maryland life and health insurance ch 2

What is the definition of risk pooling in insurance operations?

Risk pooling is the process of combining a large number of exposure units that face similar risks to share losses.

What are the benefits of risk pooling for policyholders?

Policyholders can transfer financial uncertainty for a known premium.

How does adverse selection affect insurance operations?

Adverse selection refers to higher-risk individuals selecting insurance coverage, thus increasing risk for the insurance company.

What are some warning signs of adverse selection?

Warning signs include unusual urgency in application, incomplete information, early or patterned claims, and coverage amounts exceeding actual needs.

What methods can be used to control adverse selection?

Control methods include medical underwriting, waiting periods, preexisting condition limitations, health information requirements, and risk classification.

What is the law of large numbers in insurance?

It states that as the number of exposure units increases, the accuracy of loss predictions improves.

What are the three key requirements for the law of large numbers?

Independence, similarity among exposure units, and a large number of exposure units.

What is the principle of indemnity in insurance?

Indemnity is the principle of restoring the insured to the same financial position they were in before a loss.

What is the primary purpose of the principle of indemnity?

To prevent profit from insurance and maintain it as financial protection.

Differentiate between perils and hazards in insurance.

Perils are specific events that cause loss, while hazards are conditions that increase the likelihood of a loss occurring.

What are the three types of hazards in insurance and how do they differ?

Physical hazards involve tangible conditions, moral hazards involve dishonesty, and morale hazards stem from carelessness due to being insured.

What is the distinction between pure risks and speculative risks?

Pure risks involve the possibility of loss only, while speculative risks involve the possibility of both loss and gain.

What are the methods of handling risk in insurance?

Risk handling methods include risk sharing, transfer, avoidance, reduction, retention, and prevention.

What are direct losses in the context of insurance?

Direct losses are immediate damages caused by a peril.

What are indirect losses in the context of insurance?

Indirect losses are consequential losses that result from direct losses.

What is a key distinction between moral and morale hazards?

Moral hazards are intentional and dishonest, while morale hazards arise from carelessness and unintentional behavior.

What is the role of statistics in predicting losses for insurers?

Insurers use statistics to analyze data from pooled risks, enabling them to predict potential losses and set premiums.

What does the term 'adverse selection' imply for insurance companies?

Adverse selection indicates that higher-risk individuals are more likely to seek insurance, which can lead to increased losses for the insurer.

What is the significance of the principle of indemnity regarding life insurance?

Life insurance is a valued contract and does not strictly follow indemnity as it pays a predetermined amount upon death.

In risk management, what does STARR stand for?

STARR stands for Sharing, Transfer, Avoidance, Reduction, and Retention.

What should you be cautious of when dealing with exam questions on risk definitions?

Be mindful of key terms like 'EXCEPT' or 'NOT' which may change the meaning of the question.

How can one distinguish between accidents and occurrences in insurance contexts?

An accident is a sudden and specific event, while an occurrence can be a gradual process.