Exam 1: Chapters 1, 2, 3, 5 Flashcards
Risk
a condition in which there is a possibility of an adverse deviation from a desired outcome that is expected or hoped for
Peril
a cause of a loss (fine, theft, wind, explosion)
hazard
a condition that creates an increase in the loss of the peril
three types of hazards
1) physical
2) moral
3) morale
physical hazard
material condition that increases the chance of the loss, ex. plasticware by the fryer, cancel policy
moral hazard
the increase in the probability of a loss that results from dishonest tendencies on the part of the insured that may induce that person to attempt to defraud the insurance company
morale hazard
acts to increase losses where insurance exists, not necessarily because of dishonesty but because of a different attitude toward losses that will be paid by insurance
financial risk
market risk, credit risk, liquidity risk
non-financial risk
no insurance for something like a bad grade
pure risk
used to designate those situations that involve only the chance of loss or no loss, ownership of property
speculative risk
there is a probability of loss, but also a possibility of gain, gambling
Is insurance gambling?
No
Does gambling involve a gain?
No
4 primary ways of dealing with risk
1) Avoidance
2) Retention
3) Transfer (insurance)
4) Reduction
risk avoidance
takes place when decisions are made that prevent a risk from even coming into existence
