general insurance concept 1

general insurance concept 1 - SECTION 2 General Insurance...

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1 SECTION 2 General Insurance Concepts 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 disastrous consequences. 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. Loss 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 . Risk is the possibility (uncertainty) that a loss might occur and is the reason that people buy insurance. If 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 death. Speculative risk (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 over time. 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 retained when a person decides to assume financial responsibility for certain events. The deductible amount on a health insurance policy may be seen as a way the insured retains some portion of the risk.
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General Insurance Concepts 2 In addition, his premium is reduced because of this assumption of risk. To avoid a risk, a person might stay home rather than drive somewhere. A risk is reduced when a person practices living a healthier lifestyle, thereby reducing the chance of major illness. A risk may be transferred in two ways . If someone’s negligence causes an injury, the person injured could sue the negligent party, transferring the burden of the risk to the negligent party . The second method for transferring risk is accomplished through the use of insurance
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This note was uploaded on 05/11/2010 for the course DEPARTMENT INS101 taught by Professor Taka during the Spring '10 term at 東京国際大学.

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general insurance concept 1 - SECTION 2 General Insurance...

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