Insurance and Risk Management

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Questions and Answers

What is the primary function of insurance as a risk transfer system?

To minimize the risk of losses

To provide a guarantee against losses

To distribute the costs of losses among all insureds (correct)

To maximize the profit of insurers

How do insurers determine the total amount of premiums they must collect from insureds?

By analyzing the claims history of individual insureds

By forecasting future losses based on economic trends

By considering past loss experience and the law of large numbers (correct)

By negotiating with insureds to determine the premium amount

What is the primary benefit of insurance to the insured?

The ability to transfer risk to others

The opportunity to invest in the insurance company

The possibility of a large loss

The certainty of a much smaller, periodic payment (correct)

What is the law of large numbers in the context of insurance?

A mathematical principle stating that as the number of similar but independent exposure units increases, the more predictable the losses become Signup and view all the answers

What is the primary benefit of insurance to the insurer?

The ability to keep claims costs down Signup and view all the answers

What is the primary goal of loss reduction strategies?

To reduce the likelihood and magnitude of losses Signup and view all the answers

What is risk retention in the context of insurance?

The practice of retaining some or all of the risk Signup and view all the answers

What is the primary goal of risk transfer strategies?

To transfer the risk of losses to others Signup and view all the answers

What is the primary purpose of loss prevention measures in risk management?

To reduce the frequency or severity of losses Signup and view all the answers

Why might Ming choose to transfer his risk exposure rather than retaining or controlling it?

Because he cannot afford to retain the risk Signup and view all the answers

What is a key difference between personal insurance customers and larger commercial insurance customers?

Commercial customers have more risk management options Signup and view all the answers

What is the role of big data in the insurance industry?

To analyze an insured's history and needs Signup and view all the answers

What is the primary goal of loss reduction measures in risk management?

To reduce the severity of losses Signup and view all the answers

What is an example of a loss prevention measure mentioned in the content?

Wearing safety goggles and helmets Signup and view all the answers

Why might risk transfer be more economically viable for Ming compared to noninsurance transfer methods?

Because insurance is often more affordable Signup and view all the answers

What is a key benefit of using technology and big data in the insurance industry?

More tailored recommendations and affordable coverage Signup and view all the answers

What is the primary reason why controlling risks is preferred to insuring them from an economic viewpoint?

It generally costs less to do so Signup and view all the answers

What is the main purpose of risk control representatives in the insurance industry?

To support underwriters in selecting which loss exposures to insure Signup and view all the answers

What is the primary goal of risk control in the context of insurance?

To reduce the frequency and severity of losses Signup and view all the answers

What is the purpose of a premium audit in the insurance industry?

To adjust the insurance premium based on actual loss exposures Signup and view all the answers

What technique does risk control represent in the context of insurance?

Risk reduction Signup and view all the answers

What is the outcome of effective risk control in the insurance industry?

Lower insurance premiums Signup and view all the answers

What is the relationship between risk control and insurance in the context of large loss exposures?

Risk control is used in conjunction with insurance Signup and view all the answers

What do risk control professionals do to help insureds reduce their risk exposure?

Offer suggestions on loss control techniques Signup and view all the answers

Study Notes

Insurance as a Risk Transfer System

Insurance enables individuals, families, or organizations to transfer the costs of losses to an insurer.
The insurer pays claims for covered losses from the premiums it has collected and distributes the costs of the losses among all its insureds.
Insurance is a system of both transferring and sharing the costs of losses.

Law of Large Numbers

A mathematical principle stating that as the number of similar but independent exposure units increases, the insurer can predict the number of losses that all similar exposure units combined are likely to experience.

Risk Control

Controlling risks is preferable to insuring them because it generally costs less.
Risk control involves conscious acts or decisions to reduce the frequency and/or severity of losses or make losses more predictable.
Risk control professionals can work directly with insureds, providing suggestions on which loss control techniques would be most effective at lowering the amount of risk they face.

Premium Audit

A methodical examination of a policyholder's operations to determine if any adjustments to the premium are required, based on the insured's actual loss exposures during a policy period.

Risk Management Techniques

Risk retention: bearing the financial consequences of a loss.
Risk avoidance: avoiding activities that create loss exposures.
Risk control: reducing the frequency and/or severity of losses.
Risk transfer: transferring the financial consequences of a loss to another party, such as through insurance.

Use of Technology and Big Data

Insurance professionals can use an abundance of new data to analyze an insured's history and needs.
Technology and big data can help recommend coverages, risk control, and loss prevention techniques that make the recommended coverages more affordable.

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Description

Learn about insurance as a risk transfer system, how it enables individuals and organizations to transfer costs of losses, and the role of the Law of Large Numbers in insurance.