Insurance Basics and Contract Law Flashcards
What is insurance?
A formal social device for reducing risk by transferring the risks of several individual entities to an insurer.
The insurer assumes, to a specified extent, the losses suffered by the insured for a consideration.
Define risk in the context of insurance.
A chance of loss or a person or thing insured.
It can be further classified into impaired or substandard risk.
What is impaired or substandard risk?
An applicant whose physical condition or moral habits do not meet the standard on which the rate is based.
This classification affects the insurability and premium of the applicant.
What is pure risk?
A loss or no-loss situation, as opposed to a situation when a loss or gain is possible.
Pure risks are generally insurable.
What is speculative risk?
A risk that has the possibility of either gain or loss, such as a business venture. Not insurable.
Examples include investments and gambling.
What does peril refer to in insurance?
Cause of a possible loss.
Perils are the specific risks covered by an insurance policy.
What are the three types of hazards?
Moral, morale, and physical.
Each type affects the probability of loss from a peril.
Define moral hazard.
A condition of morals or habits that increases the probability of a loss from a peril.
It refers to the behavior of the insured.
Define morale hazard.
An attitude that increases the probability of loss from a peril.
Example: ‘It’s insured; so why worry?’
What is physical hazard?
The material, structural, or operational features of the risk itself, apart from the moral or morale hazards.
It includes aspects like the condition of a building or equipment.
What is the Law of Large Numbers?
The larger the number of exposure units independently exposed to loss, the greater the probability that actual loss experience will equal expected loss experience.
This law allows for more accurate premium calculations.
What does loss exposure refer to?
The possibility of an accidental loss with measurable financial consequences for an individual or organization.
It indicates a situation or condition that could lead to a potential financial loss.
What is risk management?
Management of the pure risks to which a company might be subject.
It involves analyzing exposures to loss and determining how to handle them.
List four practices involved in risk management.
- Avoiding the risk
- Retaining the risk
- Reducing the risk
- Transferring the risk
These practices help organizations manage their exposure to risks.
