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Flashcards in Chapter 1 Deck (44):

Define the concept of risk with 4 examples

avoiding risk
controlling risk
transferring risk
accepting risk


Define managing risks through insurance with 3 exmaples

characteristics of insurable risks
insurance underwriting
insurable interest requirement


what is the definition of risk?

chance or possibility of an unexpected results, either a gain or a loss.


what is the definition of speculative risk?

involves 3 possible outcomes: loss, gain, or no change. It can not be insured.


what is the definition of pure risk?

involves no possibility of a gain, only a loss or no loss occurs. This risk can be insured.


define risk management

it is the process by which individuals and business identify and assess the risks they face and take measures to eliminate or reduce their exposure to those risks.


Which of the four concepts of risk does insurance follow?

Transferring method from individual or entity to an insurer.


define a policy benefit

is a specific amount of money the insuere agrees to pay under an insurance policy when a specific loss occurs.


Define an insurance policy.

is a written document that contains the term of the agreement between the insuere and the owner of the policy.


What is the premium?

is the specified amount of money an insuerer charges in exhcnage for agreeing to pay a policy benefirt when a specified loss occurs.


Businesses and individuals purchase insruance policies for which 3 types of risks?

property damange


what is a personal risk?

the risk of economic loss associated with death, poor helath, injury or outliving ones economic resources.


Insurance companies issue products that are individual or group insurance policies. Describe individual insurance.

a policy that is issued to insure the life or health of a named person.


Insurance companies issue products that are individual or group insurance policies. Describe group insurance.

a policy that is issued to insure the lives or health of a specific group of people.
ie .employees.


what is property damage risk?

is the risk of economic loss resulting from damaged or loss of a persons property.
> provides benefit if items are damaged, destroyed, or lost d/t specific risk as policy describes.


what is a liability risk?

risk of economic loss resulting from a person being held legally responsible for harming other or their property.
> cx who slips in a persons store.


what is an annuity contract?

Contract under which an insurer promises to make a series of periodic payments to a named individual in exchange for a premium or series of premiums.


Are property and liability insurance [AKA property and casualty insurance] marked together in a policy? if yes, give an example

yes, commonly.

- ie. Auto insurance.


In Canada what types of insurances exist? [2 categories]



1. applicant
2. policy owner
3. insured [assured]
4. beneficiary

1. applied.
2. owns the policy [usually the same as above]
3. the one being insured.
4. person who received the life-insurance benefit


Define a claim

a request for payment under the terms of an insurance policy.


what is risk pooling?

a concept that allows insurers to accept responsibility for the economic losses of their insureds.
>all people pay into a benefit, the insurers know only a certain percent will actually claim the benefit.


what 5 basic characteristics must be present for a risk (potential loss) to be considered insurable?

1. loss must occur by chance
2. loss must be definite
3. loss must be significant
4. the loss rate must be predictable
5. the loss must not be catastrophic to the insurer.


describe what is meant by " a loss must be definite"

in terms of time and amount. Terms must be clear about when to pay a policy benefit and how much those benefits should be.


what is a contract of indermninity?

a policy under which the amount of the policy benefit payable for a covered loss is based on the actual amount of financial loss that results from the covered event, as determined at the time of the event.


Are most insurance policies indemnity contracts? why?

its not easy to just add up bills for claims, so most policies are valued contracts.


what is a valued contract?

it specifies the amount of the policy benefit that will be payable when a covered loss occurs, regardless of the actual amount of loss that was incurred.


what is face amount?

the amount of the policy benefit that is payable if the insured dies while the policy is in force.
> appears on front [face]page of the policy contract.
> also known as death benefit.


What is loss rate?
how is it predicted?

the frequency of losses that insureds are likely to experience. Insurance companies cannot predict losses on individual basis, but as a collective can measure loss rates.
> Based on observations of past events and a concept known as the law of large numbers


What is the law of large numbers?

typically the more times we observe a particular event, the more likely that our observed results will approximate the true probability that the event will occur.


What is a mortality tables?

a chart developed to show the statistical records of predictability. - they indicate with great accuracy the number of people in a large group who are likely to die at each age.


What is a mortality rate?

the rates at which death occurs among a specified group of people during a specific period, typically one year. [ its displayed in the mortality tables]


what is a morbidity table?

a similar chart to mortality tables, created by insurance companies, to display morbidity rates, or "incidence' of sickness and accident by age, occurring amount a given group of people.


How to insurance companies prevent the possibility of a catastrophic loss, and ensure that losses occur independently of each other?

the company spreads the risks the choose to insure
> certain number of athletes on a team
> Certain number of houses in a region


What is reinsurance

is insurance that on insurance company [known as ceding company] purchases from another company [known as reinsurer/ assuming company]. to reduce possibility of financial catastrophic losses.


What is underwriting?

the assessment of the degree of risk an insurance company will be accepting if it inssues the policy. It is the process of identifying and classifying the degree of risk.


The premium rates that an insurance company establishes are based on what?

on the amount of risk the company is assuring for the policies it issues.


underwriting becomes more difficult because of anti-selection. What is that?

is the tendency of individuals who believe they have a greater-than-average likelihood of loss to seek insurance protection to a greater extent than do other individuals.
> this causes the insure to carefully review each application to assess the degree of risk.,


What are the 2 primary stages of undewriting?

1. identifying the risk that the proposed insured presents
2. classifying the degree of risk that a proposed insured represents.


What two hazardous does one phase when identifying risks?

1. physical hazard > physical characteriestic that may increase the likely hood of loss
2. Moral hazard > characteristic that exists when the reputation, financial position, or criminal record of an applicant or a proposed insured indicates that the person may act dishonestly in the insurance transaction.


What is a risk class? [ in terms of classifying a risk]

a grouping of insured who represent a similar level of risk to the insurer. This establishes an equitable premium rate to charge for the requested coverage.


What are the 4 typical risk classes, that a proposed insured would be offered?

1. standard risk
2. preferred risk
3. substandard
4. declined


What is an insurable interrest?

the policy owner myst be likely to suffer a genuine loss or detriment should the event insured against occur.


Can any one name any beneficiary on their own life?

yes, technically but insurance companies usually require that a beneficiary also have an insurable interest in the life of the insured.
> California has a law where any one can be the beneficiary.