Ch. 2 - Nature of Insurance, Risk, Perils, and Hazards

Question 1

Adverse Selection

Answer 1

Adverse selection is broadly defined as selection against the company. Includes the tendency of people with higher risk to seek or continue insurance to a greater extent than those with little or less risk. Adverse selection also includes the tendency of policyowners to take advantage of favorable options in insurance contracts.

Question 2

Hazard

Answer 2

Hazard is any factor, condition, or situation that creates an increased possibility that a peril (a cause of loss) will actually occur.

Question 3

Homogenous Exposure Units

Answer 3

Imagina exposure units are similar objects of insurance that are exposed to the same group of perils.

Question 4

Indemnity Contract

Answer 4

Contracts of indemnity attempt to return the insured to their original financial position.

Question 5

Law of Large Numbers

Answer 5

The law of large numbers is a fundamental principle of insurance that the larger the number of individual risks combined into a group, the more certainty there is in predicting the degree or amount of loss that will be incurred in any given period.

Question 6

Loss

Answer 6

Loss is the unintentional decrease in the value of an asset due to a peril.

Question 7

Loss Exposure

Answer 7

Loss exposure is the risk of a possible loss.

Question 8

Moral Hazard

Answer 8

Moral hazard is a hazard brought on by the effect of personal reputation, character, associates, personal living habits, financial responsibility, and environment, as distinguished from physical health, upon an individual’s general insurability.

Question 9

Peril

Answer 9

Peril is the immediate, specific event causing loss and giving rise to risk.

Question 10

Physical Hazard

Answer 10

Physical hazards are physical or tangible conditions existing in a manner that makes a loss more likely to occur.

Question 11

Pure risk

Answer 11

Pure risk is a type of risk that involves the chance of loss only; there is no opportunity for gain; it is insurable.

Question 12

Reinsurance

Answer 12

Reinsurance is the acceptance by one or more insurers, called reinsurers, of a portion of the risk underwritten by another ensure who has contracted for the entire coverage.

Question 13

Risk

Answer 13

Risk is the uncertainty regarding loss, the probability of a loss occurring for an insured or prospect.

Question 14

Risk Avoidance

Answer 14

Risk avoidance occurs when individuals evade risk entirely. It is the act of not doing something that could possibly cause a loss or the inactivity of participation in an event that may potentially cause a loss situation.

Question 15

Risk Management

Answer 15

The process of analyzing exposures that create risk and designing programs to handle them is called risk management.

Question 16

Risk Pooling/Loss Sharing

Answer 16

Risk pulling and los sharing spread risk by sharing the possibility of lost over a large number of people. It transfers risk from an individual to a group.

Question 17

Risk Reduction

Answer 17

Risk reduction takes place when the chances of loss are lessened, or the severity of a potential loss is minimized.

Question 18

Risk Retention

Answer 18

Risk retention is the active analyzing the last exposure presented by risk and determining that the potential loss is acceptable. Risk retention is often associated with self–insurance.

Question 19

Risk Transfer

Answer 19

Risk transfer is the act of shifting the responsibility of risk to another in the form of an insurance contract.

Question 20

Speculative Risk

Answer 20

Speculative risk is a type of risk that involves the chance of both loss and game; it is not insurable.

Question 21

Morale Hazard

Answer 21

Morale hazard is Hazard arising from indifference to loss because of the existence of insurance. Morale hazards are often associated with having a careless attitude.