Chapter 1 Flashcards
Introduction to Insurance
What is Insurance?
Insurance is a contract that provides protection in case an unforeseen event causes a covered loss.
Why do we need Insurance?
Why do we need Insurance?
What is Risk?
Risk is a condition where there is a chance, likelihood, or probability of a potential loss.
What are the two types of Risk?
Pure Risk & Speculative Risk
What is Pure Risk?
A pure risk is one that will result in either a loss or no change in status-there is “no possibility for gain”.
What is Speculative Risk?
A speculative risk, on the other hand, may result in a loss, “a gain, or no change in status”.
What is Loss?
In insurance a loss is defined as a reduction, decrease, or disappearance in value that affects someone’s property or financial position.
Why file a Claim?
A loss is the basis for a claim under an insurance contract.
Possibility of “Exposure” to loss?
Exposure, or loss exposure, is the condition of being at risk for a loss, whether or not an actual loss occurs. People and properties are at risk of loss purely by existing.
What is a “Peril”?
A (Peril) is the cause of a loss. An insurance company will insure against specific perils or causes of loss. Fire, Lightning, Wind, Death, and disability are common perils covered by various insurance policies.
What is a “Hazard”?
A (Hazard) is a specific condition that increases the probability of likelihood that a loss will occur from a peril.
What are the three types of Hazards?
Physical, Moral, and Morale
What is a Physical Hazard?
A condition that increases the probability of loss, including the use, condition, or occupancy or property. Physical hazards may often be seen, heard, felt, tasted, or smelled.
Example: Flammable Material stored near a furnace, or an icy sidewalk or a wet leaf on the sidewalk.
What is a Moral Hazard?
Dishonest tendencies that increase the probability of a loss, including certain characteristics and behaviors of people. Moral Hazards are most closely related to some form of lying, cheating, or stealing. Moral Hazards are intentional, so these losses are not covered.
Example: An insured burns down their own house or fakes an injury to collect the insurance payout.
What is a Morale Hazard?
An attitude of indifference toward the risk of loss that increases the probability of a loss occurring.
Example: The driver of a car stops at a convenience store to pick up a few items and leaves the car unlocked with the key in the ignition. This action increases the probability the car may be stolen.
What are the 5 “Methods of Managing Risk”?
Hint: STARR
(STARR)
Sharing
Transfer
Avoidance
Reduction
Retention
What is “Risk Sharing”?
(Managing Risk)
Hint: S
Risk Sharing means distributing or pooling a risk among several risk-takers with similar loss exposures who agree to privately cover each other for their losses.
Example: The members of a condominium association agree to share the costs of maintaining the outer structure of the building via association fees.
Risk Sharing means distributing or pooling a risk among several risk-takers with similar loss exposures who agree to privately cover each other for their losses.
What is “Risk Transfer”?
Hint: T
Risk Transfer involves shifting a risk to another party, as with insurance policy, which makes the insurer responsible for paying covered losses. Transferring risk by purchasing insurance is the most common method of managing risk. Risk can also be transferred effectively by incorporation of a business, which shifts the liability from an individual ( the business owner) to the business itself.
What is “Risk Avoidance”?
Hint: A
Risk Avoidance is the elimination of risk by not participating in activities that involve a chance of loss. Never operating a motor vehicle or not owning a car eliminates the risk of being at fault for an auto accident, but avoiding risks may also eliminate the possibility of enjoying life’s advantages. Avoidance is not always an effective method of managing risk, in which case other methods must be used.
What is “Risk Reduction”?
Hint: R
Risk reduction involves minimizing the risk we cannot completely avoid. Building with fire – resistive materials or installing fire sprinklers may reduce damage in the event of a fire. Taking a car in for regular maintenance may help reduce the chance of an accident. Diet and exercise may help reduce the risk oh health issues. Reduction is usually not a complete solution to most risks, however, since it cannot completely account for the element of chance.
What is “Risk Retention”?
Hint: R
Risk retention means maintaining responsibility for a loss, like with self-insurance, whereby an organization sets aside funds to pay potential losses. self-insurance relieves the insured from paying insurance premiums or qualifying for a policy, but it can result in tremendous financial loss when it comes to risks involving bodily injury, property damage, and liability claims and any subsequent lawsuits. Generally, this method is used by those financially secure enough to withstand significant economic hardship. On a smaller scale, most insureds retain a portion of a risk within an insurance policy in the form of deductibles.
Elements of Insurable Risks
