FL Adjusters Claim Professional Exam Study Guide

Introduction to Insurance Principles

The fundamental purpose of insurance is to indemnify policyholders against covered losses, restoring them to their financial position before the loss. This course covers the essential concepts of risk, loss, exposure, peril, and hazard, which are foundational to all forms of insurance.

Risk and Loss Concepts

Risk

Risk is the chance of loss, the primary reason insurance exists. Insurers may also refer to the insured person, property, or activity as a "risk."

Key Point: Only pure risks (e.g., house fire) are insurable; speculative risks (e.g., gambling) are not.

Loss

A loss is an unplanned reduction in economic value. Insurance indemnifies the insured for the financial value of a loss.

• Direct Loss: Immediate result of a covered peril (e.g., fire damage to a home).
• Indirect Loss: A consequence of a direct loss (e.g., additional living expenses due to an uninhabitable home).

Exposure

Exposure is the state of being subject to a possible loss. Insurers measure exposure using exposure units based on market value and risk factors.

Example: A motorist faces exposure to auto accidents, which could lead to damage, injury, or lawsuits.

Peril

A peril is the destructive event insurance protects against, such as fire, flood, theft, or collision.

Hazard

A hazard is a condition that increases the likelihood or severity of a peril. There are three types:

• Moral Hazard: Individual traits increasing loss likelihood (e.g., alcoholism, bad credit).
• Morale Hazard: Attitudes or indifference to loss (e.g., not locking a car).
• Physical Hazard: Physical conditions increasing loss risk (e.g., slippery floors, potholes).

Risk Management Techniques

Risk management involves handling risks using five techniques:

• Risk Avoidance: Avoiding risk entirely (e.g., not owning a car to avoid theft risk).
• Risk Control: Reducing likelihood (prevention) or severity (reduction) of loss (e.g., shoveling snow, using fire extinguishers).
• Risk Sharing: Pooling resources to share losses (e.g., merchants sharing cargo loss risks).
• Risk Retention: Accepting and paying for losses personally (e.g., deductibles, self-insurance).
• Risk Transfer: Transferring risk to an insurer via a policy, the basis of modern insurance.

Other Risk Concepts

Insurable Risk

For a risk to be insurable, it must meet these criteria:

• Definite as to time, cause, and location.
• Measurable in value.
• Accidental and beyond the insured’s control.
• Not catastrophic (e.g., war, massive earthquakes).
• Part of a large group of similar risks for predictability.

Adverse Selection

Adverse selection occurs when high-risk individuals are more likely to seek insurance. Underwriting helps insurers avoid this by assessing risk and setting appropriate premiums.

Example: A driver with a poor record is more likely to seek auto insurance.

Law of Large Numbers

This mathematical principle allows insurers to predict losses in a large group of similar risks, though not which specific losses will occur.

Example: An actuary can predict losses for 10,000 houses but not for 10 houses.