Ch 1: Principles Of insurance

Question 1

Risk

Answer 1

Chance or uncertainty of loss

Question 2

Methods of managing the risk

Answer 2

Avoid
Control
Retain
Transfer

Question 3

Avoid the risk

Answer 3

Elimination of hazards, activities, and exposures (IE: never drive to avoid a car wreck)

Question 4

Control the risk

Answer 4

Actions that reduce or eliminate potential risks (IE: wearing a seatbelt or emergency drills)

Question 5

Retain the risk

Answer 5

Individual or company decides to take responsibility for a risk (aka pay for it themselves)

Question 6

Transfer the risk

Answer 6

Contractual shifting of a pure risk from one party to another (AKA buying an insurance policy)

Question 7

Hold harmless agreement

Answer 7

protects business owners from being sued when someone suffers damage, bodily injury, or financial loss on business property or while a service is being provided - could also apply to tenants/owners

Question 8

Law of large numbers

Answer 8

Using large data sets to compare statistics

Question 9

Pure risk

Answer 9

Possibility of loss (with no possibility of gain)

Question 10

Speculative risk

Answer 10

Both possibility of loss and possibility of gain (IE: poker game)

Question 11

Insurable Interest

Answer 11

Someone with a chance of financial loss/interest in the property (owner of a house and anyone funding the loan, for example)

Question 12

Elements of insurability

Answer 12

• definite time/place and difficult to counterfeit
• risk must be unexpected (can’t get insurance because an old car dies, would need to be an accident)
• large enough to create financial hardship (can’t insure cheap sunglasses)
• risk must be calculable
• cost of insurance must be affordable to the insured
• must he large # of people with similar potential loss
• risk must not happen to large # of people at same time (spread of risk)

Question 13

Spread of risk

Answer 13

Insurance should be spread over many people in a variety of areas so that insurance company doesn’t suffer catastrophic loss

Question 14

Peril

Answer 14

Cause of loss (IE: fire or collision)

Question 15

Hazard

Answer 15

Anything that increases chance of loss (poor driving conditions, bad electricity, etc)

Question 16

3 types of hazards

Answer 16

Physical, morale, moral

Question 17

Physical hazard

Answer 17

Arises from the condition, occupancy, or use of property (IE: skateboard left on stairs)

Question 18

Morale hazard

Answer 18

Individual increases the possibility for loss through carelessness or by irresponsible actions (IE: careless driving because individual knows that insurance will cover collision)

Question 19

Moral hazard

Answer 19

Individual creates loss on purpose to collect money from the insurance company (fake theft, purposeful damage to older vehicle, etc)