Section 2.1

Question 1

What is risk management?

Answer 1

the process of identifying, assessing, and controlling risks that an organization faces

Question 2

What is risk transfer?

Answer 2

the process of shifting the financial burden of a risk to another party (the insurance company)

Question 3

What is risk retention?

Answer 3

the process of accepting the financial burden of a risk within an organization

Question 4

What is risk avoidance?

Answer 4

the process of eliminating a risk by not engaging in the activity that creates the risk.

Question 5

What is risk reduction?

Answer 5

the process of reducing the likelihood or severity of a risk

Question 6

What is underwriting?

Answer 6

the process of evaluating and classifying risks to determine whether to accept or reject them, and at what price.

Question 7

What is a premium?

Answer 7

the amount paid by an insured party to an insurance company for coverage against a specified risk.

Question 8

What is a pure risk?

Answer 8

only involve the possibility of a loss.

Question 9

What is a speculative risk?

Answer 9

have the possibility of a loss, and a gain (gambling)

Question 10

True or False: Only pure risks are insurable.

Answer 10

True

Question 11

Exposure is

Answer 11

how many risks for which an insurance company would be liable.

Question 12

What is a peril

Answer 12

What caused the loss (fire, hail).

Question 13

Describe the difference between a direct and indirect loss.

Answer 13

A direct loss is a physical loss that can be seen, an indirect loss is a consequence of that loss.

Question 14

What are the three types of hazards and their differences?

Answer 14

Physical hazard - can be seen
Morale hazard - carelessness
Moral hazard - dishonesty

Question 15

STARR

Answer 15

Sharing, Transfer, Avoidance, Retention, Reduction

Question 16

Who is the first and second party under a contract?

Answer 16

first - insured
second - insurer

Question 17

Define The Law of Large Numbers

Answer 17

the principle that makes insurance possible.
the larger the group, the more accurately a loss can be predicted.
estimation based on past.

Question 18

CANHAM

Answer 18

Calculable, Affordable, Non-Catastrophic, Homogenous, Measurable

Question 19

Define the elements of CANHAM

Answer 19

Premiums must be CALCULATED based on prior loss
Premiums should be AFFORDABLE
The risk must be NON-CATOSTROPHIC
The risk must be similar in nature (HOMOGENOUS)
Pross of loss must be established with numbers and dollar amounts (MEASURABLE)

Question 20

What is adverse selection?

Answer 20

Parties or risks that have a higher chance of loss and are not wanted by insurers

Question 21

Describe the difference between Facultative Reinsurance and Treaty Reinsurance

Answer 21

Facultative - the reinsurer considers each risk before allowing the transfer
Treaty - the reinsurer accepts all risks

Question 22

Reinsurance is?

Answer 22

Insurance for insurers

Question 23

Who is the company accepting the risk in reinsurance?

Answer 23

The ceding insurer

Question 24

Who is the company assuming the risk in reinsurance?

Answer 24

The reinsurer