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Rmin 4000 ch 2
| Term | Definition |
|---|---|
| Insurance | the pooling of accidental losses by transfer of such risks to insurers, who agree to indemnify (compensate) insureds for such losses, to provide other pecuniary (monetary) benefits on their occurrence, or to render services connected with the risk. |
| Law of Large Numbers | The greater the number of exposures, the more closely will actual results approach the probable results expected from an infinite number of exposures. Coin flip: 50/50 chance of heads |
| Pooling of Losses: | The spreading of losses incurred by a few over the entire group. Purpose is to reduce variation (as measured by standard deviation) which reduces uncertainty (risk). Think of standard deviation as the average distance from the mean. |
| Fortuitous | unforeseen and unexpected by the insured and occurs a result of chance. Can have a fortuitous act that have expected loss |
| Risk Transfer | A pure risk is transferred from the insured to the insurer, who typically is in a stronger financial position |
| Indemnification | the insured is restored to its approximate financial position prior to the occurrence of the loss. (to prevent people to profit from losses, prevent moral hazard) |
| 1) Large number of exposure units. | Enables the insurer to predict average loss based on the Law of Large Numbers. Large number of similar exposure units needed. Brick homes vs wood homes' risk of catching fire, charge more for uncertainty. |
| 2) Loss must be accidental and unintentional. | Loss should be outside of insured's control, Law of Large Numbers is based on randomness, Moral hazard |
| Determinable | Can you determine if a loss occurred? Thefts are hard to prove, based on sight |
| Measurable | Can you determine the amount of the loss? The dollar amount of loss |
| 4) Loss should not be catastrophic (to the insurer) | Allow pooling technique to work. Catastrophes ex: terrorism, flood, earthquake. Solutions to insurer: reinsurance, diversification |
| 5) Chance of loss must be calculable. | Must be able to calculate average frequency and average severity |
| 6) Premium must be economically feasible. | Insured must be able to afford it (based on their age and condition) |
| Adverse Selection: | Those with the highest rate of loss are most likely to purchase insurance, results in higher than expected loss levels. . Typically results from asymmetric information |
| asymmetric information | occurs when one party has information that is relevant to a transaction that the other party does not have. Avoid by collection all relevant information related to the insurance |
| Credit-Based Insurance Score: | Utilizes a consumer's credit history to predict the likelihood of future insurance losses (shows responsibility, frequency of claiming insurance) |
| the higher the credit score... | the more likely to repay debt, the less likely to have an insurance loss |
| life insurance: | pays death benefits to beneficiaries when the insured dies |
| Health Insurance: | covers medical expenses because of sickness or injury |
| Property Insurance: | indemnifies property owners against the loss or damage of real or personal property |
| Liability Insurance: | covers the insured's legal liability arising out of property damage or bodily injury to others |
| Casualty Insurance: | refers to insurance that covers whatever is not covered by fire, marine, and life insurance |
| Government Insurance – Social Insurance Programs: | Financed entirely or in large part by contributions from employers and/or employees. Benefits are heavily weighted in favor of low-income groups. Eligibility and benefits are prescribed by statute: Social security, Unemployment, Medicare |
Created by:
aychan
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