Basic and General Insurance

What is insurance? _________

• Transfer of the possibility of loss (risk) to an insurance company.

• A way to increase your income quickly.

• A method to avoid paying taxes.

• A process to guarantee profits in business.

What is a risk? _________.

• The uncertainty of financial loss.

• A guaranteed way to make profit.

• A type of insurance policy.

• A fixed interest rate.

What are the two types of loss? _________

• Pure and Speculative

• Direct and Indirect

• Physical and Emotional

• Temporary and Permanent

Which risk is insurable? Pure Why? _________

• Loss must be financial and uncertain. No financial gain can occur.

• Loss must be certain and profitable.

• Risk must be speculative and controllable.

• Only risks with guaranteed outcomes are insurable.

What causes a loss? _________.

• Peril; such as fire, accident or flood.

• Profit from investments.

• Increase in property value.

• Government regulations.

What causes a peril? ________. What is a hazard? _________.

• A hazard. Increases the likelihood of a loss; such as smoking.

• A peril. Reduces the risk of loss; such as insurance.

• A hazard. Eliminates all risks; such as safety measures.

• A peril. Prevents losses from occurring; such as fire alarms.

What are the 6 elements that make pure risk insurable?

• Loss must be due to chance, Loss must be definite and measurable, Loss must be statistically predictable, Loss cannot be catastrophic, Loss exposure must be large and insurance must not be mandatory.

• Loss must be intentional, Loss must be immeasurable, Loss must be unpredictable, Loss can be catastrophic, Loss exposure must be small and insurance must be mandatory.

• Loss must be due to certainty, Loss must be indefinite and immeasurable, Loss must be unpredictable, Loss can be catastrophic, Loss exposure must be small and insurance must be optional.

• Loss must be due to chance, Loss must be indefinite and immeasurable, Loss must be unpredictable, Loss can be catastrophic, Loss exposure must be small and insurance must be mandatory.

What is meant by loss cannot be catastrophic? _________

• Certain types of perils are unpredictable and thus uninsurable; such as war, nuclear risk and floods.

• It refers to losses that are always covered by insurance.

• It means all losses are predictable and insurable.

• It describes losses that are always minor and insignificant.

What is the concept called that predicts the appropriate number of deaths that should occur within a similar group of people (exposure) within a given period of time?

• Law of Large Numbers

• Central Limit Theorem

• Regression to the Mean

• Survivorship Bias

What is adverse selection? _________

• People in bad health keep their policy in force longer than people in good health.

• Insurance companies always make a profit regardless of claims.

• Only healthy people apply for insurance coverage.

• Adverse selection is when premiums are always lower than claims paid.