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Cloned from: Insurance & Risk

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Insurance Definition
- Way of transferring risk from consumer to insurance company
- Insurance company indemnifies(reimburses) consumer for loss
- Written contract between insured & insurer to eliminate uncertainty
- Small but certain loss(premium) exchanged for larger uncertain loss
- Possibility(not probability) of loss
- premiums based on likelihood of loss (law of large numbers)
- Create best circumstance for protect customers and still make profit
- Insurance does not create risk, it allows for transfer of risk
- Risk must be manageable for insurer, cannot take on more than it can handle
- Actual cause of loss
- Event insured against
- Insurance designed to reduce economic loss from resulting event
situations that increase likelihood of loss
Moral Hazard
Insured tries to suffer loss intentionally
Morale Hazard
Loss results from carelessness
Physical Hazard
Caused by circumstances beyond control
Methods to handle risk: Avoidance
Don't do anything or go anywhere
Methods to handle risk: Retention
Take risk upon yourself
Methods to handle risk: Sharing
Form groups to cover themselves (reciprocal insurance)
Methods to handle risk: Reduction
Careful planning & cautious actions
Methods to handle risk: Transfer
Transfer risk to insurance company
How Insurance Handles Risk
- Risk is not reduced, it is shared
- Insurer agrees to undertake risk for premium
- The greater the risk, the greater the premium
- Not all risks accepted
- Principle of indemnity: insured should not profit based on insurance
Insurable Risk
- Loss must be severe enough to cause an economic hardship
- Insured person must have insurable interest in subject property
- Loss must be predictable, accidental, unintentional or unexpected
- Catastrophic perils not insured (acts of war, nuclear events)
Law of Large Numbers
Must be large numbers to predict losses accurately
Adhesion contract
A standardized set of agreements offered by one (usually the stronger) party to another on a "take it or leave it" basis.  An insurance policy is an example of such a contract.
A person who may act either on behalf of the insurance company or the insured in settling a claim.  Employee adjusters work for an insurer; independent adjusters represent the insurance company on a fee basis; and public adjusters represent the insured on a fee basis.
Admitted insurer
An insurance company that is licensed (admitted) to conduct business within a given state.  Also know as an authorized insurer.
Adverse selection
The tendency of poorer than average risks to buy and maintain insurance.  Adverse selection occurs when insureds select only those coverages that are most likely to have losses.
Advertising injury
Claim arising out of slander, libel, copyright infringement, or misappropriation or advertising ideas.  Covereage is provided as part of covereage B of the commercial general liability.
Principles governing the authority of any agent that represents a principal.
One who solicits, negotiates or effects contracts of insurance on behalf of an insurer.  His right to excercise various functions, his authority, and his obligations and the obligations of the insurer to the agent are subject to the terms of the agency contract wtih the insurer , to statutory law and to common law.  The agent is a direct link between the insurance company and the policy holder.
Errors & Omissions Insurance
Insurance obtained by the insurance agent to guard against loss caused by an unintentional failure to properly insure (or recommend insurance to) a client.
Agent's license
A certificate of authority from the state that permits the agent to conduct business.
Aggregate limit
Type of policy limit found in Liability policies that limits covereage to a specified total amount for all losses within one policy period.
Agreed Value Condition
Condition found in some property insurance policies that stipulates a certain value will meet the coinsurance requirement.  If the policy limit equals or exceeds this amount, the insured will not be assessed a coinsurance penalty.  Also called state amount condition.
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