Basic Terms Flashcards
What is speculative risk?
Risk where the outcome is uncertain i.e. GAMBLING.
NOT INSURABLE.
What is Pure Risk?
Risk with no possible upside or gain. i.e. death, accident, illness.
THE ONLY RISK INSURANCE WILL COVER.
What is “exposure”?
A way to measure HOW VULNERABLE the loss is, expressed in dollars or units, used to calculate rate. Units include:
Medical history; sex; age; occupation
What are the three kinds of HAZARDS?
PHYSICAL: Lifestyle, slick floor
MORAL: Dishonesty, lies, on purpose
MORALE: Lack of seatbelt, lack of repair/maintenance
What is a PERIL?
A peril is the CAUSE of the loss: Tornado, flood, car accident
What is RETENTION?
When the insured assumes responsibility through DEDUCTIBLES, COPAYS or SELF PAY.
What is SHARING (reciprocal insurance exchange)?
A risk sharing arrangement, i.e. doctors pulling their funds to cover malpractice lawsuits
What is TRANSFER?
Moving risk to another party. I.e. purchasing homeowners insurance.
What characteristics must be present for PURE RISK to be insured?
large numbers of similar risks in the pool; loss is definite and measurable; catastrophic peril is excluded; insurance must not be mandatory, must be justified; loss must be due to chance; loss must be statistically predictable.
What is ADVERSE SELECTION?
Basically, making a bad bet. Entering risks, more prone to loss. Insurers may protect themselves against this by
limiting coverage; raising premiums; or rejecting coverage.
What is the law of large numbers?
The theory of probability that is the basis of insurance.
MORE UNITS INSURED =
Achieving the underlying chance of loss.
What is REINSURANCE?
Risk that an insurance company buys for their OWN protection.
What is the most common way to transfer risk?
INSURANCE
What is the chance a loss may occur?
RISK
