Nature Of Insurance

Question 1

This is broadly defined as selection against the company or the tendency of people with higher risks to seek/continue insurance to a greater extent than those with little or less risk. In other words, adverse selection occurs when the percentage of poor risks among those covered by issued policies exceeds the ratio predicted by the actuaries when they designed the policies. This also consists of the tendency of policy owners to take advantage of favorable options in insurance contracts.

Answer 1

Adverse Selection:

Question 2

This is any factor, condition, or situation that creates an increased possibility that a peril (a cause of a loss) will actually occur.

Answer 2

Hazard:

Question 3

These are similar “objects of insurance” that are exposed to the same group of perils. An “object of insurance” can be a person, a business, or a piece of property. Each “unit” represents one of many similar risks that are undertaken to be insured by an insurance company.

Answer 3

Homogeneous Exposure Units:

Question 4

This is the act of restoring insureds to the financial condition that existed prior to a loss.

Answer 4

Indemnify:

Question 5

This is the amount needed to restore an individual to the financial condition he was in before he suffered a loss. An indemnity can be a reimbursement or a fixed dollar amount.

Answer 5

Indemnity:

Question 6

This is a contract that attempts to return the insured to her original financial position.

Answer 6

Indemnity Contract:

Question 7

This is a fundamental principle of insurance. The larger the number of individual risks that are 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.

Answer 7

Law of Large Numbers:

Question 8

The insurance industry defines the word “loss”
as the unintentional decrease in the monetary value of an asset due to a peril.

Answer 8

Loss:

Question 9

This is the risk of a possible loss.

Answer 9

Loss Exposure:

Question 10

This refers to each individual, organization, or asset that’s exposed to the potential of financial loss due to a defined peril. When loss exposure units are aggregated together, the maximum potential loss expresses the overall loss exposure.

Answer 10

Loss Exposure Unit:

Question 11

This is the type of hazard that exists because of the effect of an insured’s personal reputation, character, associates, personal living habits, or degree of financial responsibility. This also includes criminal activity.

Answer 11

Moral Hazard:

Question 12

This is a hazard that arises from an insured’s indifference to loss because of the existence of insurance. Morale hazards are often associated with having a careless attitude.

Answer 12

Morale Hazard:

Question 13

A peril is the immediate, specific event that causes loss and gives rise to risk.

Answer 13

Peril:

Question 14

This is a physical or tangible condition that exists in a manner which makes a loss more likely to occur.

Answer 14

Physical Hazard:

Question 15

Company: This phrase has the following meanings:
• When more than one policy covers the same claim, the term “primary insurance company” refers to the first policy to pay.
• As it relates to reinsurance, the primary insurance company writes a policy to cover a risk in the marketplace. This primary insurer then surrenders a portion of the risk to a reinsurer and the reinsurer assumes the excess risk for a reinsurance premium.

Answer 15

Primary Insurance

Question 16

This is a type of risk that involves the chance of loss only; there’s no opportunity for gain. Pure risks are the only form of insurable risks.

Answer 16

Pure

Question 17

This is the acceptance by one or more insurers-referred to as reinsurers—of a portion of the risk underwritten by another insurer that has contracted with an insured to provide coverage for the total value of a loss exposure.

Answer 17

Reinsurance:

Question 18

This is the acceptance by one or more insurers-referred to as reinsurers—of a portion of the risk underwritten by another insurer that has contracted with an insured to provide coverage for the total value of a loss exposure.

Answer 18

Reinsurance:

Question 19

This is an insurance company that assumes a portion of the risk underwritten by a primary insurance company.

Answer 19

Reinsurer:

Question 20

This is the uncertainty regarding loss. Risk is the probability of a loss occurring for an insured or prospect.

Answer 20

Risk:

Question 21

This occurs when individuals evade risk entirely. It’s the act of NOT participating in an activity that could possibly cause a
loss.

Answer 21

Risk Avoidance:

Question 22

This is the process of analyzing exposures that create risk and then designing programs to address them.

Answer 22

Risk Management:

Question 23

This is the risk management strategy that focuses on taking actions which decrease the chances of a loss occurring. It also refers to action taken to lessen the severity of a loss if one occurs.

Answer 23

Risk Reduction:

Question 24

This is the act of analyzing the loss exposure presented by a risk and determining that the potential loss is acceptable.
Risk retention is often associated with self-insurance.

Answer 24

Risk Retention:

Question 25

This is not a risk management technique that’s used by consumers. Instead, “risk selection” describes the insurance company’s process for determining whether to cover a new loss exposure. If done correctly, the ratio of losses to premium should reflect what actuaries predicted when they created the product, established the price, and set the underwriting criteria.

Answer 25

Risk Selection:

Question 26

This is the risk management technique that manages an individual’s risk by sharing the possibility of loss with others and spreading the cost over a large number of individuals. This technique transfers risk from an individual to a group.

Answer 26

Risk Sharing (Risk Pooling or Loss Sharing):

Question 27

This is the act of exchanging the responsibility for a significant potential loss (risk) to another party in exchange for a smaller, preset cost or premium.

Answer 27

Risk Transfer:

Question 28

This is a risk retention process. A self-insuring individual or organization maintains monetary reserves to cover potential costs in the event of a financial loss occurring.

Answer 28

Self-Insurance:

Question 29

This is a type of risk that involves the chance of both loss and gain; it’s not insurable.

Answer 29

Speculative Risk: