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sirinvictus
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Risk
uncertainty or possibility
2 Kinds of Risk
Speculative Risk: possibility of gain or loss. ie gambling and NOT insurable.
Pure Risk: no possibility of gain
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Elements of an Insurable Risk
Pure risks are the subject of insurance, but not all pure risks are insurable.
Elements MUST exist for risk to be insurable
- Accidental
- Ascertainable in case, time and amount
- Economically feasible premium
- Insurance must exclude catastrophic loss exposure such as war or nuclear
- Predict the chance of loss using the "Law of Large Numbers"
NOT PREDICTABLE = NOT INSURABLE
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Law of Large Numbers
Statistically predict future losses
Law of Large numbers does not predict individual losses
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Risk Management
Process of Identifying exposure to risk and deciding how to handle the risk
4 Management Techniques
1. Reduce - Lowering the hazard
2. Retain - Assume financial risk self-insure, deductible or co-pay
3. Avoid - Eliminate the financial risk
4. Transfer - Purchase insurance
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Life and Health Insurance Concepts
Insurance Policy- a legally binding contact between the two parties
Insurer: Insurance Company
Insured: The person whose life, health is insured by the insurance policy
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Morality
The likelihood of dying during a given year.
Morality tables assume everyone is statistically dead at age 100
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Rate
The price (cost) of life insurance quoted in thousands
i.e. cost per unit of exposure
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Prospective Loss Cost (aka Loss Ratio)
Portion of the rate which is projected to be paid out in insurance benefits
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Attained Age
Age at the time of application
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Who's Who?
Actuary: Mathematician who develops the rates for the insurer.
Underwriter (aka Home Office Underwriter)- employee of the insurer selects risk for insurer to avoid adverse selection.
Producer (Agent) (aka Field Underwriter)(aka Agent Underwriter)- licensed to solicit, negotiate, or sell insurance
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