Comprehensive Study Guide for General Insurance and Risk Management

Property and Casualty Insurance Exam Weighting

• General Insurance: $8\%$

• Property / Casualty Insurance Basics: $14\%$

• Policy Breakdown:

  • Dwelling and Homeowners: $12\%$

  • Personal Auto: $12\%$

  • Commercial Auto: $4\%$

  • Commercial General exability (Liability): $18\%$

  • Businessowners: $4\%$

  • Workers' Comp: $2\%$

  • Other types of property and casualty: $3\%$

• Insurance Regulation:

  • Federal laws & regulations: $2\%$

  • Regulation total: $10\%$

• Combined Content Categories:

  • Auto Policy: Some content may combine Personal auto and commercial auto, totaling $16\%$

  • Other Property & Casualty: Workers' comp is considered part of the other types of property & casualty, totaling $5\%$

  • Regulation Chapter: Federal laws & Requations are part of the Regulation Chapter, which accounts for $12\%$

• ISO (Insurance Service office): Identified as an important factor in property & casualty or personal lines.

Concepts and Learning Objectives of Insurance

• Law of Large Numbers: Students must be able to explain the law of large numbers and why insurance companies utilize it to calculate insurance rates.

• Types of Insurance: Identifying and knowing the differences between various insurance types.

• Law of Agency: Understanding the law of agency as it specifically pertains to the activities and responsibilities of an insurance producer.

• Legal Insurance Contracts: Recognizing the specific characteristics and essential elements required for a legal insurance contract.

Fundamental Principles and Definitions

• Definition of Insurance: A contract in which one party, known as the insurance company, agrees to indmnify (make whole) the insured party against loss, damag, or liability arising from an unknown event.

• Life Insurance Specifics: The policy protects survivors from financial losses suffered after the death of an insured individual.

• Transfer of Risk: Insurance is defined as the transfer of risk of loss from an individual or a business entity to an insurance company. This mechanism spreads the costs of unexpected losses among many individuals.

• The Burden of Loss: Without an insurance mechanism, the cost of a loss would have to be borne solely by the individual who suffered that loss. Under insurance, the cost is transferred to the insurer and spread among other insureds.

Classification of Risks and Exposure

• Risk: Defined as the uncertainty or chance of a loss occurring.

• Pure Risk: Refers to situations that can only result in either a loss or no change. There is no opportunity for financial gain. Pure risk is the only type of risk that insurance companies are willing to accept and insure.

• Speculative Risk: Involves the opportunity for either loss or gain. A primary example of speculative risk is gambling. Speculative risks are not insurable.

• Exposure: A unit of measurement used to determine the rates charged for insurance coverage.

• Homogeneous: Refers to a large number of units that have the same or similar exposure to loss. The basis of insurance is the sharing of risk between a large homogeneous group with similar exposure.

Categories of Hazards

• Hazards: Conditions or situations that increase the probablitiy of an insured loss occurring. Common examples include slippery floors or congested traffic.

• Physical Hazards: Hazards arising from the material, structural, or situational features of the risk. These exist independently of the persons owning or managing the risk.

• Moral Hazards: Refers to applicants who may lie on an insurance application or who have a history of submitting fraudulent claims against an insurer in the past.

• Morale Hazard: Refers to an increase in the hazard presented by a risk due to the insured’s indifference to loss because they have insurance coverage.

Classification of Perils and Loss

• Peril: The causes of loss insured against in an insurance policy.

  • Life Insurance: Insures against financial loss caused by the premature death of the insured.

  • Health Insurance: Insures against medical expenses and/or loss of income caused by the insured sickness or accidental injury.

  • Property Insurance: Insures against the loss of physical property or the loss of its income-producing abilities.

  • Casualty Insurance: Insures against the loss and/or damage of property and the resulting liabilities.

• Loss: Defined as the reduction, decrease, or diapperanance of value of the Orion or property insured in a policy, caused by a named peril. Insurance provides the means to transfer this loss.

• Relationship Summary: A risk is the chance a loss will occur; a hazard increases the probability of that loss; and a peril is the specific cause of the loss.

Methods of Managing and Handling Risk

• Avoidance: The method of dealing with risk by eliminating exposure to a loss. While effective, it is often impractical. For example, a person might choose "ever to fly in an arrogant" to avoid the risk of dying in an airplane crash.

• Retention: The planned assumption of risk by an insured. This involves the use of deductibles, co-payments, or self-insureance. This is also called self-insurance when the insured accepts responsibility for a loss before the insurer pays.

  • Purposes of Retention:

    1. To reduce expenses and improve cash flow.

    2. To increase control of claim reserving and claims settlements.

    3. To provide funds for losses that cannot be insured.

• Sharing: A method for a group of individuals or businesses with similar exposure to loss to share any losses that occur within the group. A reciprocal insurance exchange is a formal arrangement of risk-sharing.

• Reduction: An attempt to lessen the possibility or severity of a loss when risk cannot be avoided entirely. Examples include:

  • Installing smoke detectors in homes.

  • Having an annual physical to detect health problems early.

  • Making proactive changes in lifestyle.