+
Related Flashcards
Related Topics
Cards In This Set
| Front | Back |
|
Six characteristics of an Ideally Insurable Loss Exposure
|
1. Pure risk 2. Fortuitous loss3. Definite and measurable 4.Large number of similar exposure units 5.Independent and not catastrophic 6. Affordable
|
|
Pure risk
|
Involves pure risk not speculative risk -entails a change of loss or no loss, but no change of gain -speculative risk presents the possibility of loss, no loss, or gain
|
|
Fortuitous losses
|
Subject to fortuitous loss for the insured's standpoint -insured can't have control over whether or not a loss will occur -if the insured has control the insured might have an incentive to cause a loss this is known as a moral hazard
|
|
Definite and measurable
|
Subject to losses that are definite in time cause an location that are measurable -three components are required for a loss exposure to be definite: time, cause, and location (aka insured must be able to determine the event the led to the loss, when the loss occured, and where the loss occured) -measurable means the frequency or severity of the potential loss needs to be measurable
|
|
Large number of similar exposure units
|
One of a large number of similar exposure units-aka can be risk can be spread over a pool of similar loss exposures
|
|
Independent and not catastrophic
|
Not subject to a loss that would simultaneously affect many other similar loss exposures not catastrophic -independent means that a loss suffered by one insured does not affect any other insured or group of insureds (aka don't insure all the same homes within the same area only)
|
|
Affordable
|
Premiums are economically feasible -the insured can afford to pay them
|
|
The distinguishing characteristics of insurance policies are
|
-indemnity -utmost good faith -fortuitous losses -contract of adhesion -exchange of unequal amounts -conditional -nontransferable **although these characteristics are unique to insurance policies, not all insurance policies exhibit every one of them
|
|
Principle of indemnity
|
The principle that insurance policies should provide a benefit no greater than the loss suffered by an insured -aka policyholder should not profit from insurance
|
|
Contract of indemnity
|
A contract in which the insurer agrees in the event of a covered loss to pay an amount directly related to the amount of the loss
|
|
To reduce moral hazard insurance policies should not do the following related to indemnity
|
-Overindemnify the insured -Indemnify insureds more than once per loss **Insurers can reduce moral hazard by clearly defining the extent of a covered loss in the policy provisions and by carefully setting policy limits
|
|
Collateral source rule
|
A legal doctrine that provides that the damages owed to a victim should not be reduced because the victim is entitled to recover money from other sources such as an insurance policy
|
|
Insurance policy is generally more vunerable to abuses such as misrepresentation or opportunism than other contracts because
|
Information asymmetry and costly verification
|
|
Contract of adhesion
|
Any contract in which one party must either accept the agreement as written by the other party or reject it -any ambiguity or uncertainties in contracts are to be construed against the party who drafted it
|
|
Unsophisticated insured
|
Usually the insurer has drafted a ready-made policy and the insured has little or no control over the policy's wording. Ambiguities in these cases are typically interpreted against the insurer. This is the case for most personal insurance consumers
|
