Nature of Insurance Flashcards
Adverse Selection
is broadly defined as selection against the company. It includes the tendency of people with higher risks to seek or continue insurance to a greater extent than those with little or less risk. Also includes the tendency of policy owners to take advantage of favorable options in insurance contracts.
Hazard
any factor, condition, or situation that creates an increased possibility that a peril (a cause of loss) will actually occur.
Homogeneous Exposure Units
are similar objects of insurance that are exposed to the same group of perils.
Indemnity contract
attempt to return the insured to their original financial position.
Law of Large Numbers
fundamental principle of insurance that the larger the number of individual risks combined into a group, the more certainty there is in predicting the degree or amount of loss that will be incurred in any given period.
Loss
is the unintentional decrease in the value of an asset due to a peril.
Loss Exposure
is the risk of a possible loss.
Moral Hazard
a hazard brought on by the effect of personal reputation, character, associates, personal living habits, financial responsibility, and environment, as distinguished from physical health, upon an individual’s general insurability.
Morale Hazard
a hazard arising from indifference to loss because of the existence of insurance. Are often associated with having a careless attitude.
Peril
is the immediate, specific event causing loss and giving rise to risk.
Physical Hazard
are physical or tangible conditions existing in a manner that makes a loss more likely to occur.
Pure risk
is a type of risk that involves the chance of loss only; there is no opportunity for gain; it is insurable.
Reinsurance
is the acceptance by one or more insurers, called reinsurers, of a portion of the risk underwritten by another insurer who has contracted for the entire coverage.
Risk
is the uncertainty regarding loss, the probability of a loss occurring for an insured or prospect.
Risk Avoidance
occurs when individuals evade risk entirely. It is the act of not doing something that could possibly cause a loss or the inactivity of participation in an event that may potentially cause a loss situation.