Podcast
Questions and Answers
Which of the following best describes the concept of 'determinable' in the context of insurance losses?
Which of the following best describes the concept of 'determinable' in the context of insurance losses?
- The loss must be within the insured's control.
- It is possible to verify whether a loss occurred. (correct)
- The loss amount can be precisely calculated.
- The loss is an expected outcome under the policy.
Why is it important for insurance companies that the chance of loss is calculable?
Why is it important for insurance companies that the chance of loss is calculable?
- To prevent adverse selection of higher-risk clients.
- To calculate average loss frequency and severity, necessary for setting premiums. (correct)
- To enable companies to determine the optimal level of reinsurance.
- To ensure that losses are kept to a minimum for the insured.
Which type of insurance indemnifies property owners against the loss or damage of their real property?
Which type of insurance indemnifies property owners against the loss or damage of their real property?
- Workers' compensation
- Liability insurance
- Property insurance (correct)
- Casualty insurance
Which of the following is the most significant reason why a loss should NOT be catastrophic for an insurer?
Which of the following is the most significant reason why a loss should NOT be catastrophic for an insurer?
Which situation most accurately exemplifies adverse selection in insurance?
Which situation most accurately exemplifies adverse selection in insurance?
Which of these is typically included under casualty insurance?
Which of these is typically included under casualty insurance?
Which of the following is categorized under personal lines of property and liability insurance?
Which of the following is categorized under personal lines of property and liability insurance?
What differentiates private insurance from government insurance?
What differentiates private insurance from government insurance?
What is a core function of 'underwriting' in an insurance company?
What is a core function of 'underwriting' in an insurance company?
What type of insurance covers a business's legal responsibility for damages to others due to its products?
What type of insurance covers a business's legal responsibility for damages to others due to its products?
Which characteristic is most commonly associated with government provided social insurance programs?
Which characteristic is most commonly associated with government provided social insurance programs?
Why must an insured loss be largely outside of the control of the insured?
Why must an insured loss be largely outside of the control of the insured?
Which best exemplifies asymmetric information in the context of insurance?
Which best exemplifies asymmetric information in the context of insurance?
Which of the following is an example of a social insurance program?
Which of the following is an example of a social insurance program?
Which government entity ensures the safety of deposits in banks and credit unions?
Which government entity ensures the safety of deposits in banks and credit unions?
Which of the following is an example of an insurance program typically found at the state level?
Which of the following is an example of an insurance program typically found at the state level?
Which of the following best describes the concept of indemnification in insurance?
Which of the following best describes the concept of indemnification in insurance?
What does the principle of 'pooling of losses' primarily achieve in the context of insurance?
What does the principle of 'pooling of losses' primarily achieve in the context of insurance?
What is the main purpose of the 'Law of Large Numbers' in insurance?
What is the main purpose of the 'Law of Large Numbers' in insurance?
Which of the following best describes 'fortuitous loss' as it relates to insurance coverage?
Which of the following best describes 'fortuitous loss' as it relates to insurance coverage?
Which primary characteristic of insurable risk is violated when a hurricane rapidly approaches your home and then you apply for a homeowner's policy?
Which primary characteristic of insurable risk is violated when a hurricane rapidly approaches your home and then you apply for a homeowner's policy?
Why is it important for an insurance risk to have a large number of exposure units?
Why is it important for an insurance risk to have a large number of exposure units?
Which of the following is considered a fundamental step in the risk transfer process within the insurance framework?
Which of the following is considered a fundamental step in the risk transfer process within the insurance framework?
Which criteria for an ideally insurable risk is compromised if there is a possibility of widespread destruction?
Which criteria for an ideally insurable risk is compromised if there is a possibility of widespread destruction?
Flashcards
Pooling of Losses
Pooling of Losses
Combining the losses of many individuals to reduce the impact of individual losses.
Fortuitous Loss
Fortuitous Loss
An event that is unforeseen, unexpected, and occurs due to chance.
Risk Transfer
Risk Transfer
Shifting a pure risk from the insured to the insurer, who is better equipped to handle it financially.
