Sec.2 - Ch.1: Principles of Risk and Insurance

Question 1

What is the definition of Risk?

Answer 1

A condition with a possibility of loss or a situation with an exposure to loss

Question 2

What is the definition of Peril?

Answer 2

It is the cause of a loss. Insurance can cover economic loss from certain perils

Question 3

What is the definition of a Hazard?

Answer 3

A condition that may create or increase the chance of loss arising from a given peril and may also increase frequency and severity of loss

Question 4

What is the Law of Large Numbers?

Answer 4

As the number of independent events increases, the likelihood grows that the actual results will be close to the expected results

Question 5

What is Adverse Selection?

Answer 5

The tendency of the poorer-than-average risks to seek insurance to a greater extent than the average or better-than-average risks must be reduced

Question 6

What are the Insurable Risks Characteristics:

Answer 6

• There must be a sufficiently large number of homogeneous exposure units to make losses reasonably predictable
• The loss produced by the risk must be definite and measurable
• The loss must be fortuitous (by chance) or accidental
• The loss must not be catastrophic to the insurance company

Question 7

What are disadvantages to a company self-insuring?

Answer 7

• It can leave a company exposed to a catastrophic loss
• The company must duplicate the services provided by the insurance company
• The company may have to pay income taxes on reserves held for future claims at year end

Question 8

When someone is self insured can the deduct the losses incurred?

Answer 8

Yes they can

Question 9

What are the basic rules for Risk Management?

Answer 9

• Coverage for potential catastrophes should be purchased first (life, disability, health, homeowners, and auto)
• Severity is more important than probability
• High probability will mean high premiums or a decline in coverage by the carrier

Question 10

What are the three methods to control loss?

Answer 10

• Avoidance of risk
• Diversification of risk
• Reduction of risk
• Retention of risk
• Transfer of Risk

Question 11

When you have an HSA, what risk management methods are you using?

Answer 11

Since HSA’s require high deductibles, you are retaining the risk and the insurance is the risk transfer

Question 12

How do you handle risk that has HIGH loss SEVERITY and LOW loss FREQUENCY?

Answer 12

Risk Transfer - like obtaining insurance

Question 13

How do you handle risk that has HIGH loss SEVERITY and HIGH loss FREQUENCY?

Answer 13

Avoidance, you would be able to obtain insurance or the premiums would be absurd

Question 14

How do you handle risk that has LOW loss SEVERITY and HIGH loss FREQUENCY?

Answer 14

Retention and Reduction, transfer would be too costly

Question 15

How do you handle risk that has LOW loss SEVERITY and LOW loss FREQUENCY?

Answer 15

Retention

Question 16

What is the Principal of Indemnity

Answer 16

When an insurer seeks to reimburse the insured for approximately the amount of loss, no more no less

Question 17

What are the 4 principals supporting indemnity?

Answer 17

• Insurable interest
• The concept of actual cash value
• Other insurance (limit the ability to profit from a loss)
• Subrogation

Question 18

What is Insurable Interest?

Answer 18

A right or relationship with regard to that which is insured so that the insured will suffer financial loss from a loss
- Must operate at the issuance of an insurance policy AND at the time of the loss (for P&C insurance), would only be at the issuance for life insurance