Chapter 1 Introduction to Risk and Insurance Flashcards
When a situation is not insurable because it could result in either a financial loss of a financil gain, it is known as a:
a. Specutive Risk
b. hazard risk
c. personal risk
d. pure risk
a. Specutive Risk
Specutative risk exissts where there is either a chance of loss or a chance of profit. Usually not insurable.
What is liability risk?
a. The chance of loss or profit frim a business venture
b. The risk of having to pay for damage to one’s own property
c. A characteristic that makes the chance of loss more likely
d The risk of having to pay for damage to another person’s property
d. The risk of having to pay for damage to another person’s property.
Liability risk entails loss arising from an individual’s obligation to pay damages based on the individual’s neglegent act.
Identify the three broad classes of insurance.
- Personal risk, property risk, liability risks
- Pure risk, speculative risk, insurable risk
- Personal lines, commercial lines, special risk
- Personal line, commercial lines business lines
c. Personal lines, commercial lines special risk
Personal, proper and liability risks are grouped in to three classes of insurance: personal line, commercial line, and special risk.
Bill sustains an injury from an accident and is unable to work for three weeks. Bill’s loss of income from being off work is an example of which type of risk?
- Liability risk
- Personal risk
- Speculative risk
- Moral risk
b. Personal risk
Insurance offers coverage against loss arising from the occurrence of
- Excluded peril
- Speculative risk
- Hazard
- Insured peril
d. Insured peril
What is a physical hazard?
- A physical condition or characteristic of the insured object that leads to a hazard
- An event that may prevent a loss
- A condition that decreased the likelihood of a loss
- A condition attributed to the human element of risk that leads to a hazard
a. A physical condition or characteristic of the insured object that leads to a hazard
Physical hazard is a hazard arising from the physical condition or characteristics of the object that is insured
Which of the following is an example of a moral hazard?
- A tenant that does not pay their rent
- A person that leaves their keys in the car in a location that has a high risk of theft because their car is insured
- A business that does not clean up a spill
- A person injured in an accident and can no longer work
b. A person that leaves their keys in the car in a location that has a high risk of theft because their car is insured
Burglary, robbery and theft are examples of which of the following?
- Perils
- Liability risk
- Hazards
- Speculative risk
a. Perils
What is a proximate cause of loss
- A part of the chain of events leading to a loss, but which did not cause the loss
- The last link in the chain of events leading to a loss
- The immediate and effective cause of loss without which the loss would not occur.
- The event that prevents the recovery of he loss
c. The immediate and effective cause of loss without which the loss would not occur.
What is the remote cause of a loss?
- A direct cause of loss without which the loss would not have occur
- The event that determines the recovery for the loss
- The last link in the chain of events leading to a loss
- A part of the chain of evens leading to a loss, but which did not cause the loss
d. A part of the chain of evens leading to a loss, but which did not cause the loss
What is an immediate cause of a loss
- The last link in a chain of events leading to a loss
- A part of the chain of events leading to a loss, but which did not cause the loss
- The event that determine the recovery for the loss
- A direct cause of loss without which the loss would not occur
a. The last link in a chain of events leading to a loss
A torpedo hits a ship, creating a hole in its hull. As the ship sinks, a bad store arrives and creates a big ocean wave. These waves make the ship take on water, which caused it to sink faster than it would otherwise Identify the proximate cause of he ship sinking.
- The storm
- The torpedo
- The wave
- Poor weather
b The torpedo
All costs associated with managing pure risk are known as which of the following?
Select one:
a. Cost of doing business
b. Cost of risk
c. Cost of goods sold
d. Cost of loss
b. Cost of risk
Paul opens up a new barber shop on a busy downtown street and expects to earn a big profit. What is this an example of?
Select one:
a. Illegal risk
b. Speculative risk
c. Pure risk
d. Moral risk
b. Speculative risk
What is a peril?
a. An example of risk
b. An event that will give rise to a loss
c. An event that will prevent a loss
d. A factor that may increase the likelihood of a loss
b. An event that will give rise to a loss
What is a simple definition of earnings?
Select one:
a. The difference between revenues and expenses—the profits (net income) of a business
b. The cost of doing business
c. The difference between gross profit and net proceeds
d. The premium less the commission
a. The difference between revenues and expenses—the profits (net income) of a business
Which of the following is a commonly used method of exposure identification?
a. Survey
b. Personal opinion
c. Cost-benefit analysis
d. Law of large numbers
a. Survey
The following are commonly used methods of exposure identification: surveys, flow charts, financial statements, inspections
Which of the following is an example of an organization practising social responsibility after a loss?
a. Deciding to lay off as many employees as possible after a major loss affecting a building and equipment to cut costs
b. Deciding to declare bankruptcy after a major loss affecting a building and equipment
c. Deciding to stop funding an employee pension plan after a major loss affecting a building and equipment
d. Deciding to maintain as many employees on the payroll as possible in spite of a major loss affecting a building and equipment
d. Deciding to maintain as many employees on the payroll as possible in spite of a major loss affecting a building and equipment
After a loss, it is still important to consider the employees and the community.
Which of the following is a proximate cause of loss?
Select one:
a. A cigarette that was tossed from an upper balcony lands on a lower balcony and causes a fire that damages the apartment unit; fire is the proximate cause.
b. A person trips on loose carpet on stairs and falls down the stairs; the person’s footwear is the proximate cause.
c. A negligent property owner doesn’t clear snow from sidewalks in winter, and a visitor slips and falls; the fall is the proximate cause.
d. The sudden malfunction of a heating system causes smoke to enter the heating ducts and spread throughout the home, causing damage; the malfunction of the heating system is the proximate cause.
d. The sudden malfunction of a heating system causes smoke to enter the heating ducts and spread throughout the home, causing damage; the malfunction of the heating system is the proximate cause.
