Risk + Loss Flashcards
Risk means…
“chance of loss”
What is “pure risk”?
Pure risk involves only the chance of a loss, and no gain, to the person assuming the risk.
Pure risk includes:
- untimely death
- serious illness or disability of a person
Only pure risk is insurable (though not every pure risk is insurable).
What is “speculative risk”?
Speculative risk, which is uninsurable, can result in loss or gain.
Examples of speculative risk include gambling and investing in the stock market.
Define “loss”
A loss is an unplanned reduction in economic value.
Explain direct vs. indirect loss.
The death of a family breadwinner is a direct loss under a life insurance policy.
The loss of the decedent’s income is an indirect loss resulting from the direct loss of the insured’s life.
What is exposure and exposure units?
Also called loss exposure, exposure is the state of being subject to a possible loss.
Life and health insurers would charge a higher premium to provide insurance protection to a coal miner (high risk) than an accountant (low risk).
What is a “peril”? List 4 examples of a peril.
A peril is the immediate cause of a loss.
A peril is the event that insurance protects against.
Examples include:
- death
- disability
- accidental injuries and
- sickness
Every insurance policy defines, and is defined by, its covered peril(s).
What is a “hazard”?
A hazard is a condition that raises the chance of encountering a peril or increases the severity of a loss.
For example, insufficient light in a high-crime commercial area is a hazard. Potholes along a busy highway are considered road hazards. Similarly, cigarette smoking, poor diet, and excessive alcohol consumption are health hazards that increase the likelihood of illness or early death.
What are the 3 types of hazards?
Moral hazards.
Moral hazards are an individual’s traits or habits that increase the chance of a loss. Alcoholism, smoking, and drug addiction are examples of moral hazards. A willingness to defraud insurers is considered a moral hazard for which insurers remain alert.
Morale hazards.
Morale hazards are also individual tendencies, but they arise from a state of mind, attitude, or indifference to loss. Driving recklessly is an example of a morale hazard. In fact, doing anything recklessly because “I have insurance for that” demonstrates a morale hazard.
Physical hazards.
Physical hazards are individual physical characteristics that increase the chance of loss. They exist due to a person’s physical condition as opposed to arising from his or her character. High cholesterol is an example of a physical hazard.
List 5 ways to manage risk…
Common risk management techniques are
- avoiding the risk;
- reducing the risk;
- retaining the risk (all risks that are not avoided or transferred are retained by default);
- sharing the risk; and
- transferring the risk to an insurance company
RISK AVOIDANCE
List one example of risk avoidance.
One way to manage a risk is to avoid it.
Though it would be impractical to try and avoid all of life’s risks, risk avoidance is a reasonable strategy to deal with especially dangerous (and avoidable) risks.
For example, refusing to operate a vehicle after drinking alcoholic beverages or taking drugs is a practical way to avoid injury, death, and property damage that may result from driving while under the influence of alcohol or narcotics.
RISK REDUCTION
List one example of a risk reduction.
If entirely avoiding a particular risk is impractical, it may be possible to reduce it.
Exercising regularly, avoiding poor health habits, and keeping a balanced diet can reduce the risk of many illnesses, including heart disease and cancer.
RISK RETENTION
List an example of a risk retention device.
Who bears responsibility?
Risk retention is simply the acceptance of risk and dealing with it through the use of personal funds should a loss occur.
If the financial loss is small and the risk is remote, risk retention makes sense. However, if the potential loss is great or the risk is high, risk retention may lead to financial disaster. The use of deductibles in health and property insurance is a risk retention device.
Through the deductible people retain the financial consequence of small losses, leaving the insurance to cover the larger ones.
RISK SHARING
Who does it work best for?
The earliest forms of insurance were based on risk sharing, by which people who share a common risk band together and promise to “chip in” and compensate a member of the group who suffers a covered loss.
The custom of risk sharing made sense for small groups facing relatively modest losses, but it is difficult to achieve in larger groups.
RISK TRANSFER
Risk transfer— transferring the loss to a third party —is the basis for most forms of insurance today.
Through risk transfer an individual or business transfers the risk of loss to an insurance company in exchange for the payment of a premium.
