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Key Takeaways
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Key Takeaways
Key Takeaways
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Key Takeaways
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This chapter was all about giving you the basics of insurance. Let's recap some of the major points:
Insurance
Transfers the risk of loss from an individual to an insurer
Based on the principle of indemnity
Based on the spreading of risk (risk pooling) and the law of large numbers
Hazards give rise to a peril. There are 3 kinds of hazards:
Hazards
Physical — physical condition
Moral — a tendency toward increased risk
Morale — an indifference to loss
Risk
Uncertainty regarding financial loss
2 types of risks — Pure: insurable because it involves a chance of loss only; Speculative: not insurable because it involves a chance of gain
Methods of handling risk: Avoidance, Retention, Sharing, Reduction, Transfer
Elements of Insurance Risk
Due to chance: chance of loss beyond insured's control
Definite and measurable: loss must have definite time, place and amount
Predictable: number of losses must be statistically predictable
Not catastrophic: there must be limits that the loss can't exceed
Large exposure: insurer must be able to predict losses based on the law of large numbers
Randomly selected exposure: insurer must have a fair proportion of both good and poor risks
Insurable Interest
Must exist at the time of application
Exists when insuring one's own life, the life of a family member, or a business partner or key employee