Insurance Basics: Risk Management
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Questions and Answers

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?

  • 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?

  • 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?

    <p>The insured person</p> Signup and view all the answers

    Which example illustrates a third-party insurance contract?

    <p>Rick buys an insurance policy on his six-year-old son</p> Signup and view all the answers

    When must insurable interest exist for an insurance policy to be valid?

    <p>At the time of application or policy issue</p> Signup and view all the answers

    Which concept states that the larger the number of occurrences, the more predictable the losses will become?

    <p>Law of Large Numbers</p> Signup and view all the answers

    Which of the following conditions does NOT need to be met for insurable interest?

    <p>Insurable interest must exist at the time of loss</p> Signup and view all the answers

    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.

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