The Nature of Insurance

Question 1

This is a type of risk that involves the chance of both loss and gain; it’s not insurable.

Answer 1

Speculative Risk

Question 2

This is a risk retention process. A individual or organization maintains monetary reserves to cover potential costs in the event of a financial loss occurring.

Answer 2

Self-Insurance

Question 3

This is the act of exchanging the responsibility for a significant potential loss (risk) to another party in exchange for a smaller, preset cost or premium.

Answer 3

Risk Transfer

Question 4

This is the risk management technique that manages an individual’s risk by sharing the possibility of loss with others and spreading the cost over a large number of individuals. This technique transfers risk from an individual to a group.

Answer 4

Risk Sharing (Risk Pooling or Loss Sharing)

Question 5

This is the act of analyzing the loss exposure presented by a risk and determining that the potential loss is acceptable. It is often associated with self-insurance.

Answer 5

Risk Retention

Question 6

This is not a risk management technique that’s used by consumers. Instead, it describes the insurance company’s process for determining whether to cover a new loss exposure. If done correctly, the ratio of losses to premium should reflect what actuaries predicted when they created the product, established the price, and set the underwriting criteria.

Answer 6

Risk Selection

Question 7

This is the risk management strategy that focuses on taking actions which decrease the chances of a loss occurring. It also refers to action taken to lessen the severity of a loss if one occurs.

Answer 7

Risk Reduction

Question 7

This is the process of analyzing exposures that create risk and then designing programs to address them.

Answer 7

Risk Management

Question 8

This occurs when individuals evade risk entirely. It’s the act of NOT participating in an activity that could possibly cause a loss.

Answer 8

Risk Avoidance

Question 9

This is the uncertainty regarding loss. It is the probability of a loss occurring for an insured or prospect.

Answer 9

Risk

Question 10

This is an insurance company that assumes a portion of the risk underwritten by a primary insurance company.

Answer 10

Reinsurer

Question 11

This is the acceptance by one or more insurers—referred to as reinsurers—of a portion of the risk underwritten by another insurer that has contracted with an insured to provide coverage for the total value of a loss exposure.

Answer 11

Reinsurance

Question 12

This is a type of risk that involves the chance of loss only; there’s no opportunity for gain. They are the only form of insurable risks.

Answer 12

Pure Risk

Question 13

• When more than one policy covers the same claim, the term refers to the first policy to pay.
• As it relates to reinsurance, the (Blank) writes a policy to cover a risk in the marketplace. They then surrender a portion of the risk to a reinsurer and the reinsurer assumes the excess risk for a reinsurance premium.

Answer 13

Primary Insurance Company

Question 14

This is a physical or tangible condition that exists in a manner which makes a loss more likely to occur.

Answer 14

Physical Hazard

Question 15

Is the immediate, specific event that causes loss and gives rise to risk.

Answer 15

Peril

Question 16

This is a hazard that arises from an insured’s indifference to loss because of the existence of insurance. They are often associated with having a careless attitude.

Answer 16

Morale Hazard

Question 17

This is the risk of a possible loss.

Answer 17

Loss Exposure

Question 17

This refers to each individual, organization, or asset that’s exposed to the potential of financial loss due to a defined peril. When they are aggregated together, the maximum potential loss expresses the overall loss exposure.

Answer 17

Loss Exposure Unit

Question 18

This is the type of hazard that exists because of the effect of an insured’s personal reputation, character, associates, personal living habits, or degree of financial responsibility. This also includes criminal activity.

Answer 18

Moral Hazard

Question 19

The insurance industry defines the word as the unintentional decrease in the monetary value of an asset due to a peril.

Answer 19

Loss

Question 20

This is a fundamental principle of insurance. The larger the number of individual risks that are combined into a group, the more certainty there is in predicting the degree or amount of loss that will be incurred in any given period.

Answer 20

Law of Large Numbers

Question 21

This is a contract that attempts to return the insured to her original financial position.

Answer 21

Indemnity Contract

Question 22

This is the amount needed to restore an individual to the financial condition he was in before he suffered a loss. It can be a reimbursement or a fixed dollar amount.

Answer 22

Indemnity

Question 23

This is the act of restoring insureds to the financial condition that existed prior to a loss.

Answer 23

Indemnify

Question 24

These are similar “objects of insurance” that are exposed to the same group of perils. An “object of insurance” can be a person, a business, or a piece of property. Each “unit” represents one of many similar risks that are undertaken to be insured by an insurance company.

Answer 24

Homogeneous Exposure Units

Question 25

This is any factor, condition, or situation that creates an increased possibility that a peril (a cause of a loss) will actually occur.

Answer 25

Hazard

Question 25

This is broadly defined as selection against the company or the tendency of people with higher risks to seek/continue insurance to a greater extent than those with little or less risk. In other words, adverse selection occurs when the percentage of poor risks among those covered by issued policies exceeds the ratio predicted by the actuaries when they designed the policies. This also consists of the tendency of policy owners to take advantage of favorable options in insurance contracts.

Answer 25

Adverse Selection