Course 2: Insurance planning Flashcards
What is insurance?
contractual arrangement whereby one party agrees to compensate another party for losses, in exchange for consideration paid
What is exposure to loss
the insured’s possibility of loss
What is loss
Being without something previously possessed
What is a peril
the cause of a loss
Ex: fire, tornado, heart attack
Insurable loss
an undesired unplanned reduction in economic value based on chance
What is chance of loss
the probability of loss noted as a fraction
Ex: 3 houses burning out of 1000 = .003
What are hazards
Conditions that increase the probability of loss from a peril
What are moral hazards
dishonesty of an insured that increases the chance of loss
What is morale hazard
attitude of indifference to loss created by/after the purchase of an insurance contract. The attitude, “Why should I care? I’m insured,” is an example of the morale hazard.
What is proximate cause
the first peril in a chain of events resulting in a loss
What is risk
variation in possible outcomes of an event based on chance
What is pure risk
possibilities that can result in only loss or no change.
Ex: a factory’s exposure to loss by fire
What is law of large numbers
he greater the number of observations of an event based on chance, the more likely the actual result will approximate the expected result.
What is adverse selection
When one party has more information and can take advantage of the situation
