Chapter 2 outline
DEFINTION OF INSURANCE * No single definition * The Commission on Insurance Terminology defines insurance as the pooling of fortuitous losses by transfer of such risk to insurers, who agree to indemnify insureds for such losses, to provide other pecuniary benefits on their occurrence, or to render services connected with the risk
Basic Characteristics of Insurance * Pooling of losses

* Payment of fortuitous losses

* Risk transfer

* Indemnification

Characteristics of an Ideally Insurable Risk * there must be a large number of exposure units * the loss must be accidental and unintentional * the loss must be determinable and measureable * the loss should not be catastrophic * the chance of loos must be calculable * the premium must be economically feasible
Adverse Selection and Insurance * adverse selection is the tendency of persons with a higher-than-average chance of loss to seek insurance standard rates, results in higher than expected loss levels

* Insurance and Gambling Compared

* Gambling creates a new speculative risk, while insurance is a technique for handling an already existing pure risk * Gambling is socially unproductive, the winner’s gain comes at the expense of the loser
Types of Insurance * Private Insurance * Life insurance pays death benefits to designated beneficiaries when the insured dies * Property and Liability Insurance * Liability insurance covers the insured’s legal liability arising out of property damage or bodily injury to others; legal defense cost are also paid. * Casualty insurance is a broad field of insurance that covers whatever is not covered by fire, marine, and life insurance
Government Insurance * Worker’s compensation is a casualty insurance
Other Government Insurance Programs * The Pension Benefit Guaranty Corporation (PBGC) a federal corporation that guarantees up to certain limits the pension benefits of workers if a private defined benefit pension is terminated * The National Flood Insurance Program (NFIP) make property insurance available up to certain limits to homeowners and business firms who reside in flood zones