Financial Risk

Card Set Information

Financial Risk
2010-01-31 12:24:17
Chapter 2

Dr. Ata
Show Answers:

  1. What is insurance?
    The pooling of fortuitous losses by transfer of such risks to insurers, who agree to indemnify insureds for such losses, to provide other pecuniary benefits on their occurrence, or to render services connected with the risk
  2. What are the basic characteristics of Insurance?
    • Pooling of losses
    • Payment of fortuitous losses
    • Risk transfer
    • Indemnification
  3. What is pooling of losses?
    • Spreading losses incurred by the few over the entire group
    • Risk reduction based on the Law of Large Numbers
  4. What is payment of fortuitous losses?
    Insurance pays for losses that are unforeseen, unexpected, and occur as a result of chance
  5. What is risk transfer?
    A pure risk is transferred from the insured to the insurer, who typically is in a stronger financial position.
  6. What is indemnification?
    The insured is restored to his or her approximate financial position prior to the occurrence of the loss.
  7. What are the requirements of an Insurable Risk?
    • Large number of exposure units
    • Accidental and unintentional loss
    • Determinable and measurable loss
    • No catastrophic loss
    • Calculable chance of loss
    • Economically feasible premium
  8. Large number of exposure units?
    To predict average loss
  9. Accidental and unintentional loss
    • To control moral hazard
    • To assure randomness
  10. Determinable and measurable loss?
    To facilitate loss adjustment insurer must be able to determine if the loss is covered and if so, how much should be paid.
  11. Calculable chance of loss?
    To establish an adequate premium
  12. Can be insured?
    Most personal, property and liability risks.
  13. Difficult to insure?
    Market risks, financial risks, production risks and political risks.
  14. Adverse selection?
    Is the tendency of persons with a higher-than-average chance of loss to seek insurance at standard rates
  15. Adverse selection can be controlled by?
    • Careful underwriting (selection and classification of applicants for insurance)
    • Policy provisions (e.g., suicide clause in life insurance)
  16. What are the types of insurance?
    Private Insurance & Government Insurance
  17. Types of private insurance?
    • Life and Health
    • Property and Liability
  18. Types of government insurance?
    • Social Insurance
    • Other Government Insurance
  19. Life insurance.
    Pays death benefits to beneficiaries when the insured dies.
  20. Health insurance?
    Covers medical expenses because of sickness or injury.
  21. Disability plans?
    Pay income benefits.
  22. Property insurance?
    Indemnifies property owners against the loss or damage of real or personal property.
  23. Liability insurance?
    Covers the insured’s legal liability arising out of property damage or bodily injury to others.
  24. Casualty insurance
    Refers to insurance that covers whatever is not covered by fire, marine, and life insurance
  25. Private insurance coverage can be grouped into two major categories?
    Personal lines & Commercial lines
  26. Personal lines
    Coverage that insure the real estate and personal property of individuals and families or provide protection against legal liability
  27. Commercial lines?
    Coverage for business firms, nonprofit organizations, and government agencies.
  28. Social Insurance Programs?
    Social Security, Unemployment, Workers Comp
  29. Social Benefits of Insurance?
    • Indemnification for loss
    • Reduction of worry and fear
    • Source of investment funds
    • Loss Prevention
    • Enhancement of Credit