Ch2: Nature of Insurance

Question 1

Law of Large Numbers

Answer 1

The larger the number of people, the more predictable the actual losses will be

Question 2

Speculative Risk

Answer 2

Involves the opportunity for a loss or gain, not covered by insurance companies

Question 3

Pure Risk

Answer 3

A situation that can only result in a loss, no opportunity for financial gain (only type of risk that is insurable)

Question 4

Avoidance

Answer 4

Avoiding as many risks as possible

Question 5

Reduction

Answer 5

lessens the possibility of loss by taking action to reduce the risk

Question 6

Sharing

Answer 6

When a group of individuals or businesses with similar exposures share the losses that occur within that group

Question 7

Retention

Answer 7

Aka self-insurance, is when individuals have the financial ability to fund losses by themselves when they occur

Question 8

Transfer

Answer 8

The most effective way to handle risk. Risk is transferred to another party. Insurance is common method of transferring risk from individual or group to insurance company

Question 9

Elements of Insurable Risk

Answer 9

Not all risk is insurable. Insurance companies will insure only Pure Risk

Question 10

Risk

Answer 10

Something that everyone takes on. Potential for loss.. Types of risks are pure and speculative

Question 11

Hazard

Answer 11

The likelihood of a peril or loss. Types are Physical, moral and morale

Question 12

Peril

Answer 12

Something that can cause a financial loss such as an earthquake

Question 13

Lo$$

Answer 13

The unintentional decrease in the value of an asset due to a peril