Podcast
Questions and Answers
What does the Law of Large Numbers help to calculate in insurance?
What does the Law of Large Numbers help to calculate in insurance?
- The administrative costs of running an insurance company
- The maximum coverage amount for an insured
- Policy premium for either individual or group insurance (correct)
- The number of policyholders required for profitability
Which of the following best describes adverse selection in insurance?
Which of the following best describes adverse selection in insurance?
- A sound financial strategy for insurers
- Insurance companies providing coverage to high-risk applicants (correct)
- The selection process where only healthy individuals are accepted
- The method used to decrease the risk of claims
Which policy provision can assist in eliminating most adverse selection?
Which policy provision can assist in eliminating most adverse selection?
- First come, first served basis
- Automatic approval for all applicants
- Pre-existing condition clause (correct)
- No clause is required
Who owns the policy in a two-party insurance contract?
Who owns the policy in a two-party insurance contract?
Which example illustrates a third-party insurance contract?
Which example illustrates a third-party insurance contract?
When must insurable interest exist for an insurance policy to be valid?
When must insurable interest exist for an insurance policy to be valid?
Which concept states that the larger the number of occurrences, the more predictable the losses will become?
Which concept states that the larger the number of occurrences, the more predictable the losses will become?
Which of the following conditions does NOT need to be met for insurable interest?
Which of the following conditions does NOT need to be met for insurable interest?
Study Notes
Insurance Basics: Risk Management
Law of Large Numbers
- The law states that as the number of occurrences increases, the more predictable losses become
- This law helps calculate policy premiums for individual or group insurance
- Predictable loss ratios enable insurance companies to set accurate premiums
Adverse Selection
- Adverse selection occurs when more bad risks seek insurance coverage, affecting the insurer's financial condition
- This is a hazard to the insurer's financial stability
- Sound underwriting and policy provisions can mitigate adverse selection
- Examples of policy provisions that help are pre-existing condition clauses and suicide clauses
- A profitable distribution of exposures means having an adequate number of good risks to offset poorer risks
Parties of the Contract
- In a two-party contract, the owner is the insured, owning the policy, having contractual rights, and paying the premium
- The insurer provides the guarantee in a two-party contract
- In a third-party contract, the owner is not the insured, but rather purchases insurance on someone else, such as a family member
- An insurable interest is required between the owner and the insured, often based on a financial relationship
- The insurable interest must exist at the time of application or policy issue, but not at the time of loss
- The insured must be aware of the purchase by signing the application
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Description
Understand the fundamentals of insurance, including the Law of Large Numbers and Adverse Selection, to calculate policy premiums and manage risk.
