Chapter 1: Basic Concepts of Risk and Insurance Flashcards
RISK
The possibility of loss.
POSSIBILITY VS PROBABILITY
Possibility is something that COULD occur.
Probability is proportion of times that events will occur in long run.
LOSS
The undesirable end result of risk (a decline in value unexpectedly) or predictable and planned. (depreciation or consumption of resources)
LOSS EXPOSURES
Losses that might occur.
i.e. financial losses from a fire
DIRECT VS INDIRECT LOSSES
Direct are the first or immediate losses that come from an event. (i.e. Home Fire: cost to repair or replace)
Indirect are other expenses that may occur from direct loss. (i.e. Cost for stay in hotel and meals during repair or replace)
UNCERTAINTY
State of mind due to lack of sureness of something.
PERIL
The cause of loss. (i.e. fire, theft, earthquake)
HAZARD
An act or condition that increases the LIKELIHOOD of a loss or increases the severity.
PHYSICAL HAZARD
MORAL HAZARD
ATTITUDINAL HAZARD
Physical conditions like location, structure, occupancy, exposure.
Moral are dishonest tendencies due to client’s weakened financial condition.
Attitudinal is carelessness or indifference at whether or loss occurs.
MEASUREMENT OF RISK
Deductive (a priori) is measured by physical examination.
Inductive is measured by statistical analysis of past loss experience.
LAW OF LARGE NUMBERS
As the size of the sample increases, the actual loss will more closely approximate the probability.
mass-large sample size
homogeneity-similar characteristics
independence-no correlation
FINANCIAL VS NONFINANCIAL RISKS
loss of money vs. emotional or pain & suffering
PARTICULAR VS FUNDAMENTAL RISKS
Particular affect only individual or small group
Fundamental affect large segments of society at one time
STATIC VS DYNAMIC RISKS
Static are independent of society or the economy.
Dynamic result directly from changes in society or economy.
PURE VS SPECULATIVE RISKS
Pure=possibility of loss or no loss
Speculative=possibility of loss, no loss/no gain, or gain
PERSONAL RISKS
PROPERTY RISKS
LIABILITY RISKS
Personal-death, injury, illness, old age, unemployment
Property-destruction or loss of property
Liability-according to the law
INSURABLE VS UNINSURABLE RISKS
Insurable-loss must be important, accidental, calculable, definite, not excessively catastrophic
RISK TOLERANCE LEVEL
Degree to which a person is attracted to or averse to possibility of loss.
PURE RISKS
Few or no offsetting benefits
Costs of Pure Risks:
actual losses that occur, worry and fear about possible losses, not optimal use of resources, costs of managing risks
INSURANCE
As an economic system As a legal contract By law (contract) As a business As a social device As an actuarial system As a risk management technique
BENEFITS OF INSURANCE
Pays claims Encourages peace of mind Provides a basis for credit Stimulates saving Provides investment capital Fosters loss prevention
COSTS OF INSURANCE
Operating costs-cost of business
Profits-to increase surplus
Opportunity costs-cost of pursuing one thing vs another
Increased losses-may cause moral and attitudinal hazards
Adverse selection-highly vulnerable seeking coverage
LIFE AND HEALTH VS PROPERTY AND LIABILITY
L&H=death, medical, disability
P&L=direct and indirects losses to property
PERSONAL VS BUSINESS
P=used by individuals and families
B=used by business and other organizations
PRIVATE VS GOVERNMENT (SOCIAL)
P= G=social insurance that... -compulsory -partial or total employer financed -by law -as a right -social adequacy
SOCIAL ADEQUACY VS INDIVIDUAL EQUITY
SA-a minimum floor of benefits regardless of economic status
IE-individual contributions that cover cost to insurer
APPLICANT
POLICYOWNER
INSURED
LINE OF INSURANCE
A-who applies for insurance
P-when policy goes into effect
I-personal on whose life a policy is issued
LoI-type of insurance
