Podcast
Questions and Answers
What does pure risk represent?
What does pure risk represent?
A situation in which a person can only lose or have no change.
What does insurance seek to protect against?
What does insurance seek to protect against?
Loss.
What do individuals use to transfer risk of loss to a larger group?
What do individuals use to transfer risk of loss to a larger group?
Insurance.
How does insurance function?
How does insurance function?
What is a contract which one party undertakes to indemnify another against loss called?
What is a contract which one party undertakes to indemnify another against loss called?
The legal definition of 'person' would NOT include which of the following?
The legal definition of 'person' would NOT include which of the following?
How is the risk of loss classified?
How is the risk of loss classified?
What does insurance transfer?
What does insurance transfer?
How is risk defined for insurance purposes?
How is risk defined for insurance purposes?
What are events that have both chances of winning or losing classified as?
What are events that have both chances of winning or losing classified as?
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?
What are the causes of loss insured against in an insurance policy known as?
What are the causes of loss insured against in an insurance policy known as?
What is the growing tendency of individuals to file lawsuits known as?
What is the growing tendency of individuals to file lawsuits known as?
What are events or conditions that increase the chances of an insured loss occurring referred to as?
What are events or conditions that increase the chances of an insured loss occurring referred to as?
With respect to insurance, what is a hazard?
With respect to insurance, what is a hazard?
What kind of hazard includes legal or regulatory conditions affecting an insurer's ability to collect premiums?
What kind of hazard includes legal or regulatory conditions affecting an insurer's ability to collect premiums?
What must the insured group become for reported losses to be more likely to equal the statistical probability of loss?
What must the insured group become for reported losses to be more likely to equal the statistical probability of loss?
What law is the foundation of the statistical prediction of loss for insurance rates?
What law is the foundation of the statistical prediction of loss for insurance rates?
What are loss potentials that form the basis for setting rates called?
What are loss potentials that form the basis for setting rates called?
What is the unit of measurement an underwriter uses when determining premium rates?
What is the unit of measurement an underwriter uses when determining premium rates?
Which rating method does NOT include provisions for expenses or profit?
Which rating method does NOT include provisions for expenses or profit?
What risk management method is described by an insured adopting healthier habits?
What risk management method is described by an insured adopting healthier habits?
Which of the following is an insurable risk?
Which of the following is an insurable risk?
What method does an individual use to prevent loss by not exposing oneself to risk?
What method does an individual use to prevent loss by not exposing oneself to risk?
Which of the following is NOT an element of insurability?
Which of the following is NOT an element of insurability?
What does installing deadbolt locks on doors represent?
What does installing deadbolt locks on doors represent?
Which of the following events is NOT insurable according to the Insurance Code?
Which of the following events is NOT insurable according to the Insurance Code?
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 of the following is NOT a characteristic of an insurable risk?
Which of the following is NOT a characteristic of an insurable risk?
What risk management technique prevents a specific loss by avoiding the activity?
What risk management technique prevents a specific loss by avoiding the activity?
Which of the following is NOT a goal of risk retention?
Which of the following is NOT a goal of risk retention?
All of the following are examples of risk retention EXCEPT:
All of the following are examples of risk retention EXCEPT:
What is the most common way to transfer risk?
What is the most common way to transfer risk?
What is considered a risk-sharing arrangement?
What is considered a risk-sharing arrangement?
What risk management technique is practiced when someone purchases insurance?
What risk management technique is practiced when someone purchases insurance?
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?
When must insurable interest exist in property and casualty insurance?
When must insurable interest exist in property and casualty insurance?
What does a profitable distribution of exposure refer to?
What does a profitable distribution of exposure refer to?
What type of contract involves an employer implementing a self-funded plan with insurer administration?
What type of contract involves an employer implementing a self-funded plan with insurer administration?
What protects insurers from adverse selection?
What protects insurers from adverse selection?
What is the formula for computing a loss ratio?
What is the formula for computing a loss ratio?
What is the process an insurer uses to evaluate applications called?
What is the process an insurer uses to evaluate applications called?
What does the loss ratio compare?
What does the loss ratio compare?
How is adverse selection best described?
How is adverse selection best described?
