Chapter 2 - The Nature of Insurance Flashcards
What is Adverse Selection?
Adverse Selection is the tendency of people with higher risks to seek or continue insurance more than those with lower risks.
What does Hazard refer to in insurance?
Hazard is any factor, condition, or situation that increases the possibility of a peril occurring.
What are Homogeneous Exposure Units?
Homogeneous Exposure Units are similar objects of insurance exposed to the same group of perils.
What does Indemnify mean?
Indemnify is the act of restoring insureds to their financial condition prior to a loss.
What is Indemnity?
Indemnity is the amount needed to restore an individual to their financial condition before a loss.
What is an Indemnity Contract?
An Indemnity Contract attempts to return the insured to their original financial position.
What is the Law of Large Numbers?
The Law of Large Numbers states that the larger the number of individual risks combined, the more certainty there is in predicting loss.
How does the insurance industry define Loss?
Loss is defined as the unintentional decrease in the monetary value of an asset due to a peril.
What is Loss Exposure?
Loss Exposure is the risk of a possible loss.
What is a Loss Exposure Unit?
A Loss Exposure Unit refers to each individual, organization, or asset exposed to potential financial loss.
What is Moral Hazard?
Moral Hazard exists due to the effect of an insured’s personal reputation, character, and financial responsibility.
What is Morale Hazard?
Morale Hazard arises from an insured’s indifference to loss because of the existence of insurance.
What is a Peril?
A Peril is the immediate, specific event that causes loss and gives rise to risk.
What is a Physical Hazard?
A Physical Hazard is a tangible condition that makes a loss more likely to occur.
What does Primary Insurance Company mean?
Primary Insurance Company refers to the first policy to pay when multiple policies cover the same claim.
What is Pure Risk?
Pure Risk involves the chance of loss only; there’s no opportunity for gain.
What is Reinsurance?
Reinsurance is the acceptance by reinsurers of a portion of the risk underwritten by another insurer.
What is a Reinsurer?
A Reinsurer is an insurance company that assumes a portion of the risk from a primary insurance company.
What is Risk?
Risk is the uncertainty regarding loss and the probability of a loss occurring.
What is Risk Avoidance?
Risk Avoidance is the act of evading risk entirely by not participating in potentially risky activities.
What is Risk Management?
Risk Management is the process of analyzing exposures that create risk and designing programs to address them.
What is Risk Reduction?
Risk Reduction focuses on actions that decrease the chances of a loss occurring.
What is Risk Retention?
Risk Retention is the act of determining that a potential loss is acceptable.
What is Risk Selection?
Risk Selection describes the insurance company’s process for determining whether to cover a new loss exposure.
