Nature of Insurance, Risk, Perils, and Hazards

Question 1

Adverse Selection

Answer 1

Broadly defined as selection against the company. It includes the tendency of people with higher risk to seek or continue Insurance to a greater extent that those with little or less risk. Also includes the tendency of policy owners to take advantage of favorable options in insurance contracts.

Question 2

Hazard

Answer 2

Any factor, conditions, or situation that creates an increased possibility that a peril will actually occur.

Question 3

Homogeneous Exposure Units

Answer 3

Similar objects of insurance that are exposed to the same groups of perils.

Question 4

Indemnity Contracts

Answer 4

An attempt to return the insured to their original financial position

Question 5

Law of Large Numbers

Answer 5

A fundamental principle of insurance that the larger numbers of individual risks combined into a group, the more combined into a group, the more certainty their is in predicting the degree or amount of loss that will be incured in any given period.

Question 6

Loss

Answer 6

The intentional decrease in the value of an asset due to a peril.

Question 7

Loss Exposure

Answer 7

The risk of a possible loss.

Question 8

Moral Hazard

Answer 8

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 individuals general insurability.

Question 9

Morale Hazard

Answer 9

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

Question 10

Peril

Answer 10

An immediate, specific event causing loss and giving rise to risk

Question 11

Physical Hazard

Answer 11

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

Question 12

Pure Risk

Answer 12

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

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

The uncertainty regarding loss; the probability of a loss occuring or prospect

Question 15

Risk Avoidance

Answer 15

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

The process of analyzing exposure that create risk and designing programs to handle them.

Question 17

Risk Pooling / Loss Sharing

Answer 17

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

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

The act of analyzing the loss exposure presented by a risk and determining that the potential loss is acceptable. Often associated with self insurance

Question 20

Risk Transfer

Answer 20

The act of shifting the responsibility of risk to another in the form of an insurance contract.

Question 21

Speculative Risk

Answer 21

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

Question 22

Exam Tip 1

Answer 22

Every accident is an occurrence, but not every occurrence is an accident