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3. define a peril
- Peril are the immediate cause ad reason for a loss occurring. It can be the result of an
accident or sickness. Common perils include accidental death, disability caused by
sickness or accident, and property losses caused by fire, windstorm, tornado, earthquake,
burglary, and collision.
8. describe the law of large numbers and why it is useful for insurance.
- The law of large number is a principle that states that actual outcomes will approach the
mean probability as the sample size increase. And it tells us that the more similar the
events or exposures, the more likely the actual losses will equal the expected losses.
- The law of large numbers is useful for insurance companies because the lager the
insured pool, the more likely actual losses will approach the expected losses, thereby
reducing forecasting error and objective risk. This results in insurance premiums that are
more efficient and thus are less costly to the insured.
15. explain the difference between the principal of indemnity and a subrogation clause.
- The principle of indemnity asserts that an insurer will only compensate the insured to
the extent the insured has suffered an actual financial loss. The insured cannot make a
profit from insurance. However, The principle of indemnity does not assert that an
insured will recoup 100 percent of any loss, as most policies will have deductibles and
limits on the amount of losses covered.
- A subrogation clause in an insurance policy requires that the insured relinquish a claim
against a negligent third party, if the insurer has already indemnified the insured. A
subrogation clause entitles the insurer to seek a claim against a negligent third party, for
any claims paid to the insured
16. when must an insurable interest exist for property, liability, and life insurance.
- An insurable interest for property and liability insurance must exist both at the inception
of the policy and at the time of loss. An insurable interest for life insurance need only
exist at the inception of the policy.
Multiple-choice problems:
1. D
2. A
3. B
4. B
5. A