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Questions and Answers
What is the purpose of having a large group of exposure units that are subject to the same peril?
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?
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?
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?
What does the law of large numbers rely on for predicting losses?
How does an insurer protect itself against catastrophic losses?
How does an insurer protect itself against catastrophic losses?
Why is it important for an insurer to be able to calculate the average frequency and severity of future losses with some accuracy?
Why is it important for an insurer to be able to calculate the average frequency and severity of future losses with some accuracy?
What term refers to an insured's ability to afford the premium charged by an insurer?
What term refers to an insured's ability to afford the premium charged by an insurer?
Which types of risks are considered ideally insurable?
Which types of risks are considered ideally insurable?
What is the primary purpose of property insurance?
What is the primary purpose of property insurance?
Which type of insurance covers an insured’s legal liability for property damage or bodily injury to others?
Which type of insurance covers an insured’s legal liability for property damage or bodily injury to others?
What is the main goal of pooling of losses in insurance?
What is the main goal of pooling of losses in insurance?
According to the concept of adverse selection, what is the tendency of persons with a higher than average chance of loss?
According to the concept of adverse selection, what is the tendency of persons with a higher than average chance of loss?
What is fortuitous loss in the context of insurance?
What is fortuitous loss in the context of insurance?
What is the purpose of indemnification in insurance?
What is the purpose of indemnification in insurance?
What does the handling of existing risk make insurance in terms of social productivity?
What does the handling of existing risk make insurance in terms of social productivity?
What is the process of selecting and classifying applicants for insurance known as?
What is the process of selecting and classifying applicants for insurance known as?
In insurance, what type of risk is transferred from the insured to the insurer?
In insurance, what type of risk is transferred from the insured to the insurer?
What is the concept that refers to the unforeseen and unexpected nature of losses in insurance?
What is the concept that refers to the unforeseen and unexpected nature of losses in insurance?
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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.
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