Insurance Concepts Flashcards
Risk and Related Terms
Risk
means the chance of loss and used to refer to the person, property, or activity that is insured
Exposure
is the state of being subject to a possible loss.
Hazard
defined as a condition that increases the likely number of losses or the likely severity of a loss.
Peril
is a cause of loss- •fire •explosion •windstorm •flood•theft •collision
Loss
an unwelcomed and unplanned reduction in economic value.
Types of losses
- 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.
Methods of Handling Risk
- avoiding it
- controlling it
- sharing it
- retaining it
- transferring it
Risk Avoidance
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.
Risk Control
- 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.
Risk Sharing
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.
Risk Retention
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.
Risk Transfer
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.
Requirements for a Risk to Be Insurable
•A covered loss must be definite as to time, cause, and location. It must be clear that a covered loss has occurred
Requirements for a Risk to Be Insurable
•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.
Requirements for a Risk to Be Insurable
•The insured event must be accidental or outside the insured’s control. Only losses that occur due to chance are insurable.
Requirements for a Risk to Be Insurable
•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.
Requirements for a Risk to Be Insurable
Pure risks are generally insurable, but speculative risks are not.
Requirements for a Risk to Be Insurable
•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.
Pure versus Speculative Risk
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.
Pure risks
- the possibility of loss of a home as a result of a fire, and
- the possible death of a person.
Law of Large Numbers
number of independent events increases, the likelihood that actual results will be close to the expected results also increases.
Law of Large Numbers
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.
Adverse Selection
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.
