New User Special Price Expires in

Let's log you in.

Sign in with Facebook


Don't have a StudySoup account? Create one here!


Create a StudySoup account

Be part of our community, it's free to join!

Sign up with Facebook


Create your account
By creating an account you agree to StudySoup's terms and conditions and privacy policy

Already have a StudySoup account? Login here

Principles of Insurance Chapter 2

by: Miranda Houston

Principles of Insurance Chapter 2 INS 3103

Marketplace > Mississippi State University > Business > INS 3103 > Principles of Insurance Chapter 2
Miranda Houston
GPA 3.43

Preview These Notes for FREE

Get a free preview of these Notes, just enter your email below.

Unlock Preview
Unlock Preview

Preview these materials now for free

Why put in your email? Get access to more of this material and other relevant free materials for your school

View Preview

About this Document

These are the notes for chapter 2
Principles of Insurance
Seth Pounds
Class Notes
Principles, Insurance, chapter 2
25 ?




Popular in Principles of Insurance

Popular in Business

This 4 page Class Notes was uploaded by Miranda Houston on Tuesday January 26, 2016. The Class Notes belongs to INS 3103 at Mississippi State University taught by Seth Pounds in Fall 2015. Since its upload, it has received 33 views. For similar materials see Principles of Insurance in Business at Mississippi State University.

Similar to INS 3103 at MSU


Reviews for Principles of Insurance Chapter 2


Report this Material


What is Karma?


Karma is the currency of StudySoup.

You can buy or earn more Karma at anytime and redeem it for class notes, study guides, flashcards, and more!

Date Created: 01/26/16
Outline I. Meaning of Insurance: no single definition A. Definition of Insurance: The pooling of fortuitous losses by transfer of such risks to insurers, who agree to indemnify insured’s for such losses, to provide other pecuniary benefits on their occurrence, or to render services connected with the risk B. Basic Characteristics of Insurance 1. Pooling of losses: The heart of insurance. Pooling involves spreading losses incurred by the few over the entire group so that in the process average loss is substituted for actual loss. Risk reduction is based on the Law of Large Numbers. According to the Law of Large Numbers, the greater the number of exposures, the more closely will the actual results approach the probable results that are expected from an infinite number of exposures. Page 20-21 2. Payment of fortuitous losses: A fortuitous loss is one that is unforeseen, unexpected, and occur as a result of chance 3. Risk transfer: A pure risk is transferred from the insured to the insurer, who typically is in a stronger financial positionm 4. Indemnification: The insured is restored to his or her approximate financial position prior to the occurrence of the loss II. Requirements of an Ideally Insurable Risk A. General Requirements 1. Large number of exposure units: to predict average loss based on the Law of Large Numbers 2. Accidental and unintentional loss: to assure random occurrence of events 3. Determinable and measurable loss: to determine how much should be paid 4. No catastrophic loss: to allow the pooling technique to work, exposures to catastrophic loss can be managed by using reinsurance, dispersing coverage over a large geographical area, or using financial instruments, such as catastrophe bonds 5. Calculable chance of loss: insurer must be able to calculate the average frequency and severity of future losses, so that a premium that is sufficient to pay all claims and expenses and yields a profit during the policy period can be established 6. Economically feasible premium: So people can afford to purchase the policy. For Insurance to be an attractive purchase, the premium paid must be substantially less than the face value, or amount, of the policy B. Application of the Requirements: Exhibit 2.1 1. The risk of fire to a private dwelling satisfies the requirements. 2. The risk of unemployment does not completely meet all requirements. C. Adverse Selection and Insurance: The tendency of persons with a higher- than-average chance of loss to seek insurance at standard rates. If no controlled by underwriting, adverse selection results in higher-than-expected loss levels. Can be controlled by: careful underwriting (selection and classification of applicants for insurance), policy provisions (ie suicide clause in life insurance) 1. Nature of adverse selection 2. Consequences of adverse selection III. Insurance and Gambling Compared Insurance: a technique for handling an already existing pure risk. Insurance is always socially productive: both parties have a common interest in the prevention of a loss Gambling: creates a new speculative risk. Gambling is not socially productive: the winner’s gain comes at the expense of the loser A. Insurance eliminates a pure risk, while gambling creates a new speculative risk. B. Insurance is socially productive, while gambling is socially unproductive. IV. Insurance and Hedging Compared Insurance: Risk is transferred by contract, involves the transfer of pure (insurable) risk. Can reduce the objective risk of an insurer: through the law of large numbers Hedging: Risk is transferred by contract, involves risks that are typically uninsurable. Does not result in reduced risk A. Insurance transfers a pure risk, while hedging involves the transfer of a speculative risk. B. Insurance reduces objective risk, while hedging does not. V. Types of Insurance A. Private Insurance: Exhibit 2.3 Personal Lines: coverage that insure the real estate and personal property of individuals and families or provide protection against legal liability Commercial Lines: coverage for business firms, nonprofit organizations, and government agencies 1. Life insurance: pays death benefits to beneficiaries when the insured dies 2. Health insurance: covers medical expenses because of sickness or injury Disability Plans: pay income benefits 3. Property and liability insurance Property Insurance: Indemnifies property owners against the loss or damage of real or personal property Liability Insurance: Covers the insured’s legal liability arising out of property damage or bodily injury to others Casualty Insurance: Refers to insurance that covers whatever fire, marine, and life insurance do not cover B. Government Insurance 1. Social insurance: financed entirely or in a large part by contributions from employers and/or employees. Benefits are heavily weighted in favor of low-income groups. Eligibility and benefits are prescribed by statute. Ex: social security, unemployment, workers comp 2. Other government insurance programs: found at both the federal and state level. Ex: federal flood insurance, state health insurance pools VI. Social Benefits and Costs of Insurance A. Benefits of Insurance to Society 1. Indemnification for loss (Stability): less likely to apply for public assistance or welfare benefits, business can remain open 2. Reduction of worries and fear: takes away the worry of inevitable or probable risk. Ex: house burning, death of a family dependent 3. Source of investment funds: insurance companies make money and they put that back into the market, creates more money to borrow for business 4. Loss prevention: insurers employ loss prevention specialists 5. Enhancement of credit: property insurance protects lender and borrower B. Costs of Insurance to Society 1. Cost of doing business: and expense loading is the amount needed to pay all expenses, including commissions, general administrative expenses, state premium taxes, acquisition expenses, and an allowance for contingencies and profit 2. Fraudulent claims: 3. Inflated claims: seeking more money than the claim is worth What is the result to the insurance company? They must charge higher premiums to cover additional losses


