Chapter 2: Vocab

Question 1

Risk

Answer 1

defined as the chance of loss, uncertainty associated with loss, or the possibility of a loss

Question 2

Four categories of loss

Answer 2

pure and speculative risk
subjective and objective risk
fundamental and particular risk
non-financial and financial risk

Question 3

pure risk

Answer 3

the chance of a loss or no loss occurring

Question 4

speculative risk

Answer 4

the chance of loss, no loss, or a profit

Question 5

subjective risk

Answer 5

the risk that an individual perceives based on their prior experiences and the severity of those experiences

Question 6

objective risk

Answer 6

the difference between the expected and actual losses

Question 7

fundamental risk

Answer 7

a risk that can impact a large number of individuals at one time, such as war or an earthquake

Question 8

particular risk

Answer 8

risk that can impact a particular individual, such as death or the inability to work because of a sickness or accident

Question 9

non-financial risk

Answer 9

a risk that would result in a loss, other than a monetary loss

Question 10

financial risk

Answer 10

a loss of financial value, such as the premature death of a family’s primary wage earner

Question 11

law of large numbers

Answer 11

a principle that states that actual outcomes will approach the mean probability as the sample size increases

Question 12

Steps in the risk management process

Answer 12

1. determining the objectives of the risk management program
2. identifying the risks to which the individual is exposed
3. evaluating the identified risks for the probability and severity of the loss
4. determining the alternatives for managing the risks
5. selecting the most appropriate alternative for each risk
6. implementing the risk management plan selected
7. periodically evaluating and reviewing the risk management program

Question 13

Risk management alternatives

Answer 13

risk reduction
risk transfer
risk avoidance
risk retention

Question 14

risk reduction

Answer 14

the process of reducing the likelihood of a pure risk that is high in frequency and low in severity
example: car door dings, common cold

Question 15

risk transfer

Answer 15

transferring of low frequency high severity risk to a third party
example: death, damage to personal residence

Question 16

risk retention

Answer 16

accepting some or all of the potential loss for low frequency/low severity risks
example: co payments, minor damage to home and autos, deductibles.

Question 17

risk avoidance

Answer 17

high frequency and high severity

example: smoking in bed, drunk driving

Question 18

peril

Answer 18

immediate cause and reason for a loss occurring

example: accidental death, fire, tornado, burglary

Question 19

hazard

Answer 19

specific conditions that increase the likelihood of a loss occurring

Question 20

moral hazard

Answer 20

the potential for loss caused by the moral character of the insured
Example: filing a false claim

Question 21

morale hazard

Answer 21

indifference to risk due to the fact the insured has insurance
Ex: leaving keys in your car

Question 22

physical hazard

Answer 22

physical condition that increases the likelihood of a loss occurring
Ex: wet floors and icy roads

Question 23

Requirements of insurable risk

Answer 23

1. it has a large number of homogeneous exposures
2. losses must be accidental
3. must be measurable and determinable
4. loss must not bee financially catastrophic to the insurer
5. loss of probability must be determinable
6. premium for risk coverage must be reasonable and affordable

Question 24

law of large numbers

Answer 24

the more similar the events or exposures, the more likely thee actual losses will equal the expected lossees

Question 25

elements of a valid contract

Answer 25

1. mutual consent
2. offer and acceptance
3. performance or delivery
4. lawful purpose
5. leal competency of all parties

Question 26

principle of indemnity

Answer 26

an insurer will only compensate the insured to the extent the insured has suffered an actual financial loss

Question 27

subrogation clause

Answer 27

an insurance policy requires that the insured relinquish a claim against a negligent third party if the insurer has already indemnified the insured

Question 28

three principles of utmost good faith

Answer 28

1. representation
2. warranty
3. concealment

Question 29

representation

Answer 29

a statement made by the applicant during the application process

Question 30

warranty

Answer 30

promise made by the insured that is part of the insurance contract

Question 31

concealment

Answer 31

occurs when the insured is intentionally silent regarding a material fact during the application process

