T1 MHA, C1  Definition of ins.: "a financial method that transfers cost of potential losses to an ins. pool (insurer), the pool combines them & transfers the cost (premium) back to the exposed to risk (insureds).  Basic Characteristics of Ins.: 1-Pooling of Losses: a)Spreading losses incurred by few over the entire group, then, average loss is substituted for actual loss. b)Grouping of large # of exposures so; we can predict accurately.  CH2: Ins. & RISK

T2 MHA, C1 2-Payment of fortuitous losses: unforeseen, unexpected & occurs as result of chance (accidental & occur randomly). 3-Risk Transfer: from the insured to the insurer, (in a stronger financial position). 4-Indemnification: the insured is restored to his financial position prior to the loss (insurer has the right to: repair, replace or pay money).  CH2: Ins. & RISK

T3 MHA, C1  Requirement of An Insurable Risk: 1-Large # of Exposure Units: large # of similar units (not necessarily identical) subject to the same peril, why? to predict accurtely. 2-Accidental & Unintentional (fortuitous) Loss: the insured wouldn't intentionally cause a loss otherwise he shouldn't be indemnified, Why? -First, if intentional losses paid, moral hazard & prem. increase, few purchase ins. & insurer can not predict accurately.  CH2: Ins. & RISK

T4 MHA, C1 -Second, law of large #s is based on random occurrence & intentional loss is not a random event & makes prediction inaccurate. 3-Determinable and Measurable Loss: means loss should be definite regarding cause, time, place & amount. -Life ins. meets this requirement but, some losses are difficult to determine & measure (ex: dishonest insured deliberately fake sickness or injury to collect benefits).  CH2: Ins. & RISK

T5 MHA, C1 -The purpose of this requirement is to enable an insurer to determine if the loss is covered & how much should be paid. 4-No Catastrophic Loss: means large portion of exposures shouldn't incur loss at the same time otherwise, prem. increases to a prohibitive level & ins. is no longer an affordable technique. 5-Calculable Chance of Loss: insurer must be able to calculate frequency & severity of loss accurately to charge a prem. that cover claims, expenses & profit.  CH2: Ins. & RISK

T6 MHA, C1 6-Economically Feasible Premium: means chance of loss must be small so that prem. will be attractive (less than amount of ins.). -Most market, financial & political risks are uninsurable by private insurers because: - First, these are speculative risks, so difficult to insure. -Second, the potential of a catastrophic loss is high. -Finally, it is difficult to calculate chance of loss & then the prem.  CH2: Ins. & RISK

T7 MHA, C1  Adverse Selection & Ins.: adverse selection is tendency of persons with high-than- average chance of loss to seek ins. at average rates, which result in higher-than- expected loss. -Ex: high-risk drivers seek auto ins. at standard rates. If they succeed, insurer is “adversely selected against.” -Underwriting (process of selecting & classifying applicants for ins.) is used to control adverse selection.  CH2: Ins. & RISK

T8 MHA, C1 -Applicants who meet underwriting standards are insured at standard rates otherwise ins. is refused or an extra prem. must be paid.  Policy provisions: used to control adverse selection. -Ex: suicide in life ins. & preexisting conditions in health ins. are excluded.  CH2: Ins. & RISK

T9 MHA, C1  Ins. & Gambling: 2 differences: First, gambling creates speculative risks, but ins. handles existing pure risks. Second, gambling is unproductive (winner’s gain comes from loser), but, ins. is socially productive (insurd's gain doesn't resemble insurer's loss).  CH2: Ins. & RISK

T10 MHA, C1  Ins. & Hedging: 2 differences: First, ins. is the transfer of insurable risks, but hedging is handling uninsurable risks, such as prices fluctuation). Second, ins. can reduce objective risk by applying law of large #s, but, hedging transfer risks but not reducing it & prediction of loss is not based on law of large #s.  CH2: Ins. & RISK

T11 MHA, C1  BENEFITS OF INSURANCE TO SOCIETY 1-Indemnification for loss. 2-Less worry & fear. 3-Source of investment funds. 4-Loss prevention. 5-Enhancement of credit.  CH2: Ins. & RISK