Nature of Insurance, Risk, Perils, and Hazards Flashcards
Adverse Selection
Broadly defined as selection against the company. It includes the tendency of people with higher risk to seek or continue Insurance to a greater extent that 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, conditions, or situation that creates an increased possibility that a peril will actually occur.
Homogeneous Exposure Units
Similar objects of insurance that are exposed to the same groups of perils.
Indemnity Contracts
An attempt to return the insured to their original financial position
Law of Large Numbers
A fundamental principle of insurance that the larger numbers of individual risks combined into a group, the more combined into a group, the more certainty their is in predicting the degree or amount of loss that will be incured in any given period.
Loss
The intentional decrease in the value of an asset due to a peril.
Loss Exposure
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 individuals general insurability.
Morale Hazard
A hazard arising from indifferent to loss because of the existence of insurance. Morale hazards are often associated with having a careless attitude.
Peril
An immediate, specific event causing loss and giving rise to risk
Physical Hazard
Physical or tangible conditions existing in a manner that makes a loss more likely to occur.
Pure Risk
A type of risk that involves the chance of loss only; there is no opportunity for gain; it is insurable.
Reinsurance
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
The uncertainty regarding loss; the probability of a loss occuring or prospect
Risk Avoidance
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.
Risk Management
The process of analyzing exposure that create risk and designing programs to handle them.
Risk Pooling / Loss Sharing
Spread risk by sharing the possibility of loss over a large number of people. It transfers risk from an individual to a group.
Risk Reduction
Takes place when the chances of a loss are lessened, or the severity of a potential loss is minimized.
Risk Retention
The act of analyzing the loss exposure presented by a risk and determining that the potential loss is acceptable. Often associated with self insurance
Risk Transfer
The act of shifting the responsibility of risk to another in the form of an insurance contract.
Speculative Risk
A type of risk that involves the chance of both loss and gain; it is not insurable
Exam Tip 1
Every accident is an occurrence, but not every occurrence is an accident