Question 32

adhesion

Answer 32

“take it or leave it”

all insurance contracts

Question 33

aleatory

Answer 33

the dollar amounts exchanged between the insured and the insurer are unequal

Question 34

unilateral

Answer 34

there is only one promise

the insurer promised to pay the beneficiary if there is a covered loss

Question 35

conditional

Answer 35

the insured must abide by all the terms and conditions of the contract if the insured intends to collect under the policy

Question 36

personal

Answer 36

property insurance policies are personal between the insured and insurer

Question 37

express authority

Answer 37

given to an agent through a formal written document

Question 38

implied authority

Answer 38

the authority an agent relies on to do their job when the expressed authority is insufficiently precise
examples: company logo on the door, business cards on the desk

Question 39

apparent authority

Answer 39

when the third party believes implied or express authority exists, but no authority actually exists
ex: if an insurance agent is no longer with the company the company needs to lock the office, remove the signs, etc

Question 40

waiver

Answer 40

relinquishing a known legal right

Question 41

estoppel

Answer 41

the principal will not be able to deny the insured an insurance contract

Question 42

stock insurers

Answer 42

an insurance company that issues stock and is owned by shareholders with the intent of earning profit

Question 43

mutual company insurers

Answer 43

an insurance company that is owned by the policyholders, not the shareholders
profits are returned to policy holders as dividends
no treated as taxable income but as a return of premiums paid

Question 44

agents

Answer 44

legal representatives of an insurer and act on behalf of an insurer

Question 45

brokers

Answer 45

legal representatives of the insured and act in the best interest of the insured

Question 46

reinsurance

Answer 46

means by which an insurance company transfers some or all of its risk to another insurance company

Question 47

general provisions of an insurance policy

Answer 47

definitions of terms used in the contract
declarations
description of what is insured
perils covered
exclusions
conditions

Question 48

declarations section (insurance policy)

Answer 48

describes exactly which property or person is being covered

example: property address, owner name, face value, etc

Question 49

description section (of insurance policy)

Answer 49

describes exactly what is being insured

Question 50

exclusions section (insurance)

Answer 50

examples: neglect, flood, war, etc

Question 51

conditions

Answer 51

provisions in an insurance policy that require an insured to perform certain duties
examples: notifying insurer in the event of loss, filing a police report, etc

Question 52

endorsement

Answer 52

a modification or change to the existing property insurance policy

Question 53

rider

Answer 53

modification or change to a life or health insurance policy

Question 54

underwriting

Answer 54

the process of classifying applicants into risk pools, selecting insureds, and determining a premium
an underwriter determines if a risk is insurable

Question 55

adverse selection

Answer 55

the tendency of those that most need insurance to seek it while those with the least perceived risk avoid paying the premiums by not buying insurance

Question 56

deductibles

Answer 56

first dollars in a loss which the insured is responsible to pay

Question 57

copayments

Answer 57

loss-sharing arrangements whereby the insured pays a flat dollar amount or percentage of the loss in excess of the deductible

Question 58

coinsurance

Answer 58

percentage of financial responsibility the insured and the insurer must uphold

Question 59

out of pocket maximum

Answer 59

the max dollar amount that the insured will pay

Question 60

three valuation methods for insurance

Answer 60

actual cash value
replacement cost
appraised or agreed up value

Question 61

actual cash value

Answer 61

represents the replacement cost less the depreciated value of the property

Question 62

replacement cost

Answer 62

represents the amount to repair or replace property, without any deduction for depreciation

Question 63

appraised or agreed upon value

Answer 63

when items are hard to value or when the insured owns property that exceeds standard limits

Question 64

legislative regulation of insurance

Answer 64

passes laws and regs
defines how insurance products are sold
controls how agents are licensed

Question 65

judicial branch (insurance)

Answer 65

rules on the constitutionality of laws passed by the state legislative branch

Question 66

executive or state insurance commissioner

Answer 66

elected or appointed position

responsible for enforcing the legislature’s laws