1Characteristics of insurance
Pooling of losses
payment of fortuitous losses
risk transfer
indemnification
2Pooling of losses
the spreading of losses from a few individuals over the entire group
3payment of fortuitous losses
unforseen and unexpected actions that happens from the insured and happens by chance
4risk transfer
A pure risk that gets transferred from the insured to the insurer
5indemnification (compensation)
the insured is restored close it its financial position before the loss happened
6Characteristics of an ideally insurable risk
Large number of exposure units
Loss must be accidental and unintentional
Loss must be determinable and measurable through money
Loss must not be catastrophic
Chance of loss must be calculable
Premium must be affordable
7Adverse selection
When people who have more losses than the average person gets insurance at an average price
8Asymmetric information
Occurs when one party does not have the same amount of information as the other parties
9Underwriting risks
Process of selecting and classifying applicants for insurance
10Types of insurance
private insurance
government insurance
11Private insurance (Main types)
Life
Health
Property&Liability
Casualty
12Life insurance
pays a benefit to holders when the insured dies
13Health insurance
pays medical expenses because of sickness or injury
14Property insurance
compensates owners when their property gets stolen or damaged
15liability insurance
covers money when the insured steals property and hurts people
16casualty insurance
broad term that refers to insurance that is not covered by other insurance
17Categories of property and liability insurance
Personal lines
Commercial lines
18Why do they need a large number of exposure units
They need this predict the average loss
19What does it mean the loss must be accidental and unintentional, and why?
The loss must be outside of the insurer's control; If they do it on purpose, then the amount the insured pays would increase
20Determinable loss
Can you determine if a loss occured
21Measurable loss
Can you determine the amount of loss in dollars?
22Why should loss not be catastrophic
So that pooling works
23Why should the chance of loss be calculable
To be able to find the average frequency and average severity
24What does the law of large numbers say
The greater the number of exposures, the more close the actual results will reach the probable results
25Social Insurance programs
Financed by contributions from employers and/or employees
Benefits are more into low income groups
Eligibility and benefits are different