G1: Basic Insurance Concepts & Principles

Question	Answer
Underwriting Department	Department responsible for making decisions whether or not a policy will be issued.
Underwriter	Person that works in the Underwriting Department
Principle of Indemnity	Goal of insurance is to restore one back to his previous condition that existed before the loss.
Underwriter Responsibilities	1. Analyze and Evaluate Risks 2. Accept or Reject Risks 3. Protect again Adverse Selection
Adverse Selection	The tendency of higher risk person to seek out insurance more aggressively.
Principle Distribution Exposure	Principle where insurers accept risks that are spread geographically so as to not have catastrophic losses if its only in one area.
Profitable Distribution of Exposures AKA Spread of Risks	Dont put all eggs in one basket. Spread the risk geographically in case of catastrophic events.
Insurance	A contract that the insurer protects the insured against loss, damage, or liability from a contingent or unknown event.
Large Group	Characteristic to be Ideally Insurable. Group must be large enough so that enough premiums can be collected by the risk pool to cover losses of individuals within than group. Loss must create an ECONOMIC HARDSHIP.
Hardship	Characteristic to be Ideally Insurable. Any insured loss must create an economic hardship to prevent moral and morale hazards. example: setting fire to your own home just collect insurance would also create economic loss.
Catastrophic	Losses covered by an insurance company CANNOT be catastrophic. Example: Flood is the most damaging peril and insurance exclude flood in regular home insurance because its catastrophic.
Uncertain	Characteristic to be Ideally Insurable. The risk of losses to the insured must be uncertain, accidental and due to chance.
Definite and Measurable	Characteristic to be Ideally Insurable. Must be measurable=Insurer must be able measure amount of loss Definite=spell out time and place
Predictable	Charateristic to be Ideally Insurable. Insured losses must be predictable to determine premiums etc.
Large C-H-U-M-P	Characteristic to be Ideally Insurable. Large= Large Group C=Catastropic H-Economic Hardship U=Uncertain & Accidental M= Measurable & Definite P=Predictable
Insurable Interest	Having legal and economic interest in the safety and preservation of the person/property insured.
Loss Exposure	Any situation with a risk of loss.
4 Types of Loss Exposure	1. Property Loss 2. Liability Loss 3. Personal (Human) Loss 4. Personnel Loss
Property Loss Exposure	Risk of loss to ones property due to theft or destruction.
Liability Loss Exposure	Risk of having to pay for injuries to another person or for damage to anothers property.
Personal (Human) Loss Exposure	Risk of financial loss due to injury, sickness, death or unemployment.
Personnel Loss Exposure	Risked faced by a business due to death, disability, retirement or resignation of a key employee.
Peril	Cause of a Loss. Example: Fire, Theft
Hazard	Anything that increases the chances of loss occuring.
3 Types of Hazards	1. Physical 2. Moral 3. Morale
Physical Hazard	Physical condition of person/thing that increases the chance of loss. example: health of a person or Faulty breaks on a car
Moral Hazard	Increase chance of loss due to the insured dishonesty. ex: lying about health
Morale Hazard	Increased loss due to insureds carelessness and indifference because they carry insurance. Example: leaving keys in car because insurance will cover the cost of a new one.
Law of Large Numbers	Used for statistical prediction of losses so accurate rates can be determined. "The larger the number individual, but similar risks combined into a group, the more certainty as to the number of losses within that group" Can predict the losses within a group but DOES not predict losses for an individual.
Pure Risks	Involves the possibility of a Loss. No gain and is insurable. example: car accident (no gain in wrecking a car)
Speculative Risks	Involves the possibility of both Loss & Gain. UNinsurable. example: Gambling (gain=winning)
Risk	The UNCERTAINTY of loss occuring.
2 Types of Risks	1. Pure 2. Speculative

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G1: Basic Insurance Concepts & Principles

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