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Nature of insurance
| Term | Definition |
|---|---|
| a basic principle of insurance that the larger the number of individual risks combined into a group, the more certainty there is in predicting the degree or amount of loss that will be incurred in any given period. | Law of large numbers |
| the uncertainty regarding loss; the probability of loss occurring for an insured or prospect. | Risk |
| is the immediate specific event causing loss and giving rise to risk. | Peril |
| a type of risk that involves the chance of both loss and gain; it is not insurable. | Speculative risk |
| type of risk that involves the chance of loss only; there is no opportunity for gain; insurable. | Pure risk |
| occurs 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. | Risk avoidance |
| takes place when the chances of loss are lessened. Changing one's lifestyle to minimize a known risk is an example of risk reduction | Risk reduction |
| being aware of the risks involved and taking precautions for financial protection. | Risk retention |
| the act of shifting the responsibility of risk to another in the form of an insurance contract. | Risk transfer |
| selection "against the company." Tendency of less favorable insurance risks to seek or continue insurance to a greater extent than others. | Adverse selection |
| 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 | Reinsurance |
| any factor that gives rise to a peril. | Hazard |
| the effect of personal reputation, character, associates, personal living habits, financial responsibility, and environment, as distinguished from physical health, upon an individual's general insurability. | Moral hazard |
| hazard arising from indifference to loss because of the existence of insurance. | Morale hazard |
| also known as loss sharing, spreads risk by sharing the possibility of loss over a large number of people. It transfers risk from an individual to a group. | Risk pooling |
| Direct loss | results when a person or property is damaged, destroyed, or killed by a peril, without any intervening cause. The peril is the proximate cause of the direct loss. |
| Indirect loss | also known as“Consequential Loss” because the loss is a consequence of or results from a direct loss. |
| Standard risk | are considered to have an average potential for loss. |
| Substandard risk | are considered to be a poor risk for the insurance company and have a higher potential for loss. |
| Preferred risk | are considered to be great for the insurance company and have a lower potential for loss. |
| Indemnity | Accident, health, property, and casualty insurance contracts are all contracts of |
| Specified or named perils | individually list perils that they cover. |
| Special or open perils | insurance policies do not name the perils they cover but instead begin by saying they cover all direct causes of loss. |
| Loss | is an unintentional decrease in the value of an asset due to a peril. |
| Direct loss | results when a person or property is damaged, destroyed, or killed by a peril, without anyintervening cause. |
| Consequential loss | An indirect loss is also known as |
| Occurrence | any event that causes a loss. |
Created by:
Mama2020
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