General Insurance Principles - Risk and Loss Flashcards
What is the main purpose of insurance?
The transference of financial risk associated with loss onto an insurance company.
Risk
The chance of loss
How one handles the chance of loss
Risk Management
Loss
Unplanned reduction in economic value
Pure Risk
Risk that can only result in loss, not gain. This type of risk is insurable.
Speculative Risk
Risk that can result in either loss or gain. This type of risk is uninsurable.
Direct Loss
An immediate result of the occurrence of an insured peril. (e.g., the death of a household’s breadwinner)
Indirect Loss
A result of an insured loss that is not directly related to the peril. (e.g., loss of income due to the death of a household’s breadwinner)
Loss Exposure
State of being exposed to a an insurable loss.
Exposure Units
Units assigned to measure loss exposure.
Peril
The event(s) that insurance protects against (e.g., death, disability)
Hazard
Condition that increases the chance of encountering a peril or the severity of a peril.
Three types of hazards
- ) Moral Hazards
- ) Morale Hazards
- ) Physical Hazards
Two Types of Risk
- ) Pure Risk
2. ) Speculative Risk
Moral Hazard
An individual’s character traits or habits that increase the likelihood of a loss. (e.g., alcoholism, drug abuse)
Morale Hazard
Individual tendency to take on more risk out of a state of mind, attitude or indifference to loss. (e.g., “I can drive fast in the snow because I have insurance.”)
Physical Hazard
An individual’s physical traits that increase the likelihood of loss. (e.g., obesity, high cholesterol)
The Five Risk Management Techniques
- ) Avoid the Risk
- ) Reduce the Risk
- ) Retain the Risk
- ) Share the Risk
- ) Transfer the Risk
Risk Avoidance
A way to reduce the likelihood of loss by avoiding situations that could result in loss. Risk avoidance is a good practice in general, but it especially is helpful in dealing with avoidable, dangerous risks. (e.g., don’t drink and drive)
Risk Reduction
A ways to reduce the likelihood of loss by proactively reducing the chance of a loss. (e.g., exercising and eating healthy to prevent illness)
Risk Retention
The acceptance of risk and dealing with it through the use of personal funds should a loss occur. Great to use if financial loss is small and risk is remote. (e.g., self-insurance, deductible)
Sharing Risk
A ways to reduce the likelihood of financial loss whereby people who share a common risk band together and promise to “chip in” and compensate a member of the group who suffers a covered loss. The custom of risk sharing made sense for small groups facing relatively modest losses, but it is difficult to achieve in larger groups.
Risk Transference
A way to reduce the financial impact of a loss by transferring the loss to a third party.
Six Elements of Insurable Risk
- ) Loss must be definable;
- ) Loss must be measurable;
- ) The peril must be outside the insured’s control;
- ) The risk must be part of a large group of similar risks;
- ) The risk must not be catastrophic (e.g., result of war);
- ) The risk must not be a stated exclusion.
