Chp. 2 - Nature of Insurance (Risk, Perils, & Hazards) Flashcards
Indemnity
Making and insured whole again by restoring them to the same condition as before the loss happened.
Law of Large Numbers
- The larger the number of exposures that are combined into a group, the more certainty there is to the amount of loss incurred in any given period.
- It allows an increased degree of accuracy in loss predictions based on past experiences.
Peril
something that can cause a financial loss- e.i. earthquake, tornado, or the accident itself.
Loss
The unintentional decrease in value of an asset due to peril.
Loss Exposure
The Situation that presents possibility of loss.
Homogeneous Exposure Units
Similar objects of insurance that are exposed to the same group perils.
Hazard
- A condition or situation that creates or increases a chance of loss.
What are the 3 types of Hazards?
- Physical hazard
- Moral Hazard
- Morale Hazard
Physical Hazard
Poor Health - overweight, blind
Moral Hazard
Dishonesty - drugs, alcohol abuse
Morale Hazard
Careless attitude - reckless driving, stealing, carefree, careless lifestyle.
Risk
- Uncertainty or potential of loss
- Speculative Risk
- Pure Risk
Speculative Risk
Risk that presents chance of gain and loss
IS NOT INSURABLE.
Pure Risk
Risk of potential loss with no gain
IS INSURABLE.
Elements of Insurable Risk
- loss must be due to chance (accident).
- outside the insured’s control
- Loss mus be definite and measurable
- documented time, place, amount when payable
- Loss must be predictable.
- can estimate the average frequency and severity
- loss can not be catastrophic
- must be reasonable]
- loss of exposure to be insured must be large
- Insurance company must be able to predict loss
- Law of large numbers
- Insurance company must be able to predict loss
- loss must be randomly selected
- prevent adverse selection
