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
S - Sharing
2 or more individuals or business agree to pay a portion of any loss incurred by any member of the group.
T- Transfer
The insurer agrees to pay if an insured has a loss.
A - Avoidance
Eliminating a particular risk by not engaging in a certain activity.
R - Retention
The individual or business will pay for the loss if it occurs, or a portion of the loss via a deductible.
R - Reduction
Refers to lessening the chance that a loss will occur, or lessening the extent of a loss if it occurs.
Insurance uses the risk management method of _____ to spread a risk of a loss among thousands, if not millions of insured.
Transfer
What is the only way that insurance can work & make the premium affordable?
The large number of insureds who do not have an accident will be paying for the losses of the few who do have an accident.
What are the 2 parties in an Insurance Company?
1st party - Insured
2nd party - Insurer
What is an Insurance Contract ?
The legally enforceable contract that defines the limits of coverage provided to the insured & the risk of loss being transferred, & it identified under what circumstances the insurer will pay for a loss.
