Hazards and Risks

Question 1

Speculative Risk

Answer 1

• Undertaken with no certainty of gain or loss
• Made by conscious choice
• CANNOT be insured.

Question 2

Pure Risk

Answer 2

• Risk with no chance of gain
• Can only result in loss or no loss.
• CAN be insured.

Question 3

Exposure

Answer 3

• The extent to which a person, item, or organization is open to damage or loss.
• Insurers consider a risk’s exposure when deciding whether or not to insure it.
• Expressed in dollars or units
• Determining factor in issuing a policy and setting a premium.
• Ex.: Gulf coast=high exposure to hurricanes; California= high exposure to earthquakes; High crime area= high exposure to theft.

Question 4

Hazard

Answer 4

• A condition increasing the likelihood or severity of a loss.
• Ex.: Storing dangerous materials in a building, record of drunk driving, smoking.

Question 5

Peril

Answer 5

• The actual cause of loss or damage

- Ex.: Lightning, fire, flood, vandalism

Question 6

Loss

Answer 6

1. ) Reduction in value of an insured item. (Ex.: reduction in value of Dan’s car after accident)
2. ) Financial loss due to an occurrence or accident. (Ex.: medical bills for Dan’s injured wrist.)
3. ) For insurers: the amount paid out in a claim settlement. (Ex.: what the insurer has to pay an for his property damage and injury)

Question 7

6 Qualifications of Insurable Risk

Answer 7

1. ) Adequate Premiums
2. ) Definable Risk
3. ) Unexpected Losses
4. ) Substantial Losses
5. ) Exclusions
6. ) Law of Large Numbers

Question 8

A risk can be:

Answer 8

• Potential for financial loss (being exposed or open to damage)
• an insured item

Question 9

Named Peril

Answer 9

Lists each peril that is covered

Question 10

All Peril (Open Peril)

Answer 10

Covers all perils except those specifically excluded

Question 11

Exposure

Answer 11

Possibility or likelihood of damage or loss

Question 12

Hazard

Answer 12

Anything that increases exposure

Question 13

Peril

Answer 13

The cause of damage or loss

Question 14

Loss

Answer 14

• Reduction in value
• Expense caused by a covered peril
• The amount an insurer pays to settle a claim

Question 15

Insurable risk

Answer 15

• Risk: an item, person, or organization that has been insured.
• Not everything is insurable
• 6 qualifications determine what can be insured

Question 16

Qualifications of Insurable Risk: Adequate Premiums

Answer 16

Insurer must be able to cover claims with premium income:
-Potential losses cannot be too much for insurer to pay
- Insurer must be able to cover claims and expenses
-If premiums must be set too high, the risk is not insurable.
Ex.: South TX homeowners policies exclude hurricane coverage because the disasters have been too large in scale.

Question 17

Qualifications of Insurable Risk: Definable Risk

Answer 17

1. ) The insurer can define the exact conditions under which the item is covered by the policy. Ex.: Jewelry is covered up to a specified limit if stolen.
2. ) The item itself is definable (it can be precisely described). Ex.: A house, car or diamond necklace can be defined. An entire riverbed cannot.
3. ) The item has precise value. Ex.: A house or car does. A family photo does not.

Question 18

Qualifications of Insurable Risk: Unexpected Losses

Answer 18

The loss must be:
-unforeseeable
-unexpected
-reasonably unpreventable
-completely random in nature
Ex.: Flood insurance is not available in many areas because flooding has become expected.

Question 19

Qualifications of Insurable Risk: Substantial Losses

Answer 19

The loss must cause substantial economic hardship.
-Ex.: If your shirt is ruined while you’re barbecuing, you can easily buy a new one. This is not a substantial loss; If a guest accidentally backs his car into your porch, you can’t easily afford a new porch. This is a substantial loss.

Question 20

Qualifications of Insurable Risk: Exclusions

Answer 20

-The insurer must exclude coverage for large-scale disasters and catastrophic events.
-Insurers have to charge adequate premiums
-Some losses would require such large premiums that it is impossible to insure them.
Ex.: Wars and terrorism, nuclear and missile attacks, earthquakes, floods.

Question 21

Qualifications of Insurable Risk: Law of Large Numbers

Answer 21

A large number of similar risks must be insured.

• Spreads the risk across more policies.
• Helps the insurer predict losses more accurately.
• “Similar risks” can mean: cars, houses, persons’ lives, similar businesses, etc.

Question 22

The Law of Large Numbers

Answer 22

A large number of insured units reduces the possibility of variation from the expected number of claims.
(If there are more units involved, then there will be much less variation from statistics, which means the rate of claims will be more predictable.

Question 23

Adverse Selection

Answer 23

When someone decides to buy insurance because he knows he will probably have to file a claim, typically because of information about the risk that the insurer is unaware of or unable to discriminate against.
-Ex.: Smokers may be more motivated to purchase health insurance than non smokers.
-Healthy young people usually buy minimal health insurance with low premiums, while high-risk people tend to choose more extensive coverage.
-Problems: Insufficient premiums for level of risk exposure; leads to higher premiums, which might cause people to cancel policies.
Solution: Charging higher-risk individuals higher premiums.

Question 24

A risk is insurable if:

Answer 24

• Policy premiums will cover both claims and expenses
• The insurer can define the exact conditions under which the item is covered by the policy; if the item itself is definable; and if the item, person, or organization has clearly defined value.

Question 25

A risk is insurable if:

Answer 25

• Policy premiums will cover both claims and expenses.
• The insurer can define the exact conditions under which the item is covered by the policy; if the item itself is definable; and if the item, person, or organization has clearly defined value.
• The loss is unforeseeable, unexpected, and reasonably unpreventable.
• The loss causes substantial economic hardship.
• The insurer can exclude coverage for signifig

Question 26

A risk is insurable if:

Answer 26

• Policy premiums will cover both claims and expenses.
• The insurer can define the exact conditions under which the item is covered by the policy; if the item itself is definable; and if the item, person, or organization has clearly defined value.
• The loss is unforeseeable, unexpected, and reasonably unpreventable.
• The loss causes substantial economic hardship.
• The insurer can exclude coverage for significant disasters and catastrophic events.
• A large number of similar types of risk are insured.