The Nature Of Insurance

Question 1

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, this 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

Answer 1

Adverse selection

Question 2

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

Answer 2

Hazard

Question 3

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 3

Homogenous exposure units

Question 4

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

Answer 4

Indemnify

Question 5

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

Answer 5

Indemnity

Question 6

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

Answer 6

Indemnity contract

Question 7

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 7

Law of large numbers

Question 8

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

Answer 8

Loss

Question 9

______________ is the risk of a possible loss

Answer 9

Loss exposure

Question 10

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

Answer 10

Lost exposure units

Question 11

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

Answer 11

Moral hazard

Question 12

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

Answer 12

Morale hazard

Question 13

____________ is the immediate, specific event that causes loss and gives rise to risk

Answer 13

Peril

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

When more than one policy covers the same claim, the term ___________________ refers to the first policy to pay.

As it relates to reinsurance, the _________________ writes a policy to cover a risk in the marketplace.

*** same answer for both blanks

Answer 15

Primary insurance company

Question 16

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

Answer 16

Pure risk

Question 17

This is the acceptance by one or more insurers… when 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 17

Reinsurance

Question 18

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

Answer 18

Reinsurer

Question 19

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

Answer 19

Risk

Question 20

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

Answer 20

Risk avoidance

Question 21

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

Answer 21

Risk management

Question 22

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

Answer 22

Risk reduction

Question 23

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

Answer 23

Risk retention

Question 24

This is not a risk management technique that is used by consumers. Instead, _______________ 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, establish the price, and set the underwriting criteria.

Answer 24

Risk selection

Question 25

This is a risk management technique that manages an individuals 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 25

Risk sharing (risk pooling or loss sharing)

Question 26

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 26

Risk transfer

Question 27

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

Answer 27

Self insurance

Question 28

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

Answer 28

Speculative risk

Question 29

This type of insurance policy does not name the peril that they cover. Instead, these policies begin by stating that they cover all direct causes of loss and then list the peril they exclude from coverage.

Answer 29

Special or open peril

Question 30

These insurance policies list those specific perils that they cover. If a loss is caused by a peril that is not listed within the policy, then the loss is not

Answer 30

Specified or named perils

Question 31

An ________________ is an unforeseen, unexpected, unintended, and sudden event that occurs at a specific time and a specific place.

Answer 31

Accident

Question 32

An ________________ can be any event that causes a loss. This can include accidents, injuries, illnesses, as well as losses that are caused by repeated or continuous exposure to conditions overtime.

Answer 32

Occurrence

Question 33

For insurance purposes, similar objects which are exposed to the same group of perils are referred to as:

Answer 33

Homogenous exposure units

Question 34

Which of these statements NOT a characteristic of the law of large numbers?

Answer 34

Individual losses can be predicted based on past experience

Question 35

Purchasing insurance is an example of risk _____________

Answer 35

Transference

Question 36

The law of large numbers enables an insurer to:

Answer 36

Predict losses

Question 37

Which of the following involves sharing an uncertain risk with another similar group??

Answer 37

Transfer

Question 38

How can an insurance company minimize exposure?

Answer 38

By reinsuring risks

Question 39

Which of the following can be defined as “the potential for loss” ?

Answer 39

Risk

Question 40

Which of the following describes the act of ensuring a risk against possible loss?

Answer 40

Risk transfer

Question 41

A condition that increases the possibility of financial loss:

Answer 41

A hazard