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General Insurance
Key Terms
| Term | Definition |
|---|---|
| Insurance | Based on the spreading of risk (risk pooling) and the law of large numbers. Insurance transfers risk from an individual or group to a company |
| Risk | Uncertainty regarding financial loss Pure Risk-insurable because it involves a chance of loss only Speculative Risk-not insurable because it involves a chance of loss or gain, i.e. gambling. |
| Exposure | The financial amount or chance of a loss that one could incur |
| Hazard | Gives rise to a peril. There are three kinds of hazards: |
| 3 Types of Hazard | Physical - physical condition: medical history, blindness, deafness Moral - a lie: filing a false claim or a lie on an application Morale - an indifference to loss: driving recklessly, speeding |
| Peril | The cause of a loss (fire, accident, flood) |
| Loss | A reduction in the quantity, quality, or value of something |
| Methods of Handling Risk | S.T.A.R.R |
| Sharing | distributing risk among a similar group (condo owners) |
| Transfer | The loss is handled by another party. This is the most effective way of handling risk. (Example, buy insurance). |
| Avoidance | simply avoiding the risk (choose not to fly) |
| Reduction | lessen the possibility of loss, (install a smoke alarm) |
| Retention | accepting the risk and confronting it when it occurs (self-insured) |
| Elements of Insurable Risk | Due to chance, definite and measurable, predictable, loss cannot be catastrophic, exposure must be large and randomly selected |
| Due to chance | chance of loss beyond insured’s control |
| Must be definite and measurable | loss must have definite time, place and amount |
| Must be predictable | number of losses must be statistically predictable |
| Loss cannot be catastrophic | there must be limits that the loss cannot exceed |
| Exposure must be large | insurer must be able to predict losses based on the law of large numbers. |
| Exposure must be randomly selected | insurer must have a fair proportion of both good and poor risks |
| Adverse Selection | Less favorable insurance risk (example: poor health) seek to continue insurance in greater numbers than other risks |
| Law of Large Numbers | Predicts the number of deaths that should occur within a similar group of people (exposure) within a given period of time The larger the number, the more accurate the prediction |
| STARR | Sharing, Transfer, Avoidance, Retention and Reduction |
Created by:
donnarae.johnson
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