Chapter 2 Flashcards
Is broadly defined as selection against the company. It includes the tendency of people with higher risks to see or continue insurance to a greater extent than those with little or less risk. Also includes the tendency of policyowners to take advantage of favorable options in insurance contracts.
Adverse Selection
Is any factor, condition, or situation that creates an increased possibility that a peril (a cause of a loss) will actually occur.
Hazard
Are similar objects of insurance that are exposed to the same group of perils.
Homogeneous Exposure Units
Attempt to return the insured to their original financial position.
Indemnity contract
is a fundamental principal of insurance that the larger the number of individual risks combined into a group, the more certainty there is in predicting the degree or amount of loss that will be incurred in any given period.
Law of large numbers
Is the unintentional decrease in the value of an asset due to a peril
Loss
Is the risk of possible loss
Loss Exposure
Is a hazard brought on by the effect of personal reputation, character, associates, personal living habits, financial responsibility, and environment, as distinguished from physical health, upon an individual’s general insurability.
Moral Hazard
Is a hazard arising from indifference to loss because of the existence of insurance. Are often associated with having a careless attitude.
Moral Hazard
Is the immediate specific event causing loss and giving risk to risk.
Peril
are physical or tangible condtions existing in a manner taht makes a loss more likely to occur.
Physical Hazard
Is a type of risk that involves the chance of loss only; there is no opportunity for gain; it is insurable
Pure risk
Is the acceptance by one or more insurers, called reinsurers, of a portion of the risk underwritten by another insurer who has contracted for the entire coverage.
Reinsurance
Is the uncertainty regarding loss, the probability of a loss occuring for an insured or prospect.
Risk
occurs when individuals evade risk entirely. It is the act of not doing somelthing could possibly cause a loss or the inactivity of particiaption in an event that may potentially cause a loss situation.
Risk Avoidance
Is the process of analyzing exposures that create risk and designing programs to handle them is called risk management
Risk Management
Spread risk by sharing the possibility of loss over a large number of people. It transfers risk from an indvidual to a group.
Risk Pooling/Loss sharing
Takes place when the chances of a loss are lessened, or the severity of a potential loss is minimized.
Risk Reduction
Is the act of analyzing the loss exposure presented by a risk and determining that the potential loss is acceptable. is often associated with self-insurance.
Risk Retention
Is the act of shifting the responsiblity of risk to another in the form of an insurance contact.
Risk Transfer
Is a type of risk that involves the chance of both loss and gain; it is not insurable.
Speculative Risk
Accident, health, property, and casualty insurance contracts are all contracts of
Indemnity
Is a principle of actuarial science that states that the higher the number of risks insured in the same risk pool; the more predictable losses become.
Law of Large numbers
Is something that can cause a financial loss
Peril
individually list perils that they cover.
Specified or named perils
Insurance polices do not name the perils they cover but instead begin by saying they cover all direct causes or loss
Speical or Open peril
Is an unintentional decrease in the value of an asset due to a peril
Loss
results when a person or property is damaged, destroyed or killed by a peril, without any intervening cause
Direct loss
An indirect loss is also known as
Consequential loss
is any even that causes a loss
occurrence
is a condition or situation that creates or increases a chance of loss. Types of hazards:
Physical hazard, moral hazard, morale hazard.
Hazard
are physical or tangible conditions existing in a manner that makes a loss more likely to occur
Physical hazards
make the loss more likely to occur due to the dishonest or villainous character of the insured
moral hazard
is created base as a result of the perosonal or subjective thought process of the insured
morale hazard
Is defined as the potential for loss. There are two types of risks:
speculative risk and pure risk
Risk
are considered to have an average potential for loss
standard risks
are considered to be a poor risk for the insurance company and have a higher potential for loss
substandard risks
Also known as loss sharing, spreads risk by sharing the possibility of loss over a large number of people
Risk pooling
Is defined as the tendency for pooer than average risk to seek out insurance. Insurer must minimize
Adverse selection
The process of analyzing exposures that create risk and designing programs to handle them is called. Treatment of risk includes implementing the following strategies:
Risk Avoidance, Risk Reduction, Risk Retention, Risk Transfer, Risk Sharing
Risk management
Risk can be avoided by eliminating a hazard
Risk Avoidance
Risk can be reduced by minimizing the severity of a potential loss
Risk Reduction
Risk can be retained through self-insurance
Risk Retention
Risk can be transferred or passed from one party to another through an insurnce contrct.
Risk transfer
Risk can be shared by multiple parties
Risk Sharing
is the spreading of risk from one insurer to one or more other insurers
Reinsurance
involves taking actions to eliminate damage or loss
Loss prevention
