Principles of Risk Management and Insurance Quiz 1 – Flashcards

question
The pooling of fortuitous losses by transfer of risks to insurers, who agree to indemnify insured for losses, to provide other benefits on their occurrence, or to render services connected with risk.
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Insurance
question
Spreading of losses by the few over a larger group, so that in the process, average loss is substituted for actual loss
answer
Pooling
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The greater the number of exposures, the more closely actual results approach the probably results expected from an infinite number of exposures.
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Law of Large Numbers
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Unforeseen loss that occurs as a result of chance
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Fortuitous Loss
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When a pure risk is transferred from the insured to the insurer. (Usually is in a stronger financial position to pay the loss than the insured.)
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Risk Transfer
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When the insured is restored to his or her approximate financial position prior to the occurrence of the loss
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Idemnification
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A: Must be a large number of exposure Units. B: Loss must be accidental and unintentional. C: The loss must be determinable and measurable. D: Loss should not be catastrophic. E: Loss must be calculable. F: Premium Must be economically feasible.
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Characteristics of Insurable Risk
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The tendency of persons with higher-than-average chance of loss to seek insurance at standard (average) rates, which can result in higher-than-expected loss levels.
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Adverse Selection
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Refers to the process of selecting and classifying applicants for insurance.
answer
Underwriting
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A: Gambling creates a new speculative risk, while insurance handles already existing pure risk. B: Gambling is socially unproductive, because the winner's gain comes at the expense of the loser.
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Insurance vs. Gambling
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A: Insurance Transactions Involve the transfer of insurable risks, because the characteristics of an insurable risk generally can be met. (Hedging risks are typically uninsurable.)B: Insurance can reduce the objective risk of an insurer by application of law of large numbers. (Hedging only transfers risk, a.k.a. buying 1,000 instead of 100 corn futures doesn't reduce your risk because they all have the same market price. You just risk losing more by buying more)
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Insurance vs. Hedging
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Pays death benefits to designated beneficiaries when the insured dies.
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Life Insurance
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Indemnifies property owners against loss or damage of real or personal property, often from fire, lightning, windstorm.
answer
Property Insurance
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Cover's insured's legal liability arising out of property damage or bodily injury to others; also pays legal defense costs.
answer
Liability Insurance
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Broad field of insurance that covers whatever is not covered by fire, marine, and life insurance; includes auto, liability, burglary and theft, workers compensation, and health insurance.
answer
Casualty Insurance
question
Coverage that insures the real estate and personal property of individuals and families or provide them with protection against legal liability. Includes Private Passenger auto insurance, Homeowners Insurance, Personal Umbrella liability insurance, Boat owners Insurance.
answer
Personal Lines
question
Property and Casualty overages for business firms, nonprofit organizations, and government agencies. Includes Fire insurance, commercial multiple-peril insurance, General liability insurance, workers compensation, commercial auto insurance, accident and health insurance, Inland Marine Insurance, Ocean marine insurance, Professional liability insurance, Medical Malpractice insurance, Directors and Offices liability insurance, Equipment breakdown insurance, Fidelity Bonds/Surety Bonds, Crime Insurance, Aircraft Insurance, Credit Insurance, and Financial Guaranty Insurance.
answer
Commercial Lines
question
Government Insurance programs financed by mandatory contributions from employers, employees, or both, and not primarily by revenues from the government. Includes Old-Age, Survivors, and Disability Insurance (Social Security), Medicare, Unemployment, Workers Compensation)
answer
Social Insurance
question
(Not financed by employers and employees) Federal Employees Retirement System, Civil Service Retirement System, Federal Deposit Insurance Corporation, Pension Benefit Guaranty Corporation, National Flood Insurance Program. (State Level) State Worker's Compensation, State Children's Health Insurance Programs (SCHIP), high risk pools, Insurers of last resort.
answer
Other Government Insurance
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Indemnification for Loss, Reduction of Worry and Fear, Source of Investment Funds, Loss Prevention, Enhancement of Credit.
answer
Benefits of Insurance to Society
question
Cost of Doing Business, Fraudulent Claims, Inflated Claims
answer
Costs of Insurance to Society
question
The Amount Needed o pay all expenses, Including Commissions, expenses, taxes, and allowance for contingencies and profit.
answer
Expense Loading
question
1 in 5 U.S. adults find it acceptable to defraud insurers under certain conditions.
