UNIT_2_Insurance_and_Risk_Student_s_Notes - UNIVERSITY OF...

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UNIVERSITY OF TECHNOLOGY, JAMAICA FACULTY OF BUSINESS AND MANAGEMENT SCHOOL OF BUSINESS ADMINISTRATION INSURANCE UNIT2 - INSURANCE AND RISK TOPICS Definition and Basic Characteristics of Insurance Requirements of an Insurable Risk Adverse Selection and Insurance Insurance vs. Gambling Insurance vs. Hedging Types of Insurance Benefits and Costs of Insurance to Society * Definition of Insurance * Insurance is the pooling of fortuitous losses by transfer of such risks to insurers, who agree to indemnify insureds for such losses, to provide other pecuniary benefits on their occurrence, or to render services connected with the risk * Basic Characteristics of Insurance * Pooling of losses * Spreading losses incurred by the few over the entire group * Risk reduction based on the Law of Large Numbers * Payment of fortuitous losses * Insurance pays for losses that are unforeseen, unexpected, and occur as a result of chance * Risk transfer * A pure risk is transferred from the insured to the insurer, who typically is in a stronger financial position * Indemnification * The insured is restored to his or her approximate financial position prior to the occurrence of the loss * Requirements of an Insurable Risk * Large number of exposure units * to predict average loss * Accidental and unintentional loss * to control moral hazard * to assure randomness * Determinable and measurable loss * to facilitate loss adjustment * insurer must be able to determine if the loss is covered and if so, how much
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This note was uploaded on 02/26/2012 for the course ECON 101 taught by Professor Adam during the Three '11 term at University of Technology, Sydney.

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UNIT_2_Insurance_and_Risk_Student_s_Notes - UNIVERSITY OF...

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