Section 2.1 Flashcards
(24 cards)
What is risk management?
the process of identifying, assessing, and controlling risks that an organization faces
What is risk transfer?
the process of shifting the financial burden of a risk to another party (the insurance company)
What is risk retention?
the process of accepting the financial burden of a risk within an organization
What is risk avoidance?
the process of eliminating a risk by not engaging in the activity that creates the risk.
What is risk reduction?
the process of reducing the likelihood or severity of a risk
What is underwriting?
the process of evaluating and classifying risks to determine whether to accept or reject them, and at what price.
What is a premium?
the amount paid by an insured party to an insurance company for coverage against a specified risk.
What is a pure risk?
only involve the possibility of a loss.
What is a speculative risk?
have the possibility of a loss, and a gain (gambling)
True or False: Only pure risks are insurable.
True
Exposure is
how many risks for which an insurance company would be liable.
What is a peril
What caused the loss (fire, hail).
Describe the difference between a direct and indirect loss.
A direct loss is a physical loss that can be seen, an indirect loss is a consequence of that loss.
What are the three types of hazards and their differences?
Physical hazard - can be seen
Morale hazard - carelessness
Moral hazard - dishonesty
STARR
Sharing, Transfer, Avoidance, Retention, Reduction
Who is the first and second party under a contract?
first - insured
second - insurer
Define The Law of Large Numbers
the principle that makes insurance possible.
the larger the group, the more accurately a loss can be predicted.
estimation based on past.
CANHAM
Calculable, Affordable, Non-Catastrophic, Homogenous, Measurable
Define the elements of CANHAM
Premiums must be CALCULATED based on prior loss
Premiums should be AFFORDABLE
The risk must be NON-CATOSTROPHIC
The risk must be similar in nature (HOMOGENOUS)
Pross of loss must be established with numbers and dollar amounts (MEASURABLE)
What is adverse selection?
Parties or risks that have a higher chance of loss and are not wanted by insurers
Describe the difference between Facultative Reinsurance and Treaty Reinsurance
Facultative - the reinsurer considers each risk before allowing the transfer
Treaty - the reinsurer accepts all risks
Reinsurance is?
Insurance for insurers
Who is the company accepting the risk in reinsurance?
The ceding insurer
Who is the company assuming the risk in reinsurance?
The reinsurer
