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HS311 - Ch1
Concepts of Risk and Insurance
| Question | Answer |
|---|---|
| Risk | The possibility of loss |
| Probability | Proportion of times an event will occur over the long run |
| Possibility | Something COULD occur |
| Loss | The undesirable result of risk |
| Loss Exposure | Losses that might occur |
| Direct Loss | Losses that occur from an event (property damage from fire) |
| Indirect Loss | Losses that occur as a secondary result of the event (cost of lodging while home is being repaired) |
| Uncertainty | A state of mind, typified by a lack of certainty about something |
| Peril | The cause of a loss (fire, theft, flood, etc) |
| Hazard | An act or condition that increases the likelihood or severity of a loss |
| Physical Hazards | Physical conditions relating to the location, structure, occupancy, etc (gas stored inside, high blood pressure, bad construction) |
| Moral Hazards | Dishonest tendencies often related to an insureds weakened condition (cause damage to collect insurance) |
| Attitudinal Hazards | Carelessness or indifference as to whether a loss occurs or the size of the loss (careless driving because insurance will pay for damage) |
| Law of Large Numbers | The larger the sample the more closely the result will approach the true probability (flip a coin 10,000 times vs. 10) |
| Mass | The size of the sample. A large sample size is required |
| Homogeneity | Exposures that have similar characteristics |
| Independence | The exposure to loss of one unit should not affect the likelihood of loss to another exposure (insuring all the homes in a town that is exposed to tornadoes) |
| Financial Risk | Involve loss of money |
| Non-Financial Risk | Losses occur other than financial (pain and suffering from illness) |
| Particular Risk | Loss possibilities that affect only individual or small groups at the same time (embezzlement, lighting strike, disability) |
| Fundamental Risk | Loss possibilities that affect large segments of society at the same time (inflation, widespread unemployment) |
| Static Risk | Exist apart from changes in society (death, fire, theft) |
| Dynamic Risk | Result directly from changes in society (Changes in technology cause losses to companies that fail to adapt, diet craze hurts the business of those that don't adhere) |
| Pure Risk | Involves only the chance of Loss or No Loss |
| Speculative Risk | Involves the chance of loss, no loss, or gain |
| Gambling | Deliberately creating speculative risk |
| Personal Risk | Pure risk associated with the individual (death, injury, illness, old age, unemployment) |
| Property Risk | Destruction or loss of property (fire, wind, flood etc.). Also includes indirect (loss of profit, extra rents, etc.) |
| Liability Risk | Risk of being sued |
| Insurable Risk | Can be effectively addressed with private insurance: - The amount of loss must be important - The loss must be accidental - Future losses must be calculable - The loss must be definite - The loss cannot be excessively catastrophic |
| Risk-Tolerance level | The degree that a person is attracted to or adverse to the possibility of loss |
| Insurance | - Economic system that reduces financial risk through pooling of losses - A contract that transfers risk to the insurer |
| Adverse Selection | Those that know they are highly vulnerable to a loss from a specific risk to be the most likely to buy insurance to cover that risk. |
| Private Insurance | Insurance provided by private insurers |
| Government Insurance | Sate or Federal government programs (Medicare, Flood, Crop) |
| Social Insurance | Government programs to solve major social problems that affect a large portion of Society (Social Security, Medicare, unemployment) |
| Social Adequecy | Benefits provide a minimum floor of benefits to all regardless of economic status |
| Individual Equity | Individual premiums based on actuarial analysis. Those that can pay more will get more. |
| Individual Insurance | Owned by the individual or entity. |
| Group Insurance | Provides coverage to more than one person under a single contract |
| Master Contract | Contract which provides benefits to the group |
| Certificate of Insurance | Evidence of insurance coverage to members of a group |
| Evidence of Insurability | Documentation (may be questionnaire) provided by group member to insurer that certifies current condition. |
| Applicant | Person or entity that applies for insurance |
| Policyowner | Usually the applicant |
| Insured | The person or entity covered by the policy |
| Line of Insurance | Type of insurance sold by the company (Life & Health, Property & Liability, etc.) |
Created by:
djseibel
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