Chapter 1 Know This

What is the fundamental concept of insurance?

Insurance is the transfer of risk of loss. The cost of an insured's loss is transferred over to the insurer and spread among other insureds.

What type of risk is insurable?

Only pure risks are insurable.

Define Risk.

A chance that a loss will occur.

Define Hazard.

A condition that increases the probability of loss.

Define Peril.

The cause of loss.

According to the Law of Large Numbers, what happens as the number of people in a risk pool increases?

Future losses become more predictable.

Who do insurance agents represent?

The insurer (principal).

What is the insurer’s consideration in an insurance contract?

The promise to pay for losses.

What is the insured's consideration in an insurance contract?

The payment of premium and statements on the application.

What does "Aleatory" mean in the context of insurance contracts?

It means there is an exchange of unequal amounts or values.

What does "Unilateral" mean in the context of insurance contracts?

It means only one of the parties to the contract is legally bound to do anything (the insurer makes a promise).

What does "Adhesion" mean in the context of insurance contracts?

The contract is prepared by one party (insurer) and accepted or rejected by the other party (insured) on a take-it-or-leave-it basis.

What is the principle of Indemnity?

Insureds cannot recover more than their loss. The purpose of insurance is to restore the insured to the same position as before the loss, not to allow them to profit.

What are Representations in insurance?

Statements believed to be true to the best of one's knowledge, such as an insured's statements on the application.