Nature of Insurance

Questions and Answers

What is the primary effect of adverse selection in insurance?

Reduced need for underwriting

Increased profits for insurance companies

Higher risks seeking insurance more than lower risks (correct)

Lower premiums for all policyholders

What does a hazard represent in the context of insurance?

An insurance policy benefit

A type of insurance claim

A factor that increases the chance of loss occurring (correct)

A financial loss guarantee

Homogeneous exposure units are primarily characterized by their:

Increased likelihood of loss

Similar characteristics and exposure to the same perils (correct)

Diverse risk profiles

Variable insurance premiums

What is the main goal of an indemnity contract in insurance?

<p>To restore the insured to their original financial position</p> Signup and view all the answers

The law of large numbers indicates that as the size of a group increases, what happens to the prediction of loss?

<p>Loss predictions become more certain</p> Signup and view all the answers

Study Notes

Adverse Selection

Refers to the phenomenon where individuals with greater risks are more likely to pursue or maintain insurance compared to those with lower risks.
Policyholders may exploit favorable terms in insurance contracts due to their higher risk profile.

Hazard

Defined as a condition, factor, or situation that increases the likelihood of a peril occurring.
Hazards contribute to higher chances of loss events manifesting.

Homogeneous Exposure Units

Comprises groups of similar objects that share the same risk profile.
Insurance risks are categorized by these units to ensure they are exposed to identical perils.

Indemnity Contract

These contracts are structured to restore the insured to their pre-loss financial status.
They focus on compensating for actual losses rather than providing a profit or bonus.

Law of Large Numbers

A core principle in insurance indicating that as the size of a risk pool increases, the prediction of losses becomes more reliable.
This principle underpins the actuarial practices used in underwriting and premium pricing.

Loss

Represented as an unintentional reduction in asset value resulting from a peril.
Loss quantification is essential for assessing claims and determining payouts in insurance.

Description

Explore the fundamental concepts of insurance, including the important idea of adverse selection. This quiz will enhance your understanding of key terms that are crucial for grasping the complexities of the insurance industry. Prepare to dive into essential definitions that shape the chapter's content.