Chapter 1

Question 1

Possibility

Answer 1

Something could occur. A possibility either exists or does not exist; it cannot be measured.

Question 2

Risk

Answer 2

The possibility of loss

Question 3

Probability

Answer 3

the proportion of times that events will occur in the long run. The probability of an occurrence
can be expressed numerically as a number between 0 and 1 or as a percentage from 0 to
100 percent

Question 4

Loss

Answer 4

a decline in value, usually in an unexpected or relatively unpredictable manner

Question 5

Loss Exposure

Answer 5

A loss that might occur

Question 6

Direct Loss

Answer 6

First or immediate losses that arise

from an event. For example, the cost to repair a dented fender is a direct loss following an auto accident.

Question 7

Indirect Loss

Answer 7

A loss that occurs only as a secondary result following the occurrence of a peril. For example, if a client’s home is severely damaged by a fire due to defective wiring, the direct loss is the cost to repair the damage to the home.

Question 8

Uncertainty

Answer 8

A state of mind that arises from the presence of risk and is characterized by not being sure about something. Uncertainty often is characterized by worry and fear.

Question 9

Peril

Answer 9

A cause of loss. Fire, earthquake, and flood are examples.

Question 10

Hazard

Answer 10

An act or condition that increases the likelihood of the occurrence of a loss and/or increases the severity of a loss. The three types of hazards are physical hazards, moral hazards, and attitudinal hazards.

Question 11

Physical Hazard

Answer 11

A physical condition relating to location, structure, occupancy, exposure, and the like.

Question 12

Moral Hazard

Answer 12

A dishonest tendency that is likely to increase loss frequency and/or severity

Question 13

Attitudinal hazard

Answer 13

A condition of carelessness or indifference on the part of an individual as to whether a loss occurs and/or the size of a loss if one does occur.

Question 14

Law of Large Numbers

Answer 14

A mathematical principle stating that as the number of independent trials or events is increased, the actual results from those trials or events will come close and closer to the results that one would expect to occur based on the underlying probability.

Question 15

Mass

Answer 15

As a characteristic of a statistical group or an insured group, sufficient size within such a group as to allow the true underlying probability to emerge.

Question 16

Homogeneity

Answer 16

The quality or state of being of the same or similar kind or nature

Question 17

Independence

Answer 17

A requirement of the law of large numbers that the occurrence of a loss to one exposure unit should not affect the likelihood of loss to another exposure unit.

Question 18

Financial Risk

Answer 18

A category of risk for which the possibility of loss involves a decrease or a disappearance of monetary value, usually in an unexpected or relatively unpredictable manner.

Question 19

Particular Risk

Answer 19

A loss possibility that affects only individuals or small groups of individuals at the same time, rather than a large segment of society. An example is the possibility of loss due to the theft of one’s wallet.

Question 20

Fundamental Risk

Answer 20

A loss possibility that can affect a large segment of society at the same time. An example is the possibility of widespread employment during an economic downturn.

Question 21

Static Risk

Answer 21

In contrast with dynamic risk, a possibility of loss that exists even in the absence of changes in society. Hurricanes are an example.

Question 22

Dynamic Risk

Answer 22

A possibility of a loss that results from changes in society or in the economy. An example of a dynamic risk is the possibility that a retailer’s inventory will become obsolete because of a sudden change in consumer tastes

Question 23

Pure Risk

Answer 23

A possibility of loss that involves only two outcomes, loss or no loss.

Question 24

Speculative Risk

Answer 24

A possibility of loss with three possible outcomes: loss, no loss/no gain, or gain

Question 25

Hedging

Answer 25

A procedure to protect against losses from price fluctuations. An example of hedging is the simultaneous taking of a "long" position and a "short" position in shares of common stock.

Question 26

Gambling

Answer 26

Deliberately creating a speculative risk by betting on an uncertain outcome. Playing poker for money is an example of gambling.

Question 27

Personal Risks

Answer 27

A loss possibility concerned with death, injury, illness, old age, and unemployment.

Question 28

Property Risk

Answer 28

A loss possibility associated with the loss or destruction of property

Question 29

Liability Risk

Answer 29

A possibility of loss as a result of being held legally responsible for an injury to another, usually for bodily injury or damage to his or her property.

Question 30

Insurable Risk

Answer 30

Insurable risks are usually financial, particular, static, and pure risks involving losses that meet these five requirements: • The amount of the loss must be important. • The loss must be of an accidental nature. • Future losses must be calculable. • The loss must be definite. • The loss cannot be excessively catastrophic.

Question 31

Risk-Tolerance Level

Answer 31

The degree to which an individual is attracted to or averse to the possibility of loss

Question 32

Adverse Selection

Answer 32

Adverse selection is the natural tendency for those who know they are highly vulnerable to loss from a specific risk to be most inclined to acquire and retain insurance to cover related losses. It also includes situations in which individuals tend to select insurance options that reflect their particular situation. A family with a 16-year-old son who has just acquired a driver’s license will probably want full-coverage auto insurance on the car. And a homeowner living in some parts of California will be especially interested in obtaining earthquake coverage.

Question 33

Private Insurance

Answer 33

All forms of insurance that privately owned insurers provided. Contrast with government insurance.

Question 34

Government Insurance

Answer 34

Various types of insurance operated by state or federal governments. Includes both social insurance programs and other programs.

Question 35

Social Insurance

Answer 35

Social insurance consists of various government programs in which the elements of the insurance technique are present. These programs are designed to help solve the major social problems that affect a large portion of society. Our country’s social insurance programs are of several types: Social Security, Medicare, unemployment insurance, temporary disability insurance, and workers’ compensation insurance.

Question 36

Social Adequacy

Answer 36

Under the principle of social adequacy, benefits are designed to provide a minimum floor of benefits to all beneficiaries under the program, regardless of their economic status. Above this floor of benefits, persons are expected to provide additional resources from their own savings, employment, or private insurance programs.

Question 37

Individual Equity

Answer 37

The principle that each individual's insurance premium payments are based on an actuarial analysis that reflects the insurer's cost of providing benefits for the risks faces by that individual

Question 38

Group Insurance

Answer 38

Group insurance provides coverage to more than one person under a single contract issued to someone other than the persons insured. The contract, referred to as a master contract, provides benefits to a group of individuals who have a specific relationship to the policyowner. Group contracts usually cover full-time employees, and the policyowner is either their employer or a trust established to provide benefits for the employees.

Question 39

Master Contract

Answer 39

A contract issued to someone other than the persons insured that provides benefits to a group of individuals who have a specific relationship to the policy owner

Question 40

Certificate of Insurance

Answer 40

A description of the group insurance coverage provided to employees. It is given to the employees, but it is not part of the master contract.

Question 41

Evidence of Insurability

Answer 41

Evidence of insurability is the documentation or other evidence submitted to the insurance company regarding the physical condition, financial condition, driving records, or other attributes of the applicant for insurance coverage.