answer
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question
The pooling of fortuitous losses by transfer of risks to insurers, who agree to indemnify insured for losses, to provide other benefits on their occurrence, or to render services connected with risk.
answer
Insurance
question
Spreading of losses by the few over a larger group, so that in the process, average loss is substituted for actual loss
answer
Pooling
question
The greater the number of exposures, the more closely actual results approach the probably results expected from an infinite number of exposures.
answer
Law of Large Numbers
question
Unforeseen loss that occurs as a result of chance
answer
Fortuitous Loss
question
When a pure risk is transferred from the insured to the insurer. (Usually is in a stronger financial position to pay the loss than the insured.)
answer
Risk Transfer
question
When the insured is restored to his or her approximate financial position prior to the occurrence of the loss
answer
Idemnification
question
A: Must be a large number of exposure Units. B: Loss must be accidental and unintentional. C: The loss must be determinable and measurable. D: Loss should not be catastrophic. E: Loss must be calculable. F: Premium Must be economically feasible.
answer
Characteristics of Insurable Risk
question
The tendency of persons with higher-than-average chance of loss to seek insurance at standard (average) rates, which can result in higher-than-expected loss levels.
answer
Adverse Selection
question
Refers to the process of selecting and classifying applicants for insurance.
answer
Underwriting
question
A: Gambling creates a new speculative risk, while insurance handles already existing pure risk. B: Gambling is socially unproductive, because the winner's gain comes at the expense of the loser.
answer
Insurance vs. Gambling
question
A: Insurance Transactions Involve the transfer of insurable risks, because the characteristics of an insurable risk generally can be met. (Hedging risks are typically uninsurable.)B: Insurance can reduce the objective risk of an insurer by application of law of large numbers. (Hedging only transfers risk, a.k.a. buying 1,000 instead of 100 corn futures doesn't reduce your risk because they all have the same market price. You just risk losing more by buying more)
answer
Insurance vs. Hedging
question
Pays death benefits to designated beneficiaries when the insured dies.
answer
Life Insurance
question
Indemnifies property owners against loss or damage of real or personal property, often from fire, lightning, windstorm.
answer
Property Insurance
question
Cover's insured's legal liability arising out of property damage or bodily injury to others; also pays legal defense costs.
answer
Liability Insurance
question
Broad field of insurance that covers whatever is not covered by fire, marine, and life insurance; includes auto, liability, burglary and theft, workers compensation, and health insurance.
answer
Casualty Insurance
question
Coverage that insures the real estate and personal property of individuals and families or provide them with protection against legal liability. Includes Private Passenger auto insurance, Homeowners Insurance, Personal Umbrella liability insurance, Boat owners Insurance.
answer
Personal Lines
question
Property and Casualty overages for business firms, nonprofit organizations, and government agencies. Includes Fire insurance, commercial multiple-peril insurance, General liability insurance, workers compensation, commercial auto insurance, accident and health insurance, Inland Marine Insurance, Ocean marine insurance, Professional liability insurance, Medical Malpractice insurance, Directors and Offices liability insurance, Equipment breakdown insurance, Fidelity Bonds/Surety Bonds, Crime Insurance, Aircraft Insurance, Credit Insurance, and Financial Guaranty Insurance.
answer
Commercial Lines
question
Government Insurance programs financed by mandatory contributions from employers, employees, or both, and not primarily by revenues from the government. Includes Old-Age, Survivors, and Disability Insurance (Social Security), Medicare, Unemployment, Workers Compensation)
answer
Social Insurance
question
(Not financed by employers and employees) Federal Employees Retirement System, Civil Service Retirement System, Federal Deposit Insurance Corporation, Pension Benefit Guaranty Corporation, National Flood Insurance Program. (State Level) State Worker's Compensation, State Children's Health Insurance Programs (SCHIP), high risk pools, Insurers of last resort.
answer
Other Government Insurance
question
Indemnification for Loss, Reduction of Worry and Fear, Source of Investment Funds, Loss Prevention, Enhancement of Credit.
answer
Benefits of Insurance to Society
question
Cost of Doing Business, Fraudulent Claims, Inflated Claims
answer
Costs of Insurance to Society
question
The Amount Needed o pay all expenses, Including Commissions, expenses, taxes, and allowance for contingencies and profit.
answer
Expense Loading
question
1 in 5 U.S. adults find it acceptable to defraud insurers under certain conditions.
answer
Random: