Nature of Insurance

Question 1

Adverse Selection

Answer 1

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

Question 2

Hazard

Answer 2

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

Question 3

Homogeneous Exposure Units

Answer 3

Homogeneous exposure units are similar objects of insurance that are exposed to the same group of perils.

Question 4

Indemnity contract

Answer 4

Contracts of indemnity attempt to return the insured to their original financial position.

Question 5

Law of Large Numbers

Answer 5

The law of large numbers is a fundamental principle 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.

Question 6

Loss

Answer 6

Loss is the unintentional decrease in the value of an asset due to a peril.

Question 7

Loss Exposure

Answer 7

Loss exposure is the risk of a possible loss.

Question 8

Moral Hazard

Answer 8

Moral hazard 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.

Question 9

Morale Hazard

Answer 9

Morale hazard is a hazard arising from indifference to loss because of the existence of insurance. Morale hazards are often associated with having a careless attitude.

Question 10

Peril

Answer 10

Peril is the immediate, specific event causing loss and giving rise to risk.

Question 11

Physical Hazard

Answer 11

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

Question 12

Pure risk

Answer 12

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

Question 13

Reinsurance

Answer 13

Reinsurance 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.

Question 14

Risk

Answer 14

Risk is the uncertainty regarding loss, the probability of a loss occurring for an insured or prospect.

Question 15

Risk Avoidance

Answer 15

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

Question 16

Risk Management

Answer 16

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

Question 17

Risk Pooling/Loss sharing

Answer 17

Risk pooling and loss sharing spread risk by sharing the possibility of loss over a large number of people. It transfers risk from an individual to a group.

Question 18

Risk Reduction

Answer 18

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

Question 19

Risk Retention

Answer 19

Risk retention is the act of analyzing the loss exposure presented by a risk and determining that the potential loss is acceptable. Risk retention is often associated with self-insurance.

Question 20

Risk Transfer

Answer 20

Risk transfer is the act of shifting the responsibility of risk to another in the form of an insurance contract.

Question 21

Speculative Risk

Answer 21

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