Chapter 3 - Principles and Practice Summary Notes Download
Chapter 3 - Quiz view
Terms | Definitions |
|---|---|
 Define ratemaking. | its the process of establishing rates for each class of insurance |
| Define chance. | is the number of times the event happens / the number of times the event may possibly happen |
| What THREE (3) factors affect the accuracy of predictions? | 1. the size of the sample 2. time over which sample was taken 3. conditions in the past relative to future condtions |
| What is the difference between the probability and the uncertainty of an event occurring? | Insurance reduces uncertainty. The smaller the sample size, the higher degree of uncertainty. |
| List the steps required in the ratemaking process, describe what each one entails, and explain why each one is necessary. | 1. Classify risks (based on types of objects and hazards of exposure) 2. Stats on past losses 3. Determine pure premium 4. Determine the total premium 5. Determine rate |
| What is the difference between pure premium and total premium? | Pure premium is the premium required to meet the losses that occur while a total premium is determined by adding loadings (trends, repair costs, inflation, expenses, overhead and profit) |
| Define underwriting. | Underwriting is the selection of risks |
| What is a peril? | A peril is an event which may cause a loss to occur. |
| What is the difference between named peril policies and multi-peril policies? | named peril polices name the perils insured against whereas mutil-peril policies refer to a combination of fire and casualty. |
| Define negligence. | is doing something a reasonable person would not do or not doing something a reasonable person would do. |
| What is a hazard? | is a condition that may cause a peril to occur. |
| What is the difference between a physical hazard and a moral hazard? | physical hazard - physical features of a risk (e.g. slippery floors) moral hazard - relates to the character of the insured |
| What is the subject of insurance contracts? | Risk is the subject of an insurance contract. |
| Discuss the TWO (2) meanings of exposure as they relate to insurance. | exposure is the danger of loss arising from what happens to a risk nearby. e.g. neigbour is a fireworks factory. exposure is also the sum total of values insured under a policy. e.g. $2 million factory is the exposure for a insurer. |
| What factors will determine the amount an underwriter may be willing to insure on a given risk? | Retention - amount an insurer retains for self Reinsurance - share risk with another insurer. |
| What is an insurer's retention? | The amount an insurer retains for self |
| Define reinsurance. | Shares risk with another insurer by paying to that insurer a portion of the premium. |
| Who carries out the rating function? | Carried by underwriters or rating clerks |
| How are loadings and deductions (or credits) used in rating? | Loadings - adds loadings to risk for features considered more hazardous than average for that class Deductions - are allowed for features that make a riskless hazardous than the average risk of that class |
| What is the difference between ratemaking and rating? | ratemaking is the process of establishing rates for each class whereas rating is applying established rates to specific items. |
