The Nature Of Insurance Flashcards
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
Adverse selection
This is any factor, condition, or situation that creates an increased possibility that a peril (a cause of loss) will actually occur.
Hazard
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.
Homogenous exposure units
This is the act of restoring insured to the financial condition that existed prior to a loss
Indemnify
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.
Indemnity
This is a contract that attempts to return the insured to her original financial position
Indemnity contract
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.
Law of large numbers
The insurance industry defines the word ________ as the unintentional decrease in the monetary value of an asset due to a peril
Loss
______________ is the risk of a possible loss
Loss exposure
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.
Lost exposure units
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.
Moral hazard
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.
Morale hazard
____________ is the immediate, specific event that causes loss and gives rise to risk
Peril
This is a physical or tangible condition that exists in a manner which makes a loss more likely to occur
Physical hazard
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
Primary insurance company
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.
Pure risk
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
Reinsurance
This is an insurance company that assumes a portion of the risk underwritten by a primary insurance company
Reinsurer
This is the uncertainty regarding loss. ____________ is the probability of a loss occurring for an insured or prospect.
Risk
This occurs when individuals evade risk entirely. It is the act of NOT participating in an activity that could possibly cause a loss.
Risk avoidance
This is the process of analyzing exposures that create risk and then designing programs to address them
Risk management
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.
Risk reduction
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.
Risk retention
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.
Risk selection
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.
Risk sharing (risk pooling or loss sharing)
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
Risk transfer
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.
Self insurance
This is a type of risk that involves the chance of both loss and gain; it is not insurable
Speculative risk
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.
Special or open peril
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
Specified or named perils
An ________________ is an unforeseen, unexpected, unintended, and sudden event that occurs at a specific time and a specific place.
Accident
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.
Occurrence
For insurance purposes, similar objects which are exposed to the same group of perils are referred to as:
Homogenous exposure units
Which of these statements NOT a characteristic of the law of large numbers?
Individual losses can be predicted based on past experience
Purchasing insurance is an example of risk _____________
Transference
The law of large numbers enables an insurer to:
Predict losses
Which of the following involves sharing an uncertain risk with another similar group??
Transfer
How can an insurance company minimize exposure?
By reinsuring risks
Which of the following can be defined as “the potential for loss” ?
Risk
Which of the following describes the act of ensuring a risk against possible loss?
Risk transfer
A condition that increases the possibility of financial loss:
A hazard
