Insurance Chapter 2 Examples

Many homeowners pay premiums into a fund used to pay the losses of the few homeowners whose houses burn down.

Pooling

An insurer can predict auto accidents more accurately using data from 100,000 drivers than from 10 drivers.

Law of large numbers

A storm unexpectedly damages a homeowner’s roof.

Fortuitous loss

A homeowner pays a premium so an insurer assumes the financial risk of a covered house fire.

Risk transfer

An insurer pays to repair a damaged car but does not allow the owner to profit from the accident.

Indemnification

A large group of similar homes faces accidental, measurable fire losses that rarely affect every home simultaneously.

Insurable risk

An insurer covers thousands of similar cars, requires accidental losses, and charges affordable premiums based on predictable claims.

Requirements of an insurable risk

A home insurer transfers part of its hurricane exposure to another insurance company.

Reinsurance

A person with serious health problems is more likely to purchase health insurance than a healthy person at the same price.

Adverse selection

An insurer reviews a driver’s accident record before deciding whether to insure the driver and what premium to charge.

Underwriting

A policy pays money to a person’s family after that person dies.

Life insurance

A homeowners policy pays for furniture destroyed by a covered fire.

Property insurance

A driver’s policy pays when the driver is legally responsible for injuring another person.

Liability insurance

Insurance covers a company against theft, employee injuries, and liability claims.

Casualty insurance

A family purchases homeowners and personal auto insurance.

Personal lines

A restaurant purchases insurance covering its building, equipment, and business liability.

Commercial lines

Insurance covers cargo that becomes damaged while traveling across the ocean by ship.

Ocean marine insurance

Insurance covers photography equipment while a photographer transports it between locations.

Inland marine insurance

A bond reimburses a store after an employee steals money from the register.

Fidelity bond

A construction company purchases a bond guaranteeing that it will complete a building project.

Surety bond

Employees and employers make required contributions to Social Security.

Social insurance

An insurer adds administrative costs and profit to the amount needed to pay expected claims.

Expense loading

A driver pays premiums to an insurer that agrees to pay covered accident losses and provide claim services.

Insurance

An insurer covers thousands of similar houses.

Large number of exposure units

A homeowner cannot intentionally burn a house and collect insurance.

Accidental and unintentional loss

An insurer can determine when a fire occurred and calculate the dollar amount of damage.

Determinable and measurable loss

One event should not cause losses to most insured properties at the same time.

Loss must not be catastrophic

An insurer can estimate the average frequency and severity of car accidents.

Chance of loss must be calculable

A homeowner’s premium is substantially lower than the home’s policy limit.

Premium must be economically feasible