Risk and Risk Management Flashcards
Vocab & Terminology
Pure Risk
Involves situations where there is a possibility of a loss or no loss but no chance of financial gain (i.e. car accident) Pure risks ARE insurable.
Speculative Risk
Involves a chance of loss or gain such as investing in stocks or gambling. Because they involve potential for a loss or gain, speculative risks ARE NOT insurable.
Risk Avoidance
Eliminating the possibility of risk by avoiding activities that lead to risk.
Risk Reduction
Efforts to reduce the severity of potential loss, such as using smoke detectors to reduce the risk of fire damage.
Risk Retention
The individual or business takes on the financial responsibility of potential loss through self insurance or setting aside reserves.
Risk Transfer
Where the financial impact of a potential loss is transferred to another party such as an insurance company by purchasing an insurance policy.
Risk Sharing
Risk is distributed among multiple parties such as group insurance plans where members share the cost of coverage.
Insurable Interest
The insured’s financial interest (cost and true ownership) which must exist at the time of loss.
Physical Hazard
Tangible characteristics that increase the probability of a loss (i.e. icy roads, faulty wiring, location of property in a flood prone area)
Morale Hazard
Related to carelessness or indifference of an insured party. If an individual leaves their car unlocked in a parking lot for example.
Moral Hazard
Intentional behavior or dishonesty which could increase potential of a loss
Indemnity
Ensures that an insured is compensated for a loss only to the extent of the loss and preventing financial gain.
Subrogation
Allows an insurance company to take over the legal rights of the insured and seek reimbursement after a claim has been paid.
Aleatory Contract
The outcome of the contract is based on an uncertain event and the exchange of value between the parties is unequal.
Unilateral Contract
The insurer is obligated to pay covered claims however the policyholder is not required to continue paying premiums.
Adhesion Contract
Contract and stipulations are prepared by the insurer and must be accepted as is. Any ambiguities in the policy are interpreted in favor of the insured.
Conditional Contract
The insurer’s promise to pay is contingent on the insured to fulfill specific obligations such as paying premiums and or providing prompt notice of a loss.
Underwriting
Insurers that evaluate risk and decide whether to provide insurance coverage and at what price based on factors such as claims history, unique characteristics, and loss potential. This ensures adequate coverage while maintaining company profitability.
