| A | B |
|---|
| Condition or situation that creates or increases a chance of loss is called | Hazard |
| Examples of hazards | icy roads, driving while intoxicated, improperly stored toxic waste |
| Examples of physical hazards | poor health, overweight, blind |
| Examples of moral hazards | dishonesty, drugs, alcohol abuse |
| Examples of morale hazards | careless attitude (reckless driving, jumping off a cliff, stealing, racing motorcycles, carefree/careless lifestyle |
| A carefree/careless lifestyle representing a morale hazard causes | an indifference to loss |
| the unintentional decrease in the value of an asset due to a peril is | loss |
| an immediate, specific event which causes loss | peril |
| examples of perils | earthquake or tornado |
| perils can be referred to as | the accident itself |
| potential for loss is | risk |
| a risk that presents both the chance for loss or gain is | speculative risk |
| example of speculative risk | gambling |
| speculative risks are | NOT insurable |
| the only insurable risk the presents a potential for loss only is | pure risk |
| examples of pure risk | injury, illness, death |
| elements of insurable risk | loss must be due to chance, definite and measurable, predictable |
| loss cannot be | catastrophic |
| loss exposure to be insured must be | large |
| loss exposure to be insured must be large & common enough that the insurer can pool many homogeneous exposure is | the law of large numbers |
| loss must be randomly | selected |
| loss must have a fair proportion of good and poor risks known as | adverse selection |
| the law of large numbers says that | the larger the amount of exposures that are combined into a group, the more certainty ther is to the amt. of loss incurred in any given period |
| Advantages of the law of large numbers | allows prediction of individual & group losses based on past experience & an increased degree of acuracy in predicting losses in large groups |
| similar objects of insurance that are exposed to the same group of perils are | homogeneous exposure units |
| example of homogeneous exposure units | insuring a large number of homes in the same geographical area against hail damage |
| the tendency for poorer than average risk to seek out insurance is known as | adverse selection |
| a person who takes 12 prescriptions is a | poor risk |
| an insurer will try to compensate poor risk with | better than average risks |
| if an insurer cannot compensate poor risk with better than average risks | its loss experience will increase and its ability to pay claims may be compromised |
| the process of analyzing exposures that create risk and designing programs to handle them is known as | risk management |
| Ways in which people deal with risk | avoidance, reduction, retention, transfer, risk pooling |
| risk pooling is also known as | loss sharing |
| when a large group of people spread a risk for a small certain cost | risk pooling |
| avoiding a risk all together is known as | avoidance (1) |
| never leading your home to not get in a car accident is an example of | avoidance (2) |
| taking precautions to minimize severity of a potential loss is called | reduction (1) |
| to decrease the risk of getting into a car accident by taking public transportation is an example of | reduction (2) |
| accepting a risk and confronting it if it occurs is | retention |
| retention is also known as | self insurance |
| an example of retaining risk of getting injured in a car accident would be to | drive without insurance (also known as craziness) |
| if you make someone else responsible for a loss it's called | transfer / transference |
| the best way to transfer risk is to | buy insurance |
| buying auto insurance transfers the cost associated with a car accident from the driver to the | insurance company |
| risk pooling is when a large group of people spread a risk for a | small certain cost |
| an example of risk sharing would be doctors pooling their money to cover | malpractice exposures |
| insurers deal with catastrophic loss through | reinsurance |
| in reinsurance a contractual arrangement that transfers exposure from one insurer to | another insurer |
| this involves making an insured whole by restoring them to the same condition as before a loss | principle of indemnity |
| the principle of indemnity involves making an insured whole by | restoring them to the same condition as before a loss |
| a method of determining the financial value of a person's life based on computing the current value of a person's future earnings is | human life value approach |
| in the human life value approach the financial value of a person's life is based on | computing the current value of a person's future earnings for a certain period of time |
| if the person earns $50,000 a year and the family needs 10 yrs. of protection they need a | $500,000 insurance policy |
| in the needs based value approach, a person's financial value is based on the | amount of money needed for current and future expenses |
| if the family needs $30,000 a year for expenses for the next 10 years they need a | $300,000 insurance policy |
| a method of determingni a person's financial value based on teh amount of money needed for current and future expenses is | needs based value approach |
| in the needs based value approach expenses might include | mortgage, college education, retirement, charity donations |
