Insurance Concepts Flashcards

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Questions and Answers

What is the definition of insurance?

It is a form of savings.

It is a guarantee of profit.

It eliminates all risks associated with loss.

It involves transferring the risk of loss to an insurance company. (correct)

What does the law of large numbers state?

Insurance companies cannot predict loss.

Larger numbers of similar exposure to loss make actual loss more predictable. (correct)

Smaller groups have more predictable outcomes.

Loss prediction is always inaccurate.

Insurance is a contract by which one seeks to protect another from a ______.

Loss

What happens to the insured if they violate the contract without the mortgage holder's knowledge?

The insured cannot collect but the mortgage holder will still be paid. Signup and view all the answers

What must be proven at the time of loss?

Insurable interest in the property covered in a policy. Signup and view all the answers

What are the two classifications of risk?

Pure risk and speculative risk Signup and view all the answers

What does insurable interest mean?

The insured would incur a financial loss if the insured property was damaged. Signup and view all the answers

What are the three elements of insurable risk?

Financial, blood, and business. Signup and view all the answers

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 ______.

Larger Signup and view all the answers

What do individuals use to transfer their risk of loss to a larger group?

Insurance. Signup and view all the answers

What is the definition of risk in insurance?

The uncertainty or chance of a loss occurring. Signup and view all the answers

What does pure risk refer to?

Situations that can only result in a loss or no change. Signup and view all the answers

What does speculative risk involve?

The opportunity for either loss or gain. Signup and view all the answers

What are perils in insurance?

The causes of loss insured against in an insurance policy. Signup and view all the answers

Which law is foundational for statistical prediction of loss in insurance?

Law of large numbers. Signup and view all the answers

What is a peril in the context of insurance?

A tornado that destroys property. Signup and view all the answers

If an insured's property policy is $250,000 and the mortgage is paid off, what will the bank receive in the event of a covered loss?

Nothing. Signup and view all the answers

What are hazards in insurance?

Conditions or situations that increase the probability of an insured loss occurring. Signup and view all the answers

What are conditions in relation to hazards?

They may increase the chance of a loss occurring. Signup and view all the answers

How are hazards classified?

Physical, moral, and morale Signup and view all the answers

What is a physical hazard?

Those arising from the material, structural, or operational features of the risk. Signup and view all the answers

What does moral hazard refer to?

Applicants that may lie on an application or submit fraudulent claims. Signup and view all the answers

What is a morale hazard?

An increase in the hazard presented by a risk due to the insured's indifference. Signup and view all the answers

What characterizes speculative risk?

Events in which a person has both the chance of winning or losing. Signup and view all the answers

What does pure risk entail?

A situation in which a person can only lose or have no change. Signup and view all the answers

What is a hazard in the context of business insurance?

Any condition or exposure that increases the possibility of loss. Signup and view all the answers

What is indemnity in insurance?

A provision that states in the event of a loss, one can collect only to the extent of financial loss. Signup and view all the answers

What is peril generally defined as?

The cause of loss insured against. Signup and view all the answers

What is subrogation?

The insurer's legal right to seek damages from third parties after reimbursement. Signup and view all the answers

What is an accident in the insurance context?

A sudden, unplanned, and unexpected event resulting in injury or damage. Signup and view all the answers

What does occurrence mean in insurance?

Losses caused by continuous or repeated exposure that results in unintentional harm. Signup and view all the answers

What does direct loss include?

Other damage where the insured peril was the proximate cause. Signup and view all the answers

In which clause is the transfer of an insured's rights to seek damages to the insurer found?

Subrogation clause. Signup and view all the answers

What does the indemnity provision do in case of a loss?

Restores an insured person to the same financial state as before the loss. Signup and view all the answers

Study Notes

Key Concepts of Insurance

Insurance transfers risk from individuals or businesses to an insurance company, enabling cost sharing for unexpected losses.
The law of large numbers states that larger groups will yield more predictable loss outcomes, aiding in the calculation of insurance rates.

Types of Risks

Loss refers to the financial harm targeted for protection through insurance contracts.
Pure risk involves situations that can only result in loss or no change, while speculative risk includes scenarios with potential for loss or gain.
Insurable interest exists when the insured would suffer financially from damage to the insured property.

Insurance Policy Terms

Conditions must be proven at the time of loss, establishing the insured’s financial involvement with the property.
Perils are the specific causes of loss that are covered in an insurance policy, e.g., tornadoes.
Insurers cannot collect if the insured violates the contract, but the mortgage holder may still receive payment post-loss.

Types of Hazards

Hazards increase the chance of loss and can be classified as physical, moral, and morale:
- Physical hazards stem from tangible characteristics of the risk itself.
- Moral hazards arise from dishonest intentions or past fraudulent behavior of the applicant.
- Morale hazards relate to carelessness resulting from the presence of insurance.

Claims and Legal Terms

Indemnity ensures that insured parties cannot profit from their losses; they are reimbursed only up to the financial loss incurred.
Subrogation allows insurers to pursue third parties for damages after compensating the insured.
An occurrence refers to repeated exposure leading to damage or injury, which is not intentional.

Overall Insurance Principles

The core purpose of insurance is to mitigate financial losses for individuals and businesses.
Effectively managing insurable risks involves understanding and categorizing risk types and hazards.

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Description

Test your knowledge of key insurance terms and concepts with these flashcards. This quiz covers fundamental terms such as 'Insurance', 'Law of Large Numbers', and 'Loss' to help deepen your understanding of risk management. Perfect for students and professionals alike!