California Life-Only Study Guide Complete Solutions

California Life-Only Study Guide Complete Solutions What does insurance do? transfers the risk of loss from an individual/ business entity to an insurance company, which then spreads the costs of unexpected losses to many individuals What is insurance? the legal agreement/ contract whereby the 2 parties involved agree to the limits of the indemnification, the circumstances under which it will occur and what things of value (consideration) will be exchanged Risk the uncertainty/ chance of a loss occuring What types of risk are there? - pure risk - speculative risk Pure risk situations that can only result in a loss or no change - no financial gain - only type of risk insurance companies are willing to accept Speculative risk involves the opportunity for either loss or gain - ex. = gambling - not insurable Perils causes of loss insured against in an insurance policy Hazards conditions or situations that increase the probability of an insured loss occurring. Types of hazards: - physical - moral - morale Physical Hazards individual characteristics that increase the chances of the cause of loss - physical condition - past medical history - condition at birth Moral Hazards tendencies towards increased risk - evaluate the character and reputation of the proposed insured - refers to those who lie/ submit fraudulent claims Morale Hazards arise from state of mind that causes indifference to loss - carelessness Legal Hazard set of legal/ regulatory conditions that affect an insurer's ability to collect premiums that are equal in value to the exposure to loss that the insurer must bear Law of Large Numbers the larger amount of people with similar exposure to loss = the more likely actual losses will occur. - forms basis for statistical prediction of loss - used to calculate insurance rates Exposure a unit of measure used to determine rates charged for insurance coverage What factors of exposure are considered when determining insurance rates? - age - medical history - occupation - sex Critical risks all exposures in which the possible losses are of the magnitude that would result in financial ruin to the insured, his/her family, and/or to his/her business What are the methods of managing risk? - avoidance - retention - sharing - reduction - transferring California Insurance Code "...any contingent or unknown event, whether past or future, which may damnify a person having an insurable interest, or create a liability against him, may be insured against..." - if a possible future event could result in loss or liability to a person, it may be insurable under the Insurance Code Predictability v. Unpredictability more predictable loss = less insurable more unpredictable loss = more insurable Insurable interest - assets that could be lost - policy owners must face possibility of losing money or valuable assets ** life insurance, insurable interest must exist AT THE TIME OF APPLICATION** - for other insurance, at the time of loss Indemnity - aka reimbursement a provision in an insurance policy that states that in the event of loss, an insured/ beneficiary is permitted to collect only to the extent of the financial loss Utmost Good Faith implies that there won't be fraud, misrepresentation or concealment between parties. Both the insurer and insured must be able to rely on the other for relevant information. The insured is expected to provide accurate information on the application for insurance. The insurer must clearly & truthfully describe policy features and benefits, and must not conceal or mislead the insured.