Basic Definitions Flashcards
Insurance
The contract that transfers risk of a financial loss from an individual/business to an insurer.
Risk
The possibility that a loss MIGHT occur.
Speculative Risk
The possibility of a loss & a possibility of a gain.
NOT INSURABLE
Examples - (1) Gambling (2) Investing
Pure Risk
ONLY involves a possibility of experiencing a loss, not a gain.
Example - the chance of being in a car accident.
Exposure
The potential for accidents & other losses.
Insurance company would be liable
The more a person drives, the more exposure she/he has to accidents and other losses.
Peril
The cause of a loss.
Example - If a house burns; the peril (cause) is the fire.
Loss
(1) The unintended, unforeseen, damage to property,
(2) injury,
(3) amount paid
Direct Loss
Physical loss to property with no intervening cause.
Example - lighting striking a house and an automobile hitting a tree.
Indirect Loss
A consequential loss as the result from a direct loss.
Hazards
Anything that increase the chances that a loss will occur.
3 Type of Hazards
Physical, Moral, Morale
Physical Hazard
Identifiable factors that increases the chance of a loss.
(any hazards you can see)
Example - Have you ever visited a restaurant where the cleaning staff recently mopped the floor? You usually see a bright yellow sign alerting guest of the wet floor. The “wet floor” is as physical hazard. Someone is most likely to slip & fall.
Moral
Arise from an individual’s character.
Dishonesty - increases the chance an individual lies on an insurance application or fakes a loss.
Morale
A state of mind or careless attitude.
Carelessness - unconscious change in a person’s actions or behavior
Example - The insured carelessly leaving the door unlock and windows down when not at home.
Methods of Handling Risk
STARR
S- Sharing T- Transfer A- Avoidance R- Reduction R- Retention
