Nature of Insurance

Question 1

Insurance

Answer 1

the transfer of risk from one party to another through a legal contract, or the transfer of risk through the pooling (accumulation) of funds

Question 2

Principle of Indemnification

Answer 2

Accident, health, property, and casualty insurance contracts are all contracts of indemnity. Their purpose is to make the insured “whole” again financially

Question 3

LAW OF LARGE NUMBERS (SPREAD OF RISK)

Answer 3

a principle of actuarial science that states that the larger the number of risks insured in the same risk pool; the more predictable losses become.

Question 4

ADVERSE SELECTION

Answer 4

the tendency for higher-than-average risks to seek out insurance.means one party in a business transaction has superior accurate information over another party.

Question 5

Peril

Answer 5

is an immediate, specific event that causes a loss. Perils can also be referred to as the accident itself.
Insurance contracts that cover Specified or Named Perils individually list perils that they cover. If a loss is caused by a peril that is not listed within the insurance policy, then the loss is not covered.

Question 6

Loss

Answer 6

defined as an unintended, unforeseen reduction, or destruction of financial or economic value

Question 7

Direct Loss

Answer 7

results when a person or property is damaged, destroyed, or killed by a peril, without any intervening cause.

Question 8

Indirect Loss

Answer 8

also known as “Consequential Loss” because the loss is a consequence of or results from a direct loss.

Question 9

accident

Answer 9

an unforeseen, unexpected, unintended, and sudden event, which occurs at a specific time and specific place

Question 10

Occurrence

Answer 10

any event that causes a loss. includes both accidents and refer to injuries or losses caused by repeated or continuous exposure to conditions over time

Question 11

Loss Exposure

Answer 11

the risk of a possible loss

Question 12

Hazard

Answer 12

creates an increased possibility that a peril (a cause of a loss) will actually occur

Question 13

Physical hazards

Answer 13

physical or tangible conditions existing in a manner that makes a loss more likely to occur can be seen, touched, tasted, smelled, or tripped over, thus causing loss

Question 14

Moral hazards

Answer 14

make the loss more likely to occur due to the dishonest character of the insured.occurs when the insured is much more intentioned and conscious of participating in wrongdoing that is more likely to lead to a loss.

Question 15

Morale hazard

Answer 15

created based as a result of the personal or subjective thought process of the insured It can arise from a state of mind related to the indifference of an insured to whatever loss may occur