Indemnification
Indemnification
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Law of Large Numbers
Law of Large Numbers
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Large Number of Exposure Units
Large Number of Exposure Units
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Accidental and Unintentional Loss
Accidental and Unintentional Loss
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Determinable and Measurable Loss
Determinable and Measurable Loss
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Large Number of Similar Exposure Units
Large Number of Similar Exposure Units
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Loss Must Be Accidental and Unintentional
Loss Must Be Accidental and Unintentional
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Loss Must Be Determinable and Measurable
Loss Must Be Determinable and Measurable
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Loss Should Not Be Catastrophic
Loss Should Not Be Catastrophic
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Chance of Loss Must Be Calculable
Chance of Loss Must Be Calculable
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Premium Must Be Economically Feasible
Premium Must Be Economically Feasible
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Adverse Selection
Adverse Selection
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Asymmetric Information
Asymmetric Information
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Liability Insurance
Liability Insurance
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Casualty Insurance
Casualty Insurance
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Property Insurance
Property Insurance
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Personal Lines
Personal Lines
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Commercial Lines
Commercial Lines
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Social Insurance Programs
Social Insurance Programs
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Other Government Insurance Programs
Other Government Insurance Programs
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Surety and Fidelity Bonds
Surety and Fidelity Bonds
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Study Notes
Risk and Insurance
- Insurance is the pooling of fortuitous losses by transferring risks to insurers, who indemnify insureds for losses, provide other pecuniary benefits, or render services connected with the risk.
- Insurance is the pooling of accidental losses.
- Key characteristics of insurance include: pooling of losses, payment of fortuitous losses, risk transfer, and indemnification.
Law of Large Numbers
- The more exposures, the closer the actual results come to the expected results from an infinite number of exposures.
- Example: Flipping a coin many times will result in a closer percentage of heads to 50%.
Pooling of Losses
- Spreading losses incurred by a few individuals across the entire group.
- This reduces variation, and in turn reduces uncertainty (risk).
- Standard deviation represents the average distance from the mean.
Payment of Fortuitous Losses
- Fortuitous losses are unforeseen and unexpected.
- These losses result from chance.
- Examples include unexpected golf ball impacts and hurricane-related home damage.
Risk Transfer
- Shifting pure risk from an insured to an insurer, who typically has a stronger financial position.
- Examples of pure risks that are transferred to insurers are not provided.
Indemnification
- Restoring the insured to an approximate financial position prior to the loss.
Characteristics of an Ideally Insurable Risk
- Large number of exposure units: Enables predicting average loss based on the Law of Large Numbers.
- Accidental and unintentional loss: Losses are outside the insured's control.
- Determinable and measurable losses: Losses are easily identifiable and quantified.
- Non-catastrophic losses: Minimizes the impact of catastrophic events on the insurer.
- Calculable chance of loss: Insurers can calculate average frequency and severity of losses.
- Economically feasible premiums: Premiums should be affordable to the insured.
Adverse Selection
- Individuals with a higher-than-average chance of loss seek insurance at standard rates.
- This can lead to higher-than-expected loss levels for insurers.
- Stems from asymmetric information.
Asymmetric Information
- One party to a transaction has information that the other party does not have.
Underwriting Risks
- The process of selecting and classifying insurance applicants.
- This includes considering standards, coverage terms, exclusions, and rates.
Types of Insurance
- Private Insurance: Life, health, property & casualty.
- Government Insurance: Social insurance programs.
Types of Private Insurance - Life and Health
- Life insurance pays death benefits to beneficiaries when the insured dies.
- Health insurance pays medical expenses due to illness or injury (non-work related).
Types of Private Insurance - Property and Liability
- Property insurance protects against loss of or damage to property.
- Liability insurance covers the insured's legal obligations arising from property damage or injury to others.
- Casualty insurance covers events not covered by fire, marine, or life insurance (e.g., auto, liability, workers' compensation).
Categories of Property & Liability Insurance - Personal Lines
- Personal auto
- Homeowners' insurance (package)
- Personal Articles
- Personal umbrella liability
- Flood
- Earthquake
- Coastal Windstorm
Categories of Property & Liability Insurance - Commercial Lines
- Commercial auto
- Workers' compensation
- Commercial general liability
- Premise liability
- Products liability
- Commercial umbrella/excess liability
- Flood
- Earthquake
- Coastal Windstorm
- Inland marine/Ocean marine
- Surety bonds
- Fidelity bonds/employee dishonesty
- Crime
- Cyber
- Others
Government Insurance – Social Insurance Programs
- Financed primarily by employee and/or employer contributions.
- Benefits heavily favor low-income groups.
- Eligibility and benefits are dictated by regulations.
Examples of Government Insurance Programs
- Old-Age, Survivors and Disability Insurance (Social Security)
- Unemployment
- Medicare
Other Government Insurance Programs
- These programs exist at the federal and state levels.
- Examples include the FDIC, NFIP, FAIR plans, beach and windstorm plans, and USDA farm programs.
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