General Insurance Concepts
Insurance is a social device for spreading the chance of financial loss among a large number of people.
By purchasing insurance, a person shares risk with a group of others, reducing the individual potential for
The insurance company, or insurer
, receives relatively small amounts of money, referred to as premium
from each of the large number of people buying insurance.
A large, uncertain loss is traded in this way
for a small, certain loss, the premium
The agreement between the insurer and the insured
, the person who is covered by the insurance, is
established in a legal document referred to as a contract of insurance, or a policy
The insurer promises to
pay the insured according to the terms of the policy if a loss occurs.
is defined as reduction in the
value of an asset.
To be paid for a loss, the insured must notify the insurer by making a claim
is the possibility (uncertainty) that a loss might occur
and is the reason that people buy insurance.
a certain event happens -- accident, sickness, or death -- loss occurs.
Insurance is designed to provide for
such losses, while not providing the insured with the possibility of gain from the accident, sickness, or
(such as gambling) creates a risk situation and offers the opportunity for gain as well as
the possibility of loss
It is this type of risk that insurance won’t cover
Pure risk is the type of risk that insurers accept
With pure risk, there is the possibility that a certain event
will occur, for example, accident or sickness.
However, it is the purpose of insurance to restore the
insured to his or her original position
, not to provide a person with the opportunity of making a profit on
an accident or sickness.
ELEMENTS OF INSURABLE RISK
Risk managers evaluate risks for loss frequency (probability of loss), severity, and potential dollar losses
Once the loss exposures are identified and analyzed, the best techniques for dealing with them
must be examined.
There are four ways to manage risk
A risk may be retained, avoided, reduced, or transferred.
A risk is
when a person decides to assume financial responsibility for certain events.
amount on a health insurance policy may be seen as a way the insured retains some portion of the risk.