Insurance Concepts

Question 1

Risk

Answer 1

means the chance of loss and used to refer to the person, property, or activity that is insured

Question 2

Exposure

Answer 2

is the state of being subject to a possible loss.

Question 3

Hazard

Answer 3

defined as a condition that increases the likely number of losses or the likely severity of a loss.

Question 4

Peril

Answer 4

is a cause of loss- •fire •explosion •windstorm •flood•theft •collision

Question 5

Loss

Answer 5

an unwelcomed and unplanned reduction in economic value.

Question 6

Types of losses

Answer 6

• A direct loss is the immediate result of an event caused by a covered peril.
• An indirect loss is a more remote ramification than a direct loss, but is still a result of loss from a covered peril.

Question 7

Methods of Handling Risk

Answer 7

• avoiding it
• controlling it
• sharing it
• retaining it
• transferring it

Question 8

Risk Avoidance

Answer 8

Individuals can avoid some risks by never having them in the first place. For example, those who simply refuse to own a car avoid the risk that that car might be stolen or damaged. This approach might work for those who live in large cities that have good public transportation systems, but it would be impractical for most adults.

Question 9

Risk Control

Answer 9

• Risk prevention measures reduce the likelihood that a loss will occur. For example, shoveling the snow off of a sidewalk makes it less likely that a visitor will slip and fall on it.
• Risk reduction measures reduce the severity of any loss that does occur. Having fire extinguishers does not keep fires from starting, but when extinguishers are available and used, they often limit fire damage.

Question 10

Risk Sharing

Answer 10

Under a risk-sharing arrangement, groups form with the intention that each member will share the financial burden of a loss suffered by any member of the group.

Question 11

Risk Retention

Answer 11

sometimes referred to as the “do nothing” option. Rather than avoiding, controlling, sharing, or transferring the risk, a person or business may simply use its own funds to pay for any losses that occur.

Question 12

Risk Transfer

Answer 12

an individual or business transfers the risk of loss to another party. By buying insurance, a person or business transfers certain risks to an insurance company in return for the payment of a premium.

Question 13

Requirements for a Risk to Be Insurable

Answer 13

•A covered loss must be definite as to time, cause, and location. It must be clear that a covered loss has occurred

Question 14

Requirements for a Risk to Be Insurable

Answer 14

•The value of the loss that is to be insured must be measurable. Otherwise, the insured would not know how much insurance to buy, and the insurer would not know how much to pay in the event of a loss.

Question 15

Requirements for a Risk to Be Insurable

Answer 15

•The insured event must be accidental or outside the insured’s control. Only losses that occur due to chance are insurable.

Question 16

Requirements for a Risk to Be Insurable

Answer 16

•The defined risk must not be a catastrophic event affecting thousands of people. Insurance companies do not generally cover losses resulting from a war or a nuclear reaction because a single event might affect many policyholders at the same time.

Question 17

Requirements for a Risk to Be Insurable

Answer 17

Pure risks are generally insurable, but speculative risks are not.

Question 18

Requirements for a Risk to Be Insurable

Answer 18

•The defined risk must be part of a large group of similar risks that the insurance company can use to predict future losses. When this condition is met, the insurance company is able to apply the law of large numbers.

Question 19

Pure versus Speculative Risk

Answer 19

Speculative risk can result in loss or gain..
A good example of speculative risk is investing in the stock market. Since stocks increase or decrease in value over time, the stockholder may experience a financial gain or loss at the time the stock is sold.

Question 20

Pure risks

Answer 20

• the possibility of loss of a home as a result of a fire, and
• the possible death of a person.

Question 21

Law of Large Numbers

Answer 21

number of independent events increases, the likelihood that actual results will be close to the expected results also increases.

Question 22

Law of Large Numbers

Answer 22

That prediction is based on an analysis of the number and size of losses to be expected within a group of exposure units. As the number of units of exposure increases, prediction becomes more accurate.

Question 23

Adverse Selection

Answer 23

select against-a person with a high-performance car and a bad driving record is especially likely to recognize the need for auto insurance, but an insurer might be reluctant to provide it for those same reasons.