Chapter 1: Basic Concepts of Risk and Insurance

Question 1

RISK

Answer 1

The possibility of loss.

Question 2

POSSIBILITY VS PROBABILITY

Answer 2

Possibility is something that COULD occur.

Probability is proportion of times that events will occur in long run.

Question 3

LOSS

Answer 3

The undesirable end result of risk (a decline in value unexpectedly) or predictable and planned. (depreciation or consumption of resources)

Question 4

LOSS EXPOSURES

Answer 4

Losses that might occur.

i.e. financial losses from a fire

Question 5

DIRECT VS INDIRECT LOSSES

Answer 5

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)

Question 6

UNCERTAINTY

Answer 6

State of mind due to lack of sureness of something.

Question 7

PERIL

Answer 7

The cause of loss. (i.e. fire, theft, earthquake)

Question 8

HAZARD

Answer 8

An act or condition that increases the LIKELIHOOD of a loss or increases the severity.

Question 9

PHYSICAL HAZARD
MORAL HAZARD
ATTITUDINAL HAZARD

Answer 9

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.

Question 10

MEASUREMENT OF RISK

Answer 10

Deductive (a priori) is measured by physical examination.

Inductive is measured by statistical analysis of past loss experience.

Question 11

LAW OF LARGE NUMBERS

Answer 11

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

Question 12

FINANCIAL VS NONFINANCIAL RISKS

Answer 12

loss of money vs. emotional or pain & suffering

Question 13

PARTICULAR VS FUNDAMENTAL RISKS

Answer 13

Particular affect only individual or small group

Fundamental affect large segments of society at one time

Question 14

STATIC VS DYNAMIC RISKS

Answer 14

Static are independent of society or the economy.

Dynamic result directly from changes in society or economy.

Question 15

PURE VS SPECULATIVE RISKS

Answer 15

Pure=possibility of loss or no loss

Speculative=possibility of loss, no loss/no gain, or gain

Question 16

PERSONAL RISKS
PROPERTY RISKS
LIABILITY RISKS

Answer 16

Personal-death, injury, illness, old age, unemployment
Property-destruction or loss of property
Liability-according to the law

Question 17

INSURABLE VS UNINSURABLE RISKS

Answer 17

Insurable-loss must be important, accidental, calculable, definite, not excessively catastrophic

Question 18

RISK TOLERANCE LEVEL

Answer 18

Degree to which a person is attracted to or averse to possibility of loss.

Question 19

PURE RISKS

Answer 19

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

Question 20

INSURANCE

Answer 20

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

Question 21

BENEFITS OF INSURANCE

Answer 21

Pays claims
Encourages peace of mind
Provides a basis for credit
Stimulates saving
Provides investment capital
Fosters loss prevention

Question 22

COSTS OF INSURANCE

Answer 22

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

Question 23

LIFE AND HEALTH VS PROPERTY AND LIABILITY

Answer 23

L&H=death, medical, disability

P&L=direct and indirects losses to property

Question 24

PERSONAL VS BUSINESS

Answer 24

P=used by individuals and families

B=used by business and other organizations

Question 25

PRIVATE VS GOVERNMENT (SOCIAL)

Answer 25

P=
G=social insurance that...
-compulsory
-partial or total employer financed
-by law
-as a right
-social adequacy

Question 26

SOCIAL ADEQUACY VS INDIVIDUAL EQUITY

Answer 26

SA-a minimum floor of benefits regardless of economic status

IE-individual contributions that cover cost to insurer

Question 27

APPLICANT
POLICYOWNER
INSURED
LINE OF INSURANCE

Answer 27

A-who applies for insurance
P-when policy goes into effect
I-personal on whose life a policy is issued
LoI-type of insurance