18 Questions
What is the purpose of having a large group of exposure units that are subject to the same peril?
To enable the insurer to predict losses based on the law of large numbers
What term describes a loss that is accidental, unforeseen, and outside the control of the insured?
Unexpected loss
Why is it important for a loss to be determinable and measurable?
To determine whether the loss is covered under the policy and the amount to be paid
What does the law of large numbers rely on for predicting losses?
Random occurrences of events
How does an insurer protect itself against catastrophic losses?
By utilizing financial instruments
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
What term refers to an insured's ability to afford the premium charged by an insurer?
Economically feasible premium
Which types of risks are considered ideally insurable?
Most personal risks and property risks
What is the primary purpose of property insurance?
To indemnify property owners against loss or damage caused by natural perils
Which type of insurance covers an insured’s legal liability for property damage or bodily injury to others?
Casualty insurance
What is the main goal of pooling of losses in insurance?
To reduce the standard deviation of possible outcomes
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
What is fortuitous loss in the context of insurance?
Unforeseen and unexpected loss by the insured
What is the purpose of indemnification in insurance?
To keep the insured in a better financial position than before the loss
What does the handling of existing risk make insurance in terms of social productivity?
Socially productive
What is the process of selecting and classifying applicants for insurance known as?
Underwriting
In insurance, what type of risk is transferred from the insured to the insurer?
Pure risk
What is the concept that refers to the unforeseen and unexpected nature of losses in insurance?
Fortuitous loss
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.
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.
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