Chapter 2:

Question 1

Adverse selection:

Answer 1

Adverse selection is broadly, defined as a selection against the company. It includes the tendency of people with higher risks to seek or continue insurance to a greater extent than those with little or less risk. Adverse selection also includes the tenancy of policy owners to take advantage of favorable options and insurance contracts.

Question 2

Hazard:

Answer 2

A hazard is any factor, condition, or situation that creates an increased possibility that a peril (a cause of loss) will actually occur.

Question 3

Homogeneous exposure units:

Answer 3

Homogenous exposure units are similar objects of insurance that are exposed to the same group of perils.

Question 4

Law of large numbers:

Answer 4

The law of large numbers is a fundamental principle 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.

Question 5

Loss:

Answer 5

Loss is the unintentional decrease in the value of an asset due to peril.

Question 6

Loss exposure:

Answer 6

Loss exposure is the risk of a possible loss.

Question 7

Moral hazard:

Answer 7

Moral hazard is a hazard brought on by the fact of personal reputation, character, associates, personal living habits, financial responsibility, and environment, as a distinguished from physical health, upon an individuals general insurability.

Question 8

Morale Hazard:

Answer 8

Morale hazard is a hazard arising from indifference to loss because of the existence of insurance. Morale hazards are often associated with having a careless attitude.

Question 9

Peril:

Answer 9

Peril is the immediate, specific event causing loss and giving rise to risk.

Question 10

Physical hazard:

Answer 10

Physical hazards are physical or tangible conditions existing in a manner that makes a loss more likely to occur.

Question 11

Pure risk:

Answer 11

Pure risk is a type of risk that involves a chance of loss. Only there is no opportunity for gain, It is insurable.

Question 12

Reinsurance:

Answer 12

Reinsurance 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.

Question 13

Risk:

Answer 13

Risk is the uncertainty regarding loss, the probability of a loss occurring for an insured or prospect.

Question 14

Risk avoidance:

Answer 14

Risk avoidance occurs when individuals evade risk entirely. It is the act of not doing something that could possibly cause a loss or the inactivity of participation in an event that may potentially cause a loss situation.

Question 15

Risk management:

Answer 15

Risk management is the process of analyzing exposure that creates risk and designing programs to handle them is called risk management.

Question 16

Risk pulling / loss sharing:

Answer 16

Risk pulling and loss sharing spread risk by sharing the possibility of loss over a large number of people. It transfers risk from an individual to a group.

Question 17

Risk reduction:

Answer 17

Risk reduction takes place when the chance of a loss our lessened, or the severity of a potential loss is minimized.

Question 18

Risk retention:

Answer 18

Risk retention is the act of analyzing the exposure presented by a risk and determining that the potential loss is acceptable. Risk retention is often as associated with “self insurance”.

Question 19

Risk transfer:

Answer 19

Risk transfer is the act of shifting the responsibility of risk to another in the form of an insurance.

Question 20

Speculative risk:

Answer 20

Speculative risk is a type of risk that involves a chance of both loss and gain; it is not insurable.