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GBA Module 2
Terms in this set (22)
Uncertainty with respect to possible losses
Cause of a loss
A condition that increases the probability that a peril will occur or tends to increase the severity of the loss when a peril occurs.
A physical condition, such as defective writing in a building or the absence of fire-extinguishing equipment, that increases the chance of loss.
Hazard - Moral
Exists when dishonesty or other character traits in an individual increase the chances of loss.
Hazard - Morale
Consists of carelessness or indifference that individuals have because they are covered by insurance and thereby protected against loss.
Involves situations where only two alternatives are possible: Either risk will not happen (no financial loss) or it will happen (financial loss takes place). No gain can result from pure risk only loss.
Losses that directly impact an individual's life or health. Death, disability, unemployment, old age.
Involve potential losses to the value of one's real or personal property. Fire, flood, earthquake.
Legal liability risk
Involve losses resulting from the negligent or wrongful actions of individuals that result in injuries or losses to others.
One does not acquire or take on the risk to begin with or gets rid of the risk and therefore is not subject to the risk.
One attempts either to prevent or reduce the probability of a loss taking place or to reduce the severity of the loss if it does take place.
The risk is assumed and paid for by the person suffering the loss or taking responsibility for the loss.
One switches or shifts the financial burden of risk to another party
Form of transfer in which the financial burden of a risk is transferred to an insurance company.
Summary of risk-handling alternatives
The most important thing to remember is that the only risk handling method that is mutually exclusive of the others is avoidance. It is also important to mention that although long-term care insurance has been growing, and unavoidable, serious thought must be given to how to handle the risk.
Advantages of using insurance in the design of an employee benefit plan
Employers have better control over its budget with a known premium making the cost predictable. The idea of having an outside of administrator can be advantageous to employers as well.
Disadvantages of using insurance in the design of an employee benefit plan
Some disadvantages of insurance could include administrative expenses, overhead expenses, and unfavorable contracts regarding premium allocation.
Characteristics of insurable risk:
1. Large number of homogeneous risk (allows for predictability)
2.Verifiable/measurable loss (helpful in determining financial loss)
3. Loss should not be catastrophic in nature (helps avoid bankruptcy)
4. Loss is subject to calculation
5. Premium is reasonable or economically feasible (insured must be able to pay the premium)
6. Loss should be accidental from stand point of the insured (can not be intentional)
Insurable risk summary
Employee benefit plans must meet the minimum standards of an insurable risk as previously discussed
Handling adverse selection
The desirable situation for an insurance company is to have a spread of risks throughout a range of acceptable insureds
The organization is retaining the risk. Characteristics of the ideally insurable risk is just as important in self-insurance/self-funding as it is for an insurance company.
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