Study 350 quiz 1 Flash Cards

 
Pile Management Card
350 quiz 1

loading
fortuitous loss
fortuitous loss = one that is unforseen and unexpected by the insured and occurs as a result of chance
Indemnification
compensation to the victim of a loss
Government Insurance (& 3 types)
Social insurance: funded by mandatory taxes

unemployment, workers compensation, social security
What type of accounting standard is required for insurance?
statutory
cross sell
trying to sell customers more insurance
independent adjustor
organization that adjusts claims for a fee
public adjustor
somebody you use if you think the insurance company is ripping you off
difference between insurance agent adjustor and company adjustor
Agent handles small claims and company adjustor handles larger claims
reinsurance
transferring risk from one insurance company to another
underwriting
the process of selecting, classifying, and pricing applicants for insurance
actuaries
people who price insurance
exclusive agency system
agent only represents one insurer or group of insurers under common ownership
direct writer
salesperson is an employee of the insurer
independent agency system
will sell a wide array of products
direct response system
insurance sold directly, without an agent
Agency building system v non agency building system
agency: insurer builds own agency by recruiting other agents that represent only the insurer.

Non agency: insurer enters into contracts with successful agents who agree to sell the insurer's products
Insurance agents and brokers are different in:
the individual they represent. Agents represent the insurance company, brokers represent the individual
captive insurer
insurer who is owned by a parent firm
Insurance agents and brokers are similar in that:
They are both marketers and compensated through commission
Demutualization
when a mutual company becomes a public company
Reciprocal exchange
insurance is exchanged among members
Lloyd's of London
not an insurer, but allows its members to write specialized lines of insurance
stock companies v mutual companies (in terms of ownership)
Stock: owned by its stockholders

Mutual: customers are owners
Trends in Insurance companies:
Consolidation: Less and less companies

Covergence: companies buying out each other now offer a wide array of services
when you drive a car and have liability insurance that is considered : _____. when you have a deductible on your physical damage that is called: _____ . when you use your seat belt that is called: ____
transfer, retention, and loss control
Risk financing: retention vs transfer
retention: means the firm retains all or part of a loss. financed through current income, borrowing, getting insurers.

Transfer: insurance and noninsurance (contracts, etc)
loss prevention v loss reduction
prevention: refers to measures that reduce the frequency of a particular loss.

reduction: refers to the measures that reduce the severity of a loss after it occurs.
Box: High frequency and high severity
avoidance
Box: Low frequency and high severity
transfer
Box: High frequency and low severity
loss control
Box: Low frequency and low severity
retention
Maximum probable loss v maximum possible loss
probable: worst loss that is likely to happen

possible: worst loss that could happen to firm in its lifetime
4 steps in Risk Management process
1. Identify loss exposure
2. measure and analyze loss exposure
3. Select between risk control and risk financing
4. Implement and monitor the program
How risk management changed in 2000
some firms started taking all risks into consideration: speculative, financial, reputation, etc
risk management: pre 1990s
Risk management was only limited to property, liability and personal loss
post-loss objectives
-survival of firm/continue operating
-earnings stability
-social responsibility
-earnings growth
pre loss objectives
-prepare for loss in most economical way
-reduce anxiety
-meet legal obligations
Risk management definition
process that identifies loss exposures faced by an organization and selects the most appropriate techniques for treating such exposures
Costs of insurance
-expenses of insurance companies
-fraudulent claims
-inflated claims
Benefits of insurance
-indemnification of losses
-reduction of fear and worry
-source of investment funds
-incentive for loss control (experience rating)
1 similarity between gambling and insurance
they both employ the law of large numbers
2 differences between insurance and gambling
1) gambling creates a new speculative risk, while insurance is a technique for handling already existing pure risk

2) gambling is socially unproductive, because the winner's gain comes at the expense of the loser.
underwriting
refers to the process of selecting and classifying applicants for insurance
adverse selection
TENDENCY of person with higher than average chance of loss to seek insurance, LEADING to higher than expected loss levels
6 characteristics of insurable risk:
-large # of similar exposure units
-fortuitous losses
-determinable and measurable losses
-losses are not catastrophic
-calculable chance of loss
-affordable premiums
Risk transfer
pure risk is transferred from the insured to the insurer, who typically is in a position to pay for the loss of the insured.
law of large numbers
the greater the number of exposures, the more closely will the actual results approach the probable results expected
pooling of losses
spreading the losses occurred by a few over the entire group
4 elements of insurance
-Pooling (law of large #s)
-Payment of fortuitous losses
-Risk Transfer
-Indemnification
noninsurance transfer v insurance transfer
noninsurance: transferring risk somewhere other than an insurance company (like incorporating, hedging price risks)

insurance transfer: transferring your risk over to an insurance company
active retention v passive retention
active: when individual is aware of potential loss and agrees to retain part of it (like paying a $500 deductible)

passive: unknowingly retaining a risk due to ignorance, indifference, or laziness.
loss prevention v loss reduction
prevention: reducing the probability of the loss

reduction: to reduce the severity of the loss after the inevitable loss occurs
risk avoidance
avoid the risk by avoiding the situation entirely
personal risk (4 types)
risk that affects individual:
-risk of premature death (unfulfilled financial obligations)
-risk of insufficient retirement income
-risk of poor health
-risk of unemployment
commercial risks
property risks, liability risks, crime, speculative financial risks.
individual risk
personal risks like poor health or unemployment
legal hazard
characteristics of the legal system that increase the frequency or severity of loss. like statues that require coverage for alcoholism
attitudinal hazard
indifference towards a loss, which increases the frequency or severity of a loss. like leaving your car unlocked
moral hazard
dishonesty or character defects in an individual that increase the frequency or severity of loss. action takes place to benefit from insurance
physical hazard
like ice, increases the chance of loss
hazard
a condition that increases the frequency or severity of loss.
peril
the cause of loss
Pure risk v Speculative risk
Pure risk: there is loss or no loss.

Speculative: a gain could occur.
the law of large numbers
as the number of exposure units increases, the more closely the loss experience will approach the expected loss experience
subjective risk
the individual's perception on how risky a situation is.
Objective Risk
variation between actual and expected results
Place this card into pile: