Adverse selection
The tendency of persons with a higher-than-average chance of loss to seek insurance at standard rates
This can lead to higher-than-expected loss levels and unprofitable business if not controlled.
Casualty insurance
A broad field of insurance covering auto, liability, burglary and theft, workers compensation, and health insurance
It includes whatever is not covered by fire, marine, and life insurance.
Commercial lines
Property and casualty coverages for business firms, nonprofit organizations, and government agencies
These lines are distinct from personal insurance lines.
Expense loading
The amount needed to pay all expenses, including underwriting and loss-adjustment expenses, commissions, and general administrative expenses
It also includes state premium taxes, acquisition expenses, and an allowance for contingencies and profit.
Fidelity bonds
Cover loss caused by the dishonest or fraudulent acts of employees, such as embezzlement and theft of money
They protect businesses from employee dishonesty.
Fortuitous loss
A loss that is unforeseen and unexpected by the insured, occurring as a result of chance
This type of loss is typically covered by insurance.
Indemnification
Restoration of the insured to their approximate financial position prior to the occurrence of the loss
It is a fundamental principle of insurance.
Inland marine insurance
Goods being shipped on land, including imports, exports, domestic shipments, and personal property like fine art and jewelry
It also covers instrumentalities of transportation such as bridges and pipelines.
Insurable risk
A type of risk insured by a private insurer
Insurable risks must meet specific criteria.
Insurance
The pooling of fortuitous losses by transfer of such risks to insurers, who agree to indemnify insureds for such losses
It may also provide other pecuniary benefits or services connected with the risk.
Law of large numbers
The greater the number of exposures, the more closely actual results will approach probable results expected from an infinite number of exposures
This principle underlies the actuarial science in insurance.
Liability insurance
Covers the insured’s legal liability arising out of property damage or bodily injury to others, including legal defense costs
It protects individuals and businesses from claims.
Life insurance
Pays death benefits to designated beneficiaries when the insured dies
It is a key financial product for individuals.
Ocean marine insurance
Ocean-going vessels and their cargo from loss or damage due to perils of the sea
It also covers the legal liability of shippers and owners.
Personal lines
Coverages that insure the buildings and personal property of individuals and families or provide protection against legal liability
These are distinct from commercial lines.
Pooling
The spreading of losses incurred by the few over the entire group, substituting average loss for actual loss
This concept is fundamental to the insurance model.
Property insurance
Loss or damage of real or personal property caused by various perils, such as fire, lightning, windstorm, or tornado
It protects property owners from financial loss.
Reinsurance
An arrangement where the primary insurer transfers part or all of the potential losses associated with insurance to another insurer
This helps manage risk and stabilize financial performance.
Requirements of an insurable risk
- Large number of exposure units
- Accidental and unintentional loss
- Determinable and measurable loss
- Non-catastrophic loss
- Calculable chance of loss
- Economically feasible premium
These criteria ensure that risks can be effectively insured.
Risk transfer
The transfer of a pure risk from the insured to the insurer, who is typically in a stronger financial position to pay the loss
It is a fundamental concept in insurance.
Social insurance
Government insurance programs with certain characteristics that distinguish them from other government insurance plans
These programs often provide coverage for specific groups or risks.
Surety bonds
Provide for monetary compensation in case of failure by bonded persons to perform certain acts, such as a contractor failing to construct a building on time
They are often used in construction and service contracts.
Underwriting
The process of selecting and classifying applicants for insurance
It is crucial for managing risk and ensuring the viability of insurance products.
