Risk selection, insurable interest, policy provisions and contract law concepts in insurance.
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- What is the primary goal of risk selection in underwriting?
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To identify and accept only those risks that meet the insurer's standards and will be profitable.- Define adverse selection
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The tendency of higher-risk individuals to seek insurance coverage more actively than lower-risk individuals.- What is antiselection?
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The same phenomenon as adverse selection, referring to the selection against the insurer.- What is a risk classification system?
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A method of grouping applicants into categories based on shared characteristics to predict loss frequency and severity.- Define selection risk
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The risk that the insured's knowledge of their own condition may result in adverse selection against the insurer.- What are the three main phases of underwriting?
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Selection (choosing risks), classification (grouping by characteristics), and rating (determining premium).- Define insurable interest
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The legal right of a person to insure another or property based on a direct relationship where they would suffer a direct loss.- When must insurable interest exist in property insurance?
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At the time of the loss, not necessarily when the policy is issued.- When must insurable interest exist in life insurance?
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At the time the policy is issued, not necessarily at the time of death.- Who has insurable interest in property they own?
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The owner has insurable interest in the full value of the property.- Can insurable interest be assigned after a loss?
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No, in property insurance insurable interest must exist at the time of loss; assignment after loss is ineffective.- Why is insurable interest required in insurance contracts?
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To prevent insurance from becoming a wagering contract and to prevent moral hazard.- What is a wagering contract?
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A contract where the parties create a risk that did not previously exist, betting on an uncertain future event.- How does an insurance contract differ from a wagering contract?
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Insurance transfers an existing risk; wagering creates a new risk. Insurance requires insurable interest; wagering does not.- Define moral hazard
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A condition where an insured might intentionally cause or exaggerate a loss because they stand to gain from the insurance proceeds.
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