BUSI 3405U Lecture Notes - Lecture 11: Term Life Insurance, Estate Planning, Mutual Insurance
Document Summary
Insurance companies assume risk of clients for premium. Many types of insurance, there are seven basic principles. 1 must be a relationship between insured and beneficiary. 2 insured must provide full and accurate information. 4 if third party compensates insures, ic obligation reduced. 5 insurance company must have large number insured so risk spread. 6 loss can be quantifiable: insurance company must be able to compute the prob of loss occur. Moral hazard problem that borrower may change decision after receiving money. Occurs when insured fails to take proper precautions (more risky) Adverse selection problem ic most likely to suffer loss. Ic can be organized in 2 ways: mutual insurance stock company. Life insurance pay premiums used to pay out future claims. Two primary liabilities life insurance payouts pension fund po. Health insurance highly vulnerable to adverse selection problem. Property & causality insurance - protects businesses and owners. Named peril policy insures against any loss only from policy.
