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# HS311 - Ch1

### Concepts of Risk and Insurance

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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