Risk Management & Insurance Week One

Practice questions covering fundamental risk management concepts, insurance contract types, legal principles, and regulatory frameworks as discussed in the Week One notes.

What does the term Risk refer to in insurance?

The uncertainty as to the outcome of an event, which specifically has two possible outcomes: Loss or No-Loss.

What is a Peril?

The cause of a possible loss, such as fire, water damage, or mold.

How is a Hazard defined?

A specific situation that increases the probability of a loss occurring from a peril, or that may influence the extent of that loss.

What is Speculative risk?

A risk accompanying the possibility of earning a profit, where business decisions result in either profits or losses; these are generally uninsurable.

What is Pure risk?

A risk involving only the possibility of loss with no potential for gain, such as hurricane damage or automobile accidents; these are generally insurable.

What are the major types of Social Insurance provided by government agencies?

Old Age, Survivors, and Disability (Social Security), Workers Compensation, and Unemployment Compensation.

In an auto insurance policy denoted as $100/300/100$, what does the first number represent?

Bodily Injury per Person: the maximum amount the insurer pays for medical bills and expenses of a single person injured by the insured.

In an auto insurance policy denoted as $100/300/100$, what does the second number represent?

Bodily Injury per Accident: the total maximum amount the insurer pays for all injuries combined in a single accident.

In an auto insurance policy denoted as $100/300/100$, what does the third number represent?

Property Damage per Accident: the maximum amount the insurer pays to repair or replace another person's vehicle or property.

What is the Principle of Indemnity?

The principle to make whole or reimburse an insured so they are in the same position as prior to the loss, ensuring they do not collect more than the actual dollar amount of the loss.

What is the Doctrine of Utmost Good Faith?

A standard that holds insurers to higher levels of good faith and fair dealing than other private contracts in the interest of the general public.

Why is an insurance policy considered an Aleatory Contract?

Because the dollar amounts exchanged are unequal, such as paying a small premium in exchange for a large potential death benefit.

What is a Contract of Adhesion?

A contract written by the insurer and offered on a 'take it or leave it' basis, where courts typically find ambiguities in favor of the insured.

What is the difference between Insurance and Gambling regarding outcomes?

Gambling has three possible outcomes (loss, no loss, or gain), while Insurance has only two (loss or no loss).

What is required for a party to have an Insurable Interest?

A legitimate financial interest in the property such that its loss would cause the insured financial harm.

What information is found on the Declarations page of a policy?

The named insured, address, policy period, agent's name, insurance company name, premium, and applicable forms and endorsements.

What does the Insuring agreement describe?

The coverage pledge and the property or liability risk covered by the policy.

What is an Endorsement?

An attachment that modifies the base insurance policy.

What did the McCarran-Ferguson Act of $1945$ establish?

It allowed individual states to regulate insurance and insurance companies within their borders.

What is the National Association of Insurance Commissioners (NAIC)?

An organization formed by state insurance commissioners to coordinate regulation of multi-state insurers and develop uniform practices.

What is the difference between Admitted and Non-admitted insurers?

Admitted insurers are licensed in a state and subject to its regulation and guaranty funds; Non-admitted insurers are not licensed in that state and not directly regulated there.

Contrast First-party and Third-party insurance contracts.

A First-party contract protects the insured's own property, while a Third-party contract protects the insured against their legal liability to others.

What defines an Independent agent?

An intermediary who typically represents several insurers and is compensated via commissions.

How do Surplus lines brokers differ from standard intermediaries?

They are specialized producers with relationships with non-admitted insurers and handle risks that the insured cannot approach directly.

What is the primary difference between Stock and Mutual insurance companies?

Stock companies are owned by stockholders and organized for profit, while Mutual companies are owned by policyholders who receive profits as dividends.

What are Reciprocal exchanges?

Unincorporated arrangements where policyholders agree to participate in insuring each other.

What is Reinsurance?

The process of transferring part or all of a risk from one insurer (the ceding reinsurer) to another (the reinsurer).

What is the Underwriting process?

The process where an insurance company analyzes risk, decides whether to accept it, designs the program, and establishes the premium.