Chapter 1: Basic Concepts of Risk and Insurance

Question 1

Risk is…

Answer 1

The possibility of loss. Not the Probability or chance of loss.

Question 2

Direct Loss vs Indirect Loss

Answer 2

Direct losses are the first or immediate losses that arise
from an event. I.e. damaging to a house because of fire. An indirect loss is a loss that occurs only as a secondary result following the occurrence of a peril. I.e. paying for a hotel because the house is damaged.

Question 3

Peril

Answer 3

The word peril refers to a cause of loss. Perils are commonplace and include unemployment, illness, old age, death, forgery, theft, fire, earthquake, windstorm, flood, and hundreds of other causes of loss.

Question 4

Hazard

Answer 4

A hazard is an act or condition that increases the likelihood of the occurrence of a loss and/or increases the severity of a loss if a peril does occur. Ordinarily, any particular person or object is exposed to many separate hazards.

Question 5

Physical Hazard

Answer 5

These are physical conditions relating to location, structure, occupancy, exposure, and the like. Insurance underwriting requires an evaluation of all physical hazards. The following are a few examples of physical hazards: high blood pressure, a dangerous hobby, newspapers piled on a staircase, gasoline stored
on the premises.

Question 6

Moral Hazard

Answer 6

These are dishonest tendencies, often due to an insured’s weakened financial condition, that are likely to increase loss frequency and/or severity. Examples include tendencies to cause deliberate damage in
order to collect insurance proceeds or to intentionally inflate claims for insurance proceeds beyond the actual size of the sustained loss.

Question 7

Attitudinal Hazards

Answer 7

Evidenced by carelessness or indifference as to whether a loss occurs or the size of a loss if it does occur. For example, laziness, disorderliness, poor dental hygiene.

Question 8

Pure Risk

Answer 8

Pure risks involve only the chance of loss or no loss. Pure risks are “pure” in the sense that they do not mix both profits and losses. Insurance is concerned mainly with the economic problems created by pure risks. Risk aversion applies to pure risks, in which the prospect of loss only is the cause of concern.

Question 9

Speculative Risk

Answer 9

Speculative risks involve the chance of loss, no loss/no gain, or gain.

Question 10

To be insurable, a risk must substantially meet the requirements of:

Answer 10

Importance, accidental nature, calculability, definiteness of loss, and no excessively catastrophic loss.

Question 11

Adverse Selection

Answer 11

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 that loss. Adverse selection by applicants and policyowners is counterbalanced by the care insurers exercise in underwriting.

Question 12

Social insurance emphasizes?

Answer 12

Social adequacy rather than individual equity. Government insurance programs may or may not be social insurance.

Question 13

Do employees covered under group insurance receive a certificate of insurance as evidence of their coverage.

Answer 13

Yes

Question 14

Possibility

Answer 14

Something could occur. A possibility either exists or does not exist. It can not be measured.

Question 15

Risk

Answer 15

Possibility of loss.

Question 16

Probability

Answer 16

The proportion of times that events will occur in the long run. The probability of some occurrence can be expressed numerically as a number between 0 and 1 or as a percentage from 0.0 to 100.

Question 17

Loss

Answer 17

A decline in value, usually in a unexpected or relatively unpredictable manner.

Question 18

Loss Exposure

Answer 18

Loss that might occur.

Question 19

Uncertainty

Answer 19

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