What is insurance?
Insurance is the transfer of financial responsibility associated with a potential of a loss (risk) to an insurance company, which in turn spreads the costs of unexpected losses to many individuals.
What is risk pooling?
A form of retention, in which the entity's risks are retained along with those of other members'. In such arrangements, the members are both the insured and the insurers.
What is the law of large numbers?
The larger the number of similar exposure units considered, the more closely the losses reported will equal the underlying probability of loss.
(Statistical prediction of loss, which determines premium rates.)
What is pure risk?
Any risk in which there can only be loss.
What is speculative risk?
Any risk in which there can be loss or gain.
(Insurance companies do not insure for this type of risk.)
What is a peril? Give examples.
The cause of loss which an insurance policy insures against.
• Life insurance / financial loss due to premature death.
• Health insurance / medical expenses, loss of income due to illness or injury.
• Property insurance / loss of physical property and its ability to produce income.
• Casualty insurance / loss and/or damage to property and resulting liabilities.)
Any situation or condition which increases the probability of an insured loss occurring.
Individual characteristics that increase the chance of the cause of loss.
(Exist in a physical condition; blindness, medical history, condition at birth, etc.)
Tendency toward increased risk due to character and reputation.
(Previous fraudulent claims, lies on insurance application.)
State of mind that causes indifference to loss.
(Action taken without forethought can lead to physical injury. (No flu shot, my insurance will cover my care if I get sick.))
The five treatments of risk:
Limiting exposure to a loss.
(Ex: Not riding a motorcycle if one does not wish to die in a motorcycle accident.)
Planned assumption of risk by the insured.
(Ex: Medical insurance co-pays, deductibles, or self-insurance.)
A method of dealing with risk for a group of businesses or individual persons with similar or the same exposure to loss to share the losses that occur within that group.
(Ex: Reciprocal insurance exchange.)
Any attempt to reduce exposure to risk.
(Ex: Wearing a helmet, kneepads, and elbow-pads while rollerblading. Annual physical to detect health issues early. Lifestyle changes.)
The bearing of a particular loss or losses by another party by means of a contractual agreement.
(Ex: The purchasing of insurance will not eliminate the risk of death or illness, it relieves the insured of the financial losses these risks bring.)
Elements of insurable intrest:
The loss must be:
• Due to chance.
• Definite and measurable.
• Statistically predictable.
• A large pool with similar risk-groups.
• Non-mandatory insurance coverage.