The nature and role of insurance in risk management
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18 Terms
What is the basic definition of insurance?
System where individuals transfer the financial risk of unexpected losses to a company, which collects money from many people to cover the losses of the few who suffer bad events.
What is a pool in insurance?
A pool is all the collected risks and money from many people.It allows insurers to spread risk and manage potential losses effectively.
What does pooling risks mean?
Pooling risks means everyone shares the financial burden of losses.This collective approach helps stabilize premiums and ensures that no single individual bears the full cost of unexpected events.
What is risk transfer?
giving your risk to the insurer
Who is the insured?
the person who buys insurance.
Who is the insurer?
the company that sells insurance and accepts the risk.
What is a premium?
the regular payment made to the insurer.
Why must there be a large number of similar exposure units?
To make losses predictable and set fair prices
What happens if exposure units are very different?
It becomes harder to predict losses correctly.
What is the law of large numbers?
It says that with many similar risks, the average loss becomes predictable.
What types of losses must insurance cover?
accidental, not intentional, losses.
Why must losses be measurable and determinable?
So the insurer knows when a loss happened and how much to pay.
Why can't insurance easily cover catastrophic losses?
Because one giant disaster would bankrupt the insurer.
How does insurance encourage economic growth?
By investing collected premiums into the economy.
What happens when premiums are not economically feasible?
People won’t buy insurance.
What is risk classification?
Grouping people based on their level of risk.It helps insurers determine appropriate premiums and coverage options.
Why is discrimination needed in insurance?
To avoid adverse selection ruining insurance.
What is adverse selection?
Risky people buy more insurance and safe people buy less.