Introduction to Insurance: Basic Concepts

Podcast

Play an AI-generated podcast conversation about this lesson

Questions and Answers

What is the purpose of having a large group of exposure units that are subject to the same peril?

To decrease the chances of any individual unit experiencing a loss

To increase the chances of a catastrophic loss occurring

To enable the insurer to predict losses based on the law of large numbers (correct)

To reduce the total number of exposure units for easier management

What term describes a loss that is accidental, unforeseen, and outside the control of the insured?

Moral hazard loss

Determinable loss

Catastrophic loss

Unexpected loss (correct)

Why is it important for a loss to be determinable and measurable?

To ensure that the insured deliberately intends to cause the loss

To determine whether the loss is covered under the policy and the amount to be paid (correct)

To enable the insurer to deny coverage for such losses

To increase moral hazard for the insured

What does the law of large numbers rely on for predicting losses?

Random occurrences of events Signup and view all the answers

How does an insurer protect itself against catastrophic losses?

By utilizing financial instruments Signup and view all the answers

Why is it important for an insurer to be able to calculate the average frequency and severity of future losses with some accuracy?

To charge a proper premium sufficient for payment of claims and yielding profits Signup and view all the answers

What term refers to an insured's ability to afford the premium charged by an insurer?

Economically feasible premium Signup and view all the answers

Which types of risks are considered ideally insurable?

Most personal risks and property risks Signup and view all the answers

What is the primary purpose of property insurance?

To indemnify property owners against loss or damage caused by natural perils Signup and view all the answers

Which type of insurance covers an insured’s legal liability for property damage or bodily injury to others?

Casualty insurance Signup and view all the answers

What is the main goal of pooling of losses in insurance?

To reduce the standard deviation of possible outcomes Signup and view all the answers

According to the concept of adverse selection, what is the tendency of persons with a higher than average chance of loss?

They seek insurance at higher than standard rates Signup and view all the answers

What is fortuitous loss in the context of insurance?

Unforeseen and unexpected loss by the insured Signup and view all the answers

What is the purpose of indemnification in insurance?

To keep the insured in a better financial position than before the loss Signup and view all the answers

What does the handling of existing risk make insurance in terms of social productivity?

Socially productive Signup and view all the answers

What is the process of selecting and classifying applicants for insurance known as?

Underwriting Signup and view all the answers

In insurance, what type of risk is transferred from the insured to the insurer?

Pure risk Signup and view all the answers

What is the concept that refers to the unforeseen and unexpected nature of losses in insurance?

Fortuitous loss Signup and view all the answers

Study Notes

Insurance Fundamentals

A large group of exposure units subject to the same peril allows for better prediction of losses due to the law of large numbers.

Loss Characteristics

A fortuitous loss is a loss that is accidental, unforeseen, and outside the control of the insured.
A loss must be determinable and measurable to ensure accurate calculation of losses.

Predicting Losses

The law of large numbers relies on a large number of exposure units to predict losses with some accuracy.
Insurers must calculate the average frequency and severity of future losses with some accuracy to set premiums and protect themselves against catastrophic losses.

Insurer Protection

Insurers protect themselves against catastrophic losses by pooling losses and spreading the risk across a large number of policyholders.
Insurers also use reinsurance to transfer risk to another insurer.

Insurability

An insured's ability to afford the premium charged by an insurer is referred to as affordability.
Ideally insurable risks are those that are accidental, unforeseen, and outside the control of the insured.

Types of Insurance

Property insurance is primarily used to protect against loss or damage to property.
Liability insurance covers an insured's legal liability for property damage or bodily injury to others.

Risk Management

The primary purpose of pooling of losses in insurance is to spread risk across a large number of policyholders.
Adverse selection occurs when persons with a higher than average chance of loss are more likely to purchase insurance.
Underwriting is the process of selecting and classifying applicants for insurance.

Risk Transfer

Pure risk is the type of risk transferred from the insured to the insurer.
Indemnification is the process of making the insured whole again after a loss.
Insurance increases social productivity by allowing individuals and businesses to manage existing risk.

Uncertainty Principle

The concept of uncertainty in insurance refers to the unforeseen and unexpected nature of losses.

Studying That Suits You

Use AI to generate personalized quizzes and flashcards to suit your learning preferences.

Description

Test your knowledge on the fundamentals of insurance, including the pooling of fortuitous losses, indemnification, pecuniary benefits, and risk prediction based on the law of large numbers.