Chapter 1 Flashcards
(45 cards)
What is insurance?
A contract that transfers the risk of financial loss from a person or business to an insurance company (e.g., paying premiums to an auto insurer to cover accident costs). (Funny Example: 6ix9ine hires bodyguards to take the punch if he gets slapped.)
What is risk?
The possibility that a loss will occur (e.g., a car crash, fire, theft, etc.). (Funny Example: Skydiving with a questionable parachute packed by your ex.)
What are the two types of risk?
Speculative risk and pure risk. (Funny Example: Betting $500 your grandma can deadlift 300 lbs.)
What is speculative risk?
A risk involving the chance of loss or gain; not insurable (e.g., gambling in Vegas or investing in stocks). (Funny Example: Betting $500 your grandma can deadlift 300 lbs.)
What is pure risk?
A risk involving only the chance of loss; insurable (e.g., house fire, illness, theft). (Funny Example: Getting tackled by a toddler with a toy sword.)
What is exposure?
The risk for which the insurance company would be liable (e.g., more driving = higher exposure to accidents). (Funny Example: Walking into a room full of toddlers with no shoes—high risk, zero reward.)
How does exposure affect premiums?
The higher the exposure, the higher the premium (e.g., a delivery driver pays more than someone who works from home). (Funny Example: Babysitting 12 sugar-rushed kids = expensive.)
What is a peril?
The cause of loss (e.g., fire burns a house, the fire is the peril). (Funny Example: A squirrel chews your power cable and burns the house down.)
What is a direct loss?
Physical damage with no intervening cause (e.g., tree falling on a car). (Funny Example: Alien mothership squashes your Prius.)
What is an indirect loss?
Consequential loss from a direct loss (e.g., lost rental income after a house fire). (Funny Example: Alien mothership squashes your Prius.)
What is a hazard?
Anything that increases the chance of a loss (e.g., wet floors, leaving doors unlocked). (Funny Example: Banana peels left on the floor like a cartoon.)
What are the three types of hazards?
Physical, moral, and morale hazards. (Funny Example: Banana peels left on the floor like a cartoon.)
What is a physical hazard?
A visible condition increasing loss risk (e.g., wet floor at a restaurant). (Funny Example: Banana peels left on the floor like a cartoon.)
What is a moral hazard?
Dishonesty or poor character increasing risk (e.g., lying on an insurance application). (Funny Example: Slipping “accidentally” after placing the banana peel yourself.)
What is a morale hazard?
Carelessness or indifference to risk (e.g., leaving a car running and unattended). (Funny Example: Letting toddlers babysit themselves—what could go wrong?)
What acronym helps remember methods of handling risk?
STARR. (Funny Example: Skydiving with a questionable parachute packed by your ex.)
What does STARR stand for?
Sharing, Transfer, Avoidance, Retention, Reduction. (Funny Example: 6 roommates split the pizza bill, but one always forgets their share.)
What is risk sharing?
When multiple parties share financial loss (e.g., stockholders in a corporation). (Funny Example: Everyone in the group chat agrees to chip in when someone wrecks their car.)
What is risk transfer?
Shifting risk to another party (e.g., paying insurance to cover car damages). (Funny Example: Hiring a stunt double to take the fall—literally.)
What is risk avoidance?
Eliminating a risk entirely (e.g., choosing not to skydive to avoid injury). (Funny Example: Declining your ex’s dinner invite.)
What is risk retention?
Keeping the risk and paying out-of-pocket (e.g., not having health insurance). (Funny Example: Crossing fingers and hoping the ER gives out coupons.)
What is risk reduction?
Minimizing the chance or impact of loss (e.g., installing smoke detectors). (Funny Example: Wearing bubble wrap to bed—just in case.)
What are the two parties in an insurance contract?
1st party = Insured (customer), 2nd party = Insurer (company). (Funny Example: 6ix9ine hires bodyguards to take the punch if he gets slapped.)
What is the law of large numbers?
The larger the group, the more predictable the losses (e.g., predicting car accidents across 1 million drivers). (Funny Example: More people = more accurate guess who’s gonna spill salsa at the party.)
