Insurance Basics: Risk Management

8 Questions

Policy premium for either individual or group insurance

Insurance companies providing coverage to high-risk applicants

Pre-existing condition clause

The insured person

Rick buys an insurance policy on his six-year-old son

At the time of application or policy issue

Law of Large Numbers

Insurable interest must exist at the time of loss

Study Notes

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 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

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