INS24-Chapter1.txt

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cgruenberg
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25001
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INS24-Chapter1.txt
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2010-06-27 18:24:51
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INS24 Chapter1
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General Insurance for Information Technology Professionals - Chapter 1
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  1. Loss exposure
    Any condition or situation that presents a possibility of loss, whether or not an actual loss occurs.
  2. Law of large numbers
    A mathematical principle stating that as the number of similar but independent exposure units increases, the relative accuracy of predictions about future outcomes (losses) also increases.
  3. Exposure unit
    A fundamental measure of the loss exposure assumed by an insurer.
  4. Indemnify
    To restore a party who has sustained a loss to the same financial position that party held before the loss occurred.
  5. Fire and allied lines insurance
    Insurance that covers direct damage to or loss of insured property.
  6. Business income insurance
    Insurance that covers the reduction in an organization's income when operations are interrupted by damage to property caused by a covered peril.
  7. Crime insurance
    Insurance that covers (1) money and securities against numerous perils (not limited to crime perils) and (2) property other than money and securities against crime perils, such as employee theft, robbery, theft by outsiders, and extortion.
  8. Ocean marine insurance
    Insurance that covers vessels and their cargoes, including various vessel-related liability exposures.
  9. Inland marine insurance
    Insurance that covers many different classes of property that typically involve an element of transportation.
  10. Auto physical damage insurance
    Coverage for damage to or theft of a covered auto that can include both collision coverage and other than collision (comprehensive) coverage.
  11. Auto liability insurance
    Insurance that covers an insured's legal liability arising out of the ownership, maintenance, or use of an automobile.
  12. Commercial general liability (CGL) insurance
    Insurance that covers many of the common liability loss exposures faced by an organization, including its premises, operations, and products.
  13. Personal liability coverage
    Coverage for damages, plus costs of any defense, related to a claim or suit brought against the insured that resulted from bodily injury or property damage caused by an occurrence covered under the policy.
  14. Professional liability insurance
    Insurance that covers persons engaged in various occupations against liability resulting from their rendering or failing to render professional services.
  15. Stock insurer
    An insurer that is owned by it's stockholders and formed as a corporation for the purpose of earning a profit for the stockholders.
  16. Mutual insurer
    An insurer that is owned by its policyholders and formed as a corporation for the purpose of providing insurance to them.
  17. Demutualization
    The process by which a mutual insurer owned by its policyholders becomes a stock company, which is then owned by its stockholders.
  18. Reciprocal insurance exchange (interinsurance exchange)
    An insurer owned by its policyholders, formed as an unincorporated association for the purpose of providing insurance coverage to its members (called subscribers), and managed by an attorney-in-fact. Members agree to mutually insure each other, and they share profits and losses in the same proportion as the amount of insurance purchased from the exchange by that member.
  19. Subscribers
    The policyholders of a reiprocal insurance exchange who agree to insure each other.
  20. Attorney-in-fact
    In a reciprocal insurance exchange, the contractually authorized manager of the reciprocal who administers its affairs and carries out its insurance transactions.
  21. Captive insurer, or captive
    A subsidiary formed to insure the loss exposures of its parent company and the parent's affiliates.
  22. Reinsurance
    The transfer of insurance risk from one insurer to another through a contractual agreement under which one insurer (the reinsurer) agrees, in return for a reinsurance premium, to indemnify another insurer (the primary insurer) for some or all of the financial consequences of certain loss exposures covered by the primary's insurance policies.
  23. Primary insurer
    In reinsurance, the insurer that transfers or cedes all or part of the insurance risk it has assumed to another insurer in a contractual arrangement.
  24. Reinsurer
    The insurer that assumes some of all of the potential costs of insured loss exposures of the primary insurer in a reinsurance contractual agreement.
  25. Risk management
    The process of making and implementing decisions that will minimize the adverse effects of accidental losses on an organization.
  26. What are some typical options used by persons or organizations to manage risk?
    To manage risk, persons or organizations may use retention, avoidance, loss prevention, and loss reduction measures, or loss transfer.
  27. Explain why insurance is described as a transfer system.
    Insurance is described as a transfer system because it transfers the costs of losses from a person, a family, or a business to an insurer. The insurer, in turn, pays for covered losses and, in effect, distributes the costs of losses among all insureds. Therefore, insurance is a system of both transferring and sharing the cost of losses.
  28. How do insurance buyers transfer the costs of their losses to insurance companies?
    Insurance buyers can transfer the costs of their losses to insurers by buying insurance.
  29. How does insurance spread the cost of losses among all insureds?
    Insurance spreads the cost of losses amoung all insureds by pooling the premiums paid by all insureds and using the money to pay covered losses.
  30. Assume that a new colony was established on an island as yet unclaimed by any country. The colonists each agree to help one another rebuild their homes in the event that one of the homes is damaged or destroyed. In what way does this agreement compare to a system of insurance?
    The threat of loss to any single colonist is transferred to the entire group of colonists. The cost of loss to any home is shared by the entire community. This arrangement is similar to insurance, which distributes the cost of losses among all insureds.
  31. Explain how exposure units can be independent of each other.
    Exposure units can be independent of each other if they are not subject to the same event.
  32. Give an example of an exposure unit.
    An example of an exposure unit in property insurance is a car or a house.
  33. How are insurers able to accurately predict the number of losses they might incur?
    Insurers can accurately predict the number of losses they might incur because of the large number of independent exposure units (the cars and houses of all their insureds, for example). Using that number, they can predict the number of losses that all similar exposure units combined are likely to experience.
  34. Insurers generally prefer to provide insurance for loss exposures that have certain characteristics. Using an example, explain why each of the following characteristics of a loss exposure tends to make it possible to provide insurance:

    Losses that involve pure risk
    The type of insurance selected for discussion is auto liability coverage. The characteristics of auto liability coverage that make it an ideally insurable loss exposure include the following:

    It involves pure risk because there is no possiblity of gain.
  35. Insurers generally prefer to provide insurance for loss exposures that have certain characteristics. Using an example, explain why each of the following characteristics of a loss exposure tends to make it possible to provide insurance:

    Losses that are accidental
    The type of insurance selected for discussion is auto liability coverage. The characteristics of auto liability coverage that make it an ideally insurable loss exposure include the following:

    Losses are accidental; therefore, the insured generally has no incentive to cause an intentional auto liability loss to a third party.

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