Study 2 Learning Objectives

Question 1

Describe how the components of the insurance model work together to spread risk.

Answer 1

• Insurance is a way to share losses.
  o Small financial contributions (premiums) from all members of a group are collected.
  o Funds from the accumulated pool of money (insurance fund) are then paid to compensate
  (indemnify) the unfortunate few members of the group who suffer certain identified types of losses (claim payments).

Draw diagram of Components of the Insurance Model
Fund Income (Premiums from Insured) ->
Insurance Fund (Insurance) +
Fund Outgo (Claim Payments)

Question 2

Describe the primary fxn of insurance and the 5 secondary fxns of insurance

Answer 2

• The primary function of insurance is to spread risk
  o It is achieved by volume, diversity of type of risk, and/or diversity of location.
• Supplementary functions also enhance the economy:
  o Security—giving peace of mind with premium payment in place of an uncertain loss payment.
  o Credit—protecting property/investments for creditors.
  o Loss prevention—reduces the costs of insurance to the consumer and reduces suffering/impact
  from losses.
  o Capital—insurers invest in Canada’s economy, in bonds/stocks/securities, and in buildings/land.
  o Employment—including trade and professional jobs.

Question 3

Give examples of the major types of insurance included under the heading of general insurance

Answer 3

• General insurance is often referred to as “property and casualty” (P&C) insurance
  because it includes the following:
  o Property insurance—indemnifies the owner or user of property for its loss, or the loss of its income-producing ability.
  o Casualty insurance—a blanket term used to describe insurance for subjects other than life, fire, or automobile.