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FIL 250 Chapter 6
Defining insurance
| Question | Answer |
|---|---|
| Law of large numbers | As the number of exposure units increases, the actual losses will more closely approach the expected losses. Thus, the (objective) risk for the group declines |
| What is adverse selection? | "Only sick people buy insurance" Adverse selection is the tendency of persons with higher-than-average chance of loss to seek insurance at average rates which, if not controlled by an insurer's underwriters, results in more losses than premiums. |
| What is "commercial" insurance? | Property and liability coverage for businesses, non-profit organizations, and government agencies. Not personal lines coverage |
| What is commercial general liability (CGL) insurance? | One of the most common types of commercial insurance. Covers several types of liability losses caused while operating a business. |
| What is a fortuitous loss? | An unforeseen and unexpected loss that occurs as a result of chance |
| What is indemnification? | Compensation to the victim of a loss in an attempt to make them financially whole by payment, repair, or replacement |
| How does pooling work? | It combines losses and financial resources to spread the losses incurred by the few over an entire group of insureds. In this process, we substitute actual loss with the average loss of the group. |
| What the requirements of ideally insurable risk? | (1) Pure risk (2) A large number of exposure units (3) Accidental and unintentional loss (4) Definite and measurable loss (5) No catastrophic loss (independent) (6) Chance of a loss must be calculable (7) Premium must be economically feasible |
| What is risk transfer? | Occurs when a pure risk is transferred from the insured another party (such as an insurer) who is typically in a stronger financial position to pay the loss than the insured |
| What are some of the benefits of insurance? | indemnification for losses, improved financial security/peace of mind, enhances credit (by protecting collateral), may help comply with legal requirements, promotes risk control activity, insurers are a source of investment capital, reduces social burden |
| What are the costs of insurance? | using insurance may be more expensive because of insurer expenses and profit, moral hazard (such as fraud) |
| What are reasons for governments to get involved in insurance markets? | a risk may not meet requirements of ideal insurable risk by private insurers, government may be more efficient provider, insurer of last resort, other social purposes |
| In what ways do governments get involved in insurance markets? | as exclusive insurer, as partners with private insurers, as a competitor to private insurers |
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