NC Property and Casualty State Exam Latest Version Graded A+

NC Property and Casualty State Exam Latest Version Graded A+ Insurance - a plan of spreading the risk of possible loss over a large number of people (Law of Large Numbers) - protects against the risk (uncertainty) of when a financial loss might occur Speculative Risk - when there is a chance of gain as well as a chance of loss (ex: buying a stock, gambling) - insurance IS NOT intended to protect against this Pure Risk - when there is a chance of loss only - not all pure risks are insurable Insurable Risk - a risk the insurance company is willing to accept - characteristics of an insurable risk 1. Low probability of a loss occurring 2. Less than catastrophic results 3. The loss must be measurable 4. The loss must be significant 5. The loss must be accidental and unintended Law of Large Numbers - makes it possible to predict future losses based upon prior experience - law states that as a large # of events are included, the difference between actual and expected results become smaller Spread of Risk - involves spreading the company's policies over a broad geographical area in order to avoid large losses in the event of a catastrophic event Adverse Selection - occurs when insureds with a high risk of loss attempt to purchase insurance and are successful in doing so - insurers attempt to PREVENT THIS (bad risk) - prevented by: 1. refusal to write 2. rating up 3. insurability standards *** deductibles do not prevent this Retention - when liability for a loss is maintained by an individual by NOT PURCHASING INSURANCE - deductible is an example of retention Transfer To shift the responsibility for a loss to an insurance company through the purchase of insurance Control/Reduction - an attempt to prevent a loss or to reduce the amount of the loss - ex: installation of a sprinkler system to reduce the amount of loss Perils Actual cause of a loss such as fire, theft, wind, hail, etc. Hazards - increase in the probability of a peril occurring - ex: bald tires on a car, faulty wires, damaged steps Principle of Indemnity - the fundamental idea that the purpose of insurance is to restore the insured to the original financial position that was enjoyed before a loss, BUT WITHOUT GAIN Private/Voluntary Insurance - neither required nor made available by the government, but does not meet recognized needs - ex: collision insurance in a PAP Social Insurance - programs