Buy Material

Are you sure you want to buy this material for

25 Karma

Buy Material

BOOM! Enjoy Your Free Notes!

We've added these Notes to your profile, click here to view them now.


You're already Subscribed!

Looks like you've already subscribed to StudySoup, you won't need to purchase another subscription to get this material. To access this material simply click 'View Full Document'

Why people love StudySoup

Bentley McCaw University of Florida

"I was shooting for a perfect 4.0 GPA this semester. Having StudySoup as a study aid was critical to helping me achieve my goal...and I nailed it!"

Kyle Maynard Purdue

"When you're taking detailed notes and trying to help everyone else out in the class, it really helps you learn and understand the I made $280 on my first study guide!"

Jim McGreen Ohio University

"Knowing I can count on the Elite Notetaker in my class allows me to focus on what the professor is saying instead of just scribbling notes the whole time and falling behind."

Parker Thompson 500 Startups

"It's a great way for students to improve their educational experience and it seemed like a product that everybody wants, so all the people participating are winning."

Become an Elite Notetaker and start selling your notes online!

Refund Policy


All subscriptions to StudySoup are paid in full at the time of subscribing. To change your credit card information or to cancel your subscription, go to "Edit Settings". All credit card information will be available there. If you should decide to cancel your subscription, it will continue to be valid until the next payment period, as all payments for the current period were made in advance. For special circumstances, please email


StudySoup has more than 1 million course-specific study resources to help students study smarter. If you’re having trouble finding what you’re looking for, our customer support team can help you find what you need! Feel free to contact them here:

Recurring Subscriptions: If you have canceled your recurring subscription on the day of renewal and have not downloaded any documents, you may request a refund by submitting an email to

Satisfaction Guarantee: If you’re not satisfied with your subscription, you can contact us for further help. Contact must be made within 3 business days of your subscription purchase and your refund request will be subject for review.

Please Note: Refunds can never be provided more than 30 days after the initial purchase date regardless of your activity on the site.