Module 1: Principles of Insurance Flashcards
(27 cards)
Financial Definition of Insurance
Financial arrangement that redistributes the costs of unexpected losses
Legal Definition of Insurance
a contract arrangement whereby one party agrees to compensate the other party for any losses in exchange for consideration paid
Insurer
party that agrees to pay the loses
Exposure to Loss
insured’s possibility of loss
Law of Large Numbers
should be big enough to combine sufficiently large numbers of exposure units so as to make s loss predictable
Loss
being without something previously possessed
Peril
the CAUSE of the loss
Example of Peril
fire, tornado, heart attack, theft
2 types of losses
Direct Loss and Indirect Loss
Direct Loss
are the immediate or first result of an insured peril
Indirect Loss
consequential losses or secondary result of peril
Specified Perils Contract
policies that cover specific perils
Open Perils Contract
Covers all losses unless specified
Chance of Loss
probibility of loss
Hazards
conditions that increase the probability of loss by increasing the frequency or potential of loss
Physical Hazards
construction, location, frayed wires, smoking bed
Moral Hazards
dishonest tendency such as exaggerating losses
Morale Hazards
having a different attitude towards loss because the loss will be covered
Legal Hazard
increased frequency and severity of losses by legislative actions
Proximate Cause
the first peril in a chain of events resulting in a loss
Pure Risks
possibilities that only result in loss or no change
Speculative Risks
exposures to price change that may result in a gain or loss
Adverse Selection
when one party has more relevant information and more control of outcome and takes advantage of having that information
Risk Avoidance
not buying a car as a college student
