Finance

Insurance

Insurance is a contract that binds the insurer to indemnify (compensate) the insured against specified types of loss in return for money (premiums). Insurance is designed to protect the financial well-being of an individual, company, or other entity again

Indemnity

The underlying principle of insurance which is restoring an insured to the same financial position that existed before a loss occurred.

Loss

The source of a claim for damages under an insurance policy; losses cause a financial loss to the insured due to loss of property, a liability from something the insured did to someone else, or the loss due to the loss of a loved one, or losses due to med

Direct Physical Loss

A loss in which damage occurs as the result of an occurrence without an intervening cause, such as hail damage to the roof of a house.

Indirect or Consequential Loss

A loss in which damage occurs as the result of a direct loss, such as the insured's increase in expenses when required to stay in a hotel because a hail-damaged home cannot be lived in.

Risk

Risk has two meanings. (1) The property or party that is insured. (2) The uncertainty of loss.
Pure risk
A situations that involve only the chance of loss or no loss such as property ownership.
Speculative risks
A situation that involves the chance for ei

Relationship Between Risk & Premium

There is a direct correlation between risk and premium. The greater the risk, either in value or in potential for a loss or claim, the greater will be the premium.

Exposure

The condition of being at risk for financial loss due to hazards or unforeseen events.

Hazard

A condition that increases risk, or the chance of a loss occurring; there are four types:

Physical

Physical hazards are created by the use, condition, or occupancy of property, such as damaged steps or worn auto tires.

Moral

Moral hazards are created by the insured's habits, such as dishonesty or criminal activity. It is a situation in which one party gets involved in a risky event knowing that it is protected against the risk and the other party will incur the cost.
Moral ha

Morale

Morale hazards are created by the attitudes of the insured, such as indifference because the insured knows he/she is insured. An example would be not making sure doors and windows are locked before leaving home. If anything is stolen, the insured doesn't

Legal

Legal risks are created when legal authority in a certain situation is unclear or unsettled. These can arise from changes in the law or from court rulings. An example would be a change in the building code requiring new construction to use different mater

Peril

The cause of a loss or the event insured against. Examples-fire, lightning, theft, etc.

Named Peril Policy

A policy that only provides insurance for perils that are specifically listed, or named, in the policy.

Open Perils Policy

A policy that provides insurance for all perils except those specifically exclude in the policy.

Accident

An unforeseen, and unintended event that is identifiable as to time and place.

Occurrence

An accident, including continuous and repeated exposure to conditions, that causes bodily injury or property damage neither expected nor intended by the insured.

Deposit Premium/ Audit

An initial or provisional premium required by an insurer that is based on estimated information and is subject to an audit to determine the actual risk amount and a premium adjustment after the end of the policy period. After adjustment, the premium becom

Tort

In common law jurisdictions, a tort is a civil wrong that unfairly causes someone else to suffer loss or harm resulting in legal liability for the person who commits the tortious act. Although crimes may be torts, the cause of legal action is not necessar

Avoidance

Refraining from engaging in activity that might give rise to risk, such as not owning or driving a car to avoid the risk of car accidents.

Retention

Assuming responsibility for loss. Retention is the most common method of handling risk, typically in the form of deductibles or choosing not to purchase insurance.

Sharing

Spreading risk among several entities or a large number of people, such as by insurance companies or physicians.

Reduction

Decreasing the chance for loss by removing or reducing hazards, such as wearing safety goggles or installing safety railings around a dangerous area.

Transfer

Shifting the risk for loss from one party to another, either through the purchase of an insurance policy or issuance of another contractual agreement (e.g., hold harmless agreement).

Elements of Insurable Risks

To be considered insurable, a risk must:
1.be accidental and due to chance
2.be measurable with respect to value
3.be predictable
4.be one unit in a large enough pool of units that the law of large numbers allows for the accurate prediction of loss
5.not

Adverse Selection

The tendency of persons who present a greater than average degree of risk for loss to apply for, or continue insurance to a greater extent than persons with average or less than average degree of risk for loss.

Law of Large Numbers

A theory that states it's more likely to predict a particular outcome as the number of units in a group increases. For example, an insurer is more likely to predict the number and types of auto insurance claims as the number of auto insurance policyholder

Reinsurance

Insurance sold and purchased between two insurance companies for the purpose of transferring and sharing risk, usually catastrophic risk or losses in excess of a specific amount (e.g., $500,000 or $10,000,000).

Reinsurer

The insurer selling reinsurance to ceding insurers.

Ceding Insurer

The insurer buying reinsurance from a reinsurer. The ceding insurer issues primary policies of insurance to individuals and/or businesses.

Reinsurance Contract or Treaty

Two types of reinsurance contracts are sold:
1.Facultative Reinsurance-The ceding insurer offers individual risks to the reinsurer and the reinsurer may choose to accept or reject each individual risk.
2.Treaty Reinsurance- The reinsurer writes coverage f

Excess of Loss

Reinsurer only pays for losses that exceed a certain dollar amount (e.g., $500,000).

Proportional

Reinsurer only pays a share of every reinsured loss (e.g., 90%).

Limits of Liability

The maximum amount the insurer will pay for loss or damage covered by an insurance policy.

Deductible

The monetary amount an insured must pay before the insurer will begin making loss payment. A deductible is a form of risk-sharing and cost containment. Most forms of insurance contain standard deductible amounts (e.g., $500) and the insured may choose hig

Co-insurance

Another cost containment feature in a property (usually commercial) insurance policy, the co-insurance clause requires a specified amount of insurance based on the value of the insured property. If the insured insures the property for less than this amoun

Self-Insurance

The concept of making financial preparations to meet risks by setting aside sufficient funds in advance to meet estimated losses, including enough to cover possible losses in excess of those estimated.

Applicant

An individual who requests insurance from an insurance company.

Insured

An individual or business who has insurance on his or her person, property, or business through an insurer.

Insurer

Another name for an insurance company.

Binder

A binder is a written or oral contract made by an agent that puts a policy immediately but temporarily into effect for a specified period of time until accepted or canceled by the insurance company that includes all the terms of and endorsements to the po

Insurable Interest

The concept that insurance can only be purchased when the applicant has a potential for financial loss, if the insured person died, or if the insured items were destroyed or not in their possession. In property and casualty insurance, insurable interest m

Negligence

Negligence is conduct that is culpable because it misses the standard required by law of a reasonable person in protecting others or the interests of others against risky or harmful acts of other people. It is:
1.the failure to do something that a reasona

Burglary

Breaking and entering (a building, safe, etc.) with felonious intent and with visible signs of forced entry--for example, a broken window, jimmied door, or blown safe (Burglary, Building. Both start with B)

Robbery

The taking of the personal property of another by force or fear of force

Larceny

The taking or removal of another's personal property with the intent to permanently deprive them of it. This could be burglary or robbery, but if property is taken without force, fear of force, or breaking and entering, it is still larceny. Walking into s

Theft

The unlawful taking of the property of another, including burglary, robbery and larceny

Mysterious Disappearance

Personal property is missing, but there is no provable cause for its disappearance; the property might have been lost or stolen.

Liability

A legally enforceable debt or obligation.