Nature of Insurance, Risk, Perils, and Hazards

Question 1

Which of the following is considered to be an event or condition that increases the probability of an insured’s loss?

Answer 1

Hazard

~ Hazards are events or conditions that increase the likelihood of an insured’s loss

Question 2

People with higher loss exposure have the tendency to purchase insurance more often than those at average risk. This is called

Answer 2

Adverse selection

~ Is the tendency of persons with higher loss exposure to purchase insurance more often that those at average risk

Question 3

Insurance companies determine risk exposure by which of the following?

Answer 3

Law of large numbers and risk pooling

~ All forms of insurance determine exposure through risk pooling and the law of large numbers

Question 4

What is known as the immediate specific even causing loss and giving rise to risk?

Answer 4

Peril
~ A peril is defined as the immediate specific event causing loss and giving rise to risk. A peril is the cause of a risk.
For example, when a building burns, fire is the peril. When a person dies, death is the peril. When an individual is injured in a accident, the accident is the peril. When a person becomes ill from a disease, the disease is the peril.

Question 5

Insurance represents the process of risk

Answer 5

Transference

~ Insurance involves the transfer of risk

Question 6

All of the following are examples of pure risk EXCEPT
<> Injured while playing football
<> Falling at a casino and breaking a hip
<> Losing money at a casino
<> Jewelry stolen during a home remedy

Answer 6

<><> Losing money at a casino
~ Pure risk is a category of risk in which loss is the only possible outcome, which is the opposite of speculative risk. Gambling is considered a speculative risk where there is a chance of either gain or loss.

Question 7

How do insurers predict the increase of individuals risks?

Answer 7

Law of large numbers

~ TLoLN helps insurance companies predict the increase of individual risks.

Question 8

An individual who removes the risk of losing money in the stock market by never purchasing stocks is said to be engaging in

Answer 8

Risk avoidance
~ Risk avoidance is a risk management technique that seeks to eliminate any possibility of risk through hazard prevention, or the discontinuation of activities determined to entail any level of risk

Question 9

An example of risk sharing would be
<> Choosing not to invest in the stock market
<> Adding more security to a high-risk building
<> Buying an insurance policy to over potential liabilities
<> doctors pooling their money to cover malpractice exposures

Answer 9

Doctors pooling their money to cover malpractice exposures

Question 10

The cause of a loss is referred to as a(n)

Answer 10

Peril
~ A peril is an event or circumstance that causes or may potentially cause a loss. Examples of perils include fire, flooding, hailstorms, tornado, hurricane, auto accident or home accident such as falling