Which of the following is an example of a peril?
a. An explosion resulting in fire
b. Loose carpet on stairs
c. Obsolete machinery at a factory
d. Poorly maintained heating system
a. An explosion resulting in fire
Which of the following is an example of an organization practising social responsibility after a loss?
a. Deciding to lay off as many employees as possible after a major loss affecting a building and equipment to cut costs
b. Deciding to declare bankruptcy after a major loss affecting a building and equipment
c. Deciding to stop funding an employee pension plan after a major loss affecting a building and equipment
d. Deciding to maintain as many employees on the payroll as possible in spite of a major loss affecting a building and equipment
d.. Deciding to maintain as many employees on the payroll as possible in spite of a major loss affecting a building and equipment
Which of the following is both a pre-loss and a post-loss objective of risk management?
Select one:
a. Sustained growth
b. Survival
c. Social responsibility
d. Operational continuity
c. Social responsibility
Which type of risk can be insured?
Select one:
a. Illegal risk
b. Pure risk
c. Speculative risk
d. Moral risk
b. Pure risk
Three types or insurable risk
a. personal risks, liability risk, corporate risk
b. property risk, personal risk, liability risk
c. liability risk, property risk corporate risk
d. liability risk, property risk, corporate risk
b. property risk, personal risk, liability risk
What are the two categories of insurance sold by insurers in Canada
General insurance - personal line, commercial line and Special risk
Life insurance - specific policy covering life, health, accident and sickness
What is a hazard?
A condition that may increase the likelyhood of a peril to occur or make the loss more severe.
It may be divided into two major divisions, Physical Hazard and Moral Hazard
Examples of Physical hazard
Slippery floor
Loose tiles
Poorly maintained heating system
Damaged electrical wires
Unshoveled walkways
Moral Hazard
“Who cares it is insured, let it burn”
Exaggeration of damages
False description of what caused the damage
What is a Peril?
A peril is an event that may cause a loss, There are many types of parils such as fire, burglary, theft, robbery, earthquake, wind storm
Explain Underwriter
The group of people that underwrites a particular risk at an insurance company
The person within the insurance company that is responsible to accept or reject business in a line they specialize in. They choose the risk they are prepared to underwrite
Proximate Cause
A cause that in a natural and continuous sequence unbroken by any new and independent cause , produced an event and without which the event would not have happened
What is Remote cause
A cause that is not the proximate cause of loss and is separate from the proximate cause in a chain of events leading to a loss
What is Immediate Cause?
A cause that is not the proximate cause of loss but is the last link in a chain of evens leading to a loss
What is the prime purpose of Risk Management?
a. to increase profit
b. to minimize loss
c. to ensure continuous growth
d. to grow the business
b. to minimize loss
The objectived of risk managment can be broken down into two components, what are they?
Pre-loss objective - Those to be met before a loss occures
Post-loss objective - Those to be met after a loss occurs
Pg. 1-12
Four broad catogories of Pre-loss objectives
Social responsibility
Externally imposed obligations
Piece of mind
Cost of risk
Five broad categories of post loss Objectives
· Social Responsibility
· Survival
· Operational continuity
· Stable earnings
· Sustained growth
Five broad categories of post loss Objectives
· Social Responsibility
· Survival
· Operational continuity
· Stable earnings
· Sustained growth
List the 5 steps of the Risk Management Process
List the 5 steps of the Risk Management Process
- Identifying and Analyzing Exposures
- Formulating options
- Selection the best techniques
- Implementing the risk management plan
- Monitoring results and modifying the plan
List the three insurable risks
Liability risk
Personal risk
Property risk
List the 3 types of risks and give two examples of each
Personal - Loss of income, loss of life, illness, loss of a limb
Property – Loss of a home, loss of a vehicle, theft of our belongings, broken windshield, crash our car,
Liability – someone is injured due to an accident in which we are at fault, a frayed carpet in our home causes someone to trip and brake a leg, our dog bites the delivery person. We run a stop sign and cause damage to a third party. We hit a person who is driving their bicycle.
What is a peril, give two examples
Is an event that will give rise to a loss.
Examples, peril of fire, lightning, wind storm, theft.
Differentiate between risk and chance.
Risk is unfavourable outcome.
Chance is favourable outcome.
Both imply doubt about the outcome
What are some methods of controlling risk?
RAT
- Reduce by preventive effort
- Assume or Retain the risk
- Transfer of risk - INSURANCE
How is risk measured?
Loss frequency - determining the likelihood of each peril occurring.
Loss severity - severity of the resulting loss or damage.
Define “peril” and give at least TWO (2) examples of perils.
Is an event that will give rise to a loss. Without this event the loss would not have occured
Examples of peril: fire, lightning. hail, high winds, and theft
Explain what it means to be indemnified.
To be indemnified is to be put back to the same financial position prior to the loss.
Having insurance and be compensated for the loss enables individuals and businesses to continue on with their lives.
Define risk
“the chance of loss”.
Is the chance that an event could occur that would leave you in a worse situation rather than a better one.
Chance, uncertainty
How does purchasing insurance enable an individual or business to control risk?
Purchasing insurance is transferring risk to someone who has better financial resources and thus a better ability to withstand loss.
It is an effective way to control risk.
What is the definition of Insurance?
A contract in which one party, the insurer, for a monetary consideration agrees to reimburse another, the insured for loss or liability for a loss on a defined subject caused by a specified hazard or peril.
What are unearned premiums?
Unearned premiums - that portion of the premium that has not yet been earned on a given policy.
What are reserves?
Reserves - are funds required by law, to be set aside to pay for losses reported but not yet paid or not reported and to cover unearned premiums
What expenses must insurance premiums cover.
- Reserves
- Unearned premiums
