Chapter 1: Basic Concepts of Risk and Insurance Flashcards
Risk is…
The possibility of loss. Not the Probability or chance of loss.
Direct Loss vs Indirect Loss
Direct losses are the first or immediate losses that arise
from an event. I.e. damaging to a house because of fire. An indirect loss is a loss that occurs only as a secondary result following the occurrence of a peril. I.e. paying for a hotel because the house is damaged.
Peril
The word peril refers to a cause of loss. Perils are commonplace and include unemployment, illness, old age, death, forgery, theft, fire, earthquake, windstorm, flood, and hundreds of other causes of loss.
Hazard
A hazard is an act or condition that increases the likelihood of the occurrence of a loss and/or increases the severity of a loss if a peril does occur. Ordinarily, any particular person or object is exposed to many separate hazards.
Physical Hazard
These are physical conditions relating to location, structure, occupancy, exposure, and the like. Insurance underwriting requires an evaluation of all physical hazards. The following are a few examples of physical hazards: high blood pressure, a dangerous hobby, newspapers piled on a staircase, gasoline stored
on the premises.
Moral Hazard
These are dishonest tendencies, often due to an insured’s weakened financial condition, that are likely to increase loss frequency and/or severity. Examples include tendencies to cause deliberate damage in
order to collect insurance proceeds or to intentionally inflate claims for insurance proceeds beyond the actual size of the sustained loss.
Attitudinal Hazards
Evidenced by carelessness or indifference as to whether a loss occurs or the size of a loss if it does occur. For example, laziness, disorderliness, poor dental hygiene.
Pure Risk
Pure risks involve only the chance of loss or no loss. Pure risks are “pure” in the sense that they do not mix both profits and losses. Insurance is concerned mainly with the economic problems created by pure risks. Risk aversion applies to pure risks, in which the prospect of loss only is the cause of concern.
Speculative Risk
Speculative risks involve the chance of loss, no loss/no gain, or gain.
To be insurable, a risk must substantially meet the requirements of:
Importance, accidental nature, calculability, definiteness of loss, and no excessively catastrophic loss.
Adverse Selection
Adverse selection is the natural tendency for those who know they are highly vulnerable to loss from a specific risk to be most inclined to acquire and retain insurance to cover that loss. Adverse selection by applicants and policyowners is counterbalanced by the care insurers exercise in underwriting.
Social insurance emphasizes?
Social adequacy rather than individual equity. Government insurance programs may or may not be social insurance.
Do employees covered under group insurance receive a certificate of insurance as evidence of their coverage.
Yes
Possibility
Something could occur. A possibility either exists or does not exist. It can not be measured.
Risk
Possibility of loss.
