Exam (elaborations)
Personal Lines Insurance - Unit 1 Questions with Accurate Answers
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Personal Lines Insurance - Unit 1
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Personal Lines Insurance - Unit 1Risk - answer The possibility that a loss will occur.
Insurance - answer A contract that transfers the risk of financial loss from an individual
or business to an insurance company.
Speculative Risks - answer A possibility of a loss and also the possibility of a gain. INS
does not cover this.
Pure Risks - answer only involve the possibility of experiencing a loss, not a gain. INS
covers.
Exposure - answer The potential for accidents and other losses. Risks for which the
insurance company would be liable.
Peril - answer What caused the loss. House burns down—peril is
the fire.
Loss - answer (1) the unintended, unforeseen damage to property, (2) injury, or (3)
amount paid. There are two types of loss.
Direct Loss vs. Indirect Loss - answer Direct loss is physical loss to property with no
intervening cause and the Indirect loss is s a consequential loss as the result from a
direct loss. loss of rental income due to house fire, which cause a loss of profits for the
landlord. The indirect loss is always consequential of the direct loss.
Hazard - answerAnything that increases the chance that a loss will occur. There are
three types of hazards: physical, moral, and morale.
Physical, Moral, and Morale Hazards - answer- Physical hazards are physically
identifiable factors that increase the chance of loss.
- Moral hazards arise from an individual's character (dishonesty).
- Morale hazards are a state of mind or careless attitude.
METHODS OF HANDLING RISK - answerSTARR
Sharing
Transfer
Avoidance
Retention
Reduction
, Sharing - answerIn risk sharing, two or more individuals or businesses agree to pay a
portion of any loss incurred by any member of the group. Stockholders in a corporation
share the risk.
Transfer - answerThe insurer (insurance company) agrees to pay if an insured
(customer) has a loss—the insured no longer bears that risk. The
individual has a cost in the form of a premium payment. But, in contrast to the loss
which is large and uncertain, the premium is a much smaller certainty.
Avoidance - answerRisk avoidance means eliminating a particular risk by not engaging
in a certain activity. For example, an individual who does not drive avoids the risk of
injuring someone in an automobile collision and being held liable for those damages.
Retention - answerRisk retention means the individual or business will pay for the loss if
it occurs, or a portion of the loss via a deductible. If you don't have car insurance to pay
for the damages you cause to another person in an accident, you have retained that
risk.
Reduction - answerRisk reduction refers to lessening the chance that a loss will occur,
or lessening the extent of a loss if it occurs. If a business installs a sprinkler system in
its building, this will help reduce or eliminate the damage caused by a fire.
Parties to a Contract - answer1st party—insured (customer)
2nd party—insurer (insurance company)
This legally enforceable contract defines the limits of coverage
provided to the insured and the risk of loss being transferred, and it identifies under
what circumstances the insurer will pay for a loss.
Law of large numbers - answerthe larger the group, the more accurately losses can be
predicted
Elements of Insurable Risk - answer(CANHAM)
Calculable, Affordable, Non-Catastrophic, Homogeneous, Accidental, Measurable
Calculable - answerPremiums must be calculable based upon prior loss statistics for
that particular risk in order to predict future losses.
Affordable - answerThe premium for transferring the risk should be affordable for the
average consumer.
Non-catastrophic - answerThe risk must be non-catastrophic for the insurance company
Homogeneous - answerThe risk must be similar in nature so the same factors affect the
chance of loss.
Accidental - answerThe loss must have been caused due to chance (accident).
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