Chapter 2

Question 1

Is broadly defined as selection against the company. It includes the tendency of people with higher risks to see or continue insurance to a greater extent than those with little or less risk. Also includes the tendency of policyowners to take advantage of favorable options in insurance contracts.

Answer 1

Adverse Selection

Question 2

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

Answer 2

Hazard

Question 3

Are similar objects of insurance that are exposed to the same group of perils.

Answer 3

Homogeneous Exposure Units

Question 4

Attempt to return the insured to their original financial position.

Answer 4

Indemnity contract

Question 5

is a fundamental principal of insurance that the larger the number of individual risks 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 5

Law of large numbers

Question 6

Is the unintentional decrease in the value of an asset due to a peril

Answer 6

Loss

Question 7

Is the risk of possible loss

Answer 7

Loss Exposure

Question 8

Is a hazard brought on by the effect of personal reputation, character, associates, personal living habits, financial responsibility, and environment, as distinguished from physical health, upon an individual’s general insurability.

Answer 8

Moral Hazard

Question 9

Is a hazard arising from indifference to loss because of the existence of insurance. Are often associated with having a careless attitude.

Answer 9

Moral Hazard

Question 10

Is the immediate specific event causing loss and giving risk to risk.

Answer 10

Peril

Question 11

are physical or tangible condtions existing in a manner taht makes a loss more likely to occur.

Answer 11

Physical Hazard

Question 12

Is a type of risk that involves the chance of loss only; there is no opportunity for gain; it is insurable

Answer 12

Pure risk

Question 13

Is the acceptance by one or more insurers, called reinsurers, of a portion of the risk underwritten by another insurer who has contracted for the entire coverage.

Answer 13

Reinsurance

Question 14

Is the uncertainty regarding loss, the probability of a loss occuring for an insured or prospect.

Answer 14

Risk

Question 15

occurs when individuals evade risk entirely. It is the act of not doing somelthing could possibly cause a loss or the inactivity of particiaption in an event that may potentially cause a loss situation.

Answer 15

Risk Avoidance

Question 16

Is the process of analyzing exposures that create risk and designing programs to handle them is called risk management

Answer 16

Risk Management

Question 17

Spread risk by sharing the possibility of loss over a large number of people. It transfers risk from an indvidual to a group.

Answer 17

Risk Pooling/Loss sharing

Question 18

Takes place when the chances of a loss are lessened, or the severity of a potential loss is minimized.

Answer 18

Risk Reduction

Question 19

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 19

Risk Retention

Question 20

Is the act of shifting the responsiblity of risk to another in the form of an insurance contact.

Answer 20

Risk Transfer

Question 21

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

Answer 21

Speculative Risk

Question 22

Accident, health, property, and casualty insurance contracts are all contracts of

Answer 22

Indemnity

Question 23

Is a principle of actuarial science that states that the higher the number of risks insured in the same risk pool; the more predictable losses become.

Answer 23

Law of Large numbers

Question 24

Is something that can cause a financial loss

Answer 24

Peril

Question 25

individually list perils that they cover.

Answer 25

Specified or named perils

Question 26

Insurance polices do not name the perils they cover but instead begin by saying they cover all direct causes or loss

Answer 26

Speical or Open peril

Question 27

Is an unintentional decrease in the value of an asset due to a peril

Answer 27

Loss

Question 28

results when a person or property is damaged, destroyed or killed by a peril, without any intervening cause

Answer 28

Direct loss

Question 29

An indirect loss is also known as

Answer 29

Consequential loss

Question 30

is any even that causes a loss

Answer 30

occurrence

Question 31

is a condition or situation that creates or increases a chance of loss. Types of hazards: Physical hazard, moral hazard, morale hazard.

Answer 31

Hazard

Question 32

are physical or tangible conditions existing in a manner that makes a loss more likely to occur

Answer 32

Physical hazards

Question 33

make the loss more likely to occur due to the dishonest or villainous character of the insured

Answer 33

moral hazard

Question 34

is created base as a result of the perosonal or subjective thought process of the insured

Answer 34

morale hazard

Question 35

Is defined as the potential for loss. There are two types of risks: speculative risk and pure risk

Answer 35

Risk

Question 36

are considered to have an average potential for loss

Answer 36

standard risks

Question 37

are considered to be a poor risk for the insurance company and have a higher potential for loss

Answer 37

substandard risks

Question 38

Also known as loss sharing, spreads risk by sharing the possibility of loss over a large number of people

Answer 38

Risk pooling

Question 39

Is defined as the tendency for pooer than average risk to seek out insurance. Insurer must minimize

Answer 39

Adverse selection

Question 40

The process of analyzing exposures that create risk and designing programs to handle them is called. Treatment of risk includes implementing the following strategies: Risk Avoidance, Risk Reduction, Risk Retention, Risk Transfer, Risk Sharing

Answer 40

Risk management

Question 41

Risk can be avoided by eliminating a hazard

Answer 41

Risk Avoidance

Question 42

Risk can be reduced by minimizing the severity of a potential loss

Answer 42

Risk Reduction

Question 43

Risk can be retained through self-insurance

Answer 43

Risk Retention

Question 44

Risk can be transferred or passed from one party to another through an insurnce contrct.

Answer 44

Risk transfer

Question 45

Risk can be shared by multiple parties

Answer 45

Risk Sharing

Question 46

is the spreading of risk from one insurer to one or more other insurers

Answer 46

Reinsurance

Question 47

involves taking actions to eliminate damage or loss

Answer 47

Loss prevention