insurance, what risk management technique is he or she practicing?
When an individual purchases insurance, what risk management technique is he or she practicing?
Which of the following is the correct formula for computing a loss ratio?
Which of the following is the correct formula for computing a loss ratio?
Which insurance provider would be considered a risk-sharing arrangement?
Which insurance provider would be considered a risk-sharing arrangement?
Loss potentials that are the basis for setting rates are?
Loss potentials that are the basis for setting rates are?
Which of the following is NOT a goal of risk retention?
Which of the following is NOT a goal of risk retention?
With respect to the business of insurance, a hazard is?
With respect to the business of insurance, a hazard is?
Adverse selection is best described as?
Adverse selection is best described as?
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Study Notes
Insurance Concepts and Principles
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Legal Hazard: A set of legal or regulatory conditions impacting an insurer's ability to charge premiums relative to incurred risks.
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Pure Risk: Situations that can only lead to loss or no change; the only type of risk insurance companies are willing to accept.
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Elements of Insurability: Includes expected loss, calculable loss, and that loss must represent financial hardship. Speculative risk is excluded as it can result in gains.
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Peril: The cause of a loss insurable under an insurance policy, such as a tornado destroying property.
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Self-Funded Plan: A health insurance plan where the employer pays all claims directly.
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Risk Transfer: The most common method for managing risk is through purchasing insurance, transferring potential loss to the insurer.
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Underwriting: The evaluation process insurers use to accept or reject insurance policy applications based on risk assessment.
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Risk Reduction: Lifestyle changes, such as exercising and dietary adjustments, that lower the risk of future health issues.
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Adverse Selection: Occurs when individuals with higher loss probabilities seek insurance more often, potentially leading to financial imbalance for insurers.
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Title Insurance: Guarantees indemnification against loss related to property ownership, protecting all holders of liens or interests.
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Goals of Risk Retention: Include increasing control over claims and funding uninsured losses; minimizing liability is not a goal.
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Insurance Mechanism: Protects individuals against losses due to uncertain future events, funded by premium payments from multiple insured individuals.
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Avoidance: A method of risk management that eliminates exposure to potential loss by avoiding risky activities altogether.
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Types of Risk: Classified into pure risk (insurable with a chance of loss) and speculative risk (uninsurable with potential for both gain and loss).
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Hazard: Any condition increasing the likelihood of a loss, categorized as physical, moral, or morale.
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Loss Exposure: Refers to potential losses which form the basis for insurance rates.
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Loss Ratio: The comparison of premiums collected to losses incurred, indicating the financial performance of an insurance line.
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Statistical Probability of Loss: Predicted based on the Law of Large Numbers, which states larger groups yield more accurate loss predictions.
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Legal Hazard: Refers to increased litigation and damages claims that raise the risk associated with insuring a group.
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Risk Sharing: Achieved through reciprocal insurance, where insured parties share the risk of loss.
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Insurance Contract: An agreement where one party indemnifies another against loss from unforeseen events.
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Perils Defined: Clearly identified as the specific causes of loss covered by a policy.
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Legal Insurance: Covers costs related to legal services performed by licensed attorneys.
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Administrative Service Only (ASO): An arrangement where employers maintain a self-funded plan but hire an insurer for administrative tasks.
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Deductible: The portion of a loss an insured pays out-of-pocket before the insurer contributes to claims.
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Risk Management Techniques: Include avoidance, reduction, sharing, and transfer, each serving distinct roles in risk control.### Insurance Concepts and Definitions
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Loss costs rating: A rating method by ISO used by insurers that excludes expenses and profits, relying purely on historical loss data and projected expenses.
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Insurance: A contract aimed at protecting individuals or entities from financial loss.
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Perils: The specific causes of loss that are covered under an insurance policy (e.g., tornado).
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Hazards: Conditions or situations that increase the likelihood of an insured loss occurring; categorized as physical, moral, or morale.
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Surety insurance: Guarantees behavior of persons and performance of contracts, excluding mortgages or deeds.
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Risk management methods: Includes avoidance (eliminating risk) and reduction (minimizing its impact).
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Adverse selection: A scenario where higher-risk individuals are more likely to seek insurance, challenging insurers to balance their risk pool.
Types of Risks and Insurance
- Speculative risk: Risks with the potential for both gain and loss, typically not insurable.
- Insurable risk: Must cause financial hardship and arise from accidents, such as hail damage to property.
- Legal hazard: Involves regulatory factors that affect the insurer's ability to collect premiums corresponding to risk exposure.
- Loss exposure: Refers to potential losses that inform the setting of insurance rates.
Risk Assessment and Management
- Loss ratio: A metric that compares premium income to the losses incurred, including claims and related expenses.
- Risk retention: Involves an entity assuming part of the risk, often aiming to control claims and improve financial management, but does not aim to minimize liability.
- Risk distribution: Achieved by balancing poor risks with preferred risks to avoid adverse selection and ensure profitability.
Legal and Regulatory Considerations
- Legal definitions: The term "person" in the insurance context includes individual humans, businesses, and corporations, but not families as a unit.
- Litigation trends: The increase in lawsuits and high damage claims is a growing legal hazard impacting insurers.
Practical Examples and Applications
- Risk management actions: Defensive driving courses and home security measures represent risk reduction strategies.
- Self-funding plans: Employers assume full responsibility for claims under self-funded insurance arrangements.
Summary
- Understanding these insurance concepts helps in navigating the complexities of risk management, ensuring proper coverage, and facilitating the role of insurance in financial protection.
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