Which term refers to the ability of two parties to rely on one another?
Which term refers to the ability of two parties to rely on one another?
In case of a loss, the indemnity provision in insurance policies:
In case of a loss, the indemnity provision in insurance policies:
Which statement is not true concerning insurable interest as it applies to life insurance?
Which statement is not true concerning insurable interest as it applies to life insurance?
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?
Installing deadbolt locks on the doors of a home is an example of which method of handling risk?
Installing deadbolt locks on the doors of a home is an example of which method of handling risk?
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:
What is insurance primarily the transfer of?
What is insurance primarily the transfer of?
If an applicant for a life insurance policy and the person to be insured by the policy are two different people, the underwriter would be concerned about:
If an applicant for a life insurance policy and the person to be insured by the policy are two different people, the underwriter would be concerned about:
When must insurable interest exist in a life insurance policy?
When must insurable interest exist in a life insurance policy?
What type of hazard is presented by a person who shows an indifferent attitude towards risk, such as not locking doors?
What type of hazard is presented by a person who shows an indifferent attitude towards risk, such as not locking doors?
Study Notes
Basic Insurance Concepts
- Pure Risk: A situation where there is only a possibility of loss with no chance for gain.
- Insurance Definition: A contract designed to protect an individual from loss caused by specified future events in exchange for premium payments.
- Transfer of Risk: Individuals use insurance to shift the risk of loss to a larger group, enabling collective management of potential losses.
Types of Risk
- Loss: The financial detriment one seeks protection against through insurance contracts.
- Risk Classification: Includes pure risk (no possibility of gain) and speculative risk (possibility of gain or loss).
Legal Entities
- Definition of Person: Includes individual humans, business entities, corporations, and various organizations; does not include families.
Risk Evaluation
- Insurance as a Financial Tool: Transfers financial responsibility of potential loss to an insurance company.
- Events that Increase Loss Chances: Classified as hazards; these include physical, moral, or morale hazards.
Insurable Events and Legal Hazards
- Perils: Conditions or events that cause loss, insured against within policies.
- Legal Hazards: Arise from court actions, which could increase the likelihood or size of claims.
Mathematical Principles
- Law of Large Numbers: Indicates that as the size of the insured group increases, predictions of loss become more accurate, aiding in determining appropriate premiums.
- Loss Ratio Formula: Represents the relationship between incurred losses plus adjustment expenses and earned premiums.
Risk Management Techniques
- Reduction: Actions taken to minimize potential losses, such as implementing security measures.
- Avoidance: Completely refraining from activities that pose risk.
- Transfer: Purchasing insurance is the primary method to shift risk away from the insured.
Insurability Criteria
- Elements of Insurable Risk: Must be calculable, represent potential financial hardship, and be expected occurrences. Risks that are speculative are not insurable.
- Insurable Interest: Must be present at the application for life insurance and is defined as the stake an individual has in not losing the insured property or person.
Risk Sharing and Premiums
- Risk-Sharing Arrangements: Individuals share their risks through reciprocal insurers, impacting how claims are managed collectively.
- Exposure Measurement: Insurers use exposure as a unit of measure when calculating insurance premiums.
Adverse Selection and Good Faith
- Adverse Selection: Occurs when high-risk individuals are more likely to seek insurance, leading to imbalanced risk pools.
- Utmost Good Faith: The principle requiring both parties in insurance contracts to fully disclose relevant information.
Claims and Indemnity
- Indemnity Provision: Ensures that an insured person is restored to their pre-loss financial condition, without profiting from the insurance claim.
- Insured Group Size: Lastly, for reported losses to reflect statistical probabilities accurately, the insured group must be larger.
Risk Retention Approaches
- Risk Retention: Involves accepting responsibility for potential losses, as seen through deductibles and copayments rather than full insurance coverage.
- Common Misconceptions: Speculative risks do not qualify for insurance coverage, which focuses only on pure risks.
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Description
Test your understanding of basic insurance concepts including pure risk, the definition of insurance, and the transfer of risk. This quiz also covers types of risk and the legal entities involved in insurance. Sharpen your knowledge on how insurance serves as a financial tool for loss management.
