XCEL Terms - CHAPTER 2 - PART 1

Adverse Selection

occurs when the percentage of poor risks among those covered by issued policies exceeds the ratio predicted by the actuaries when they designed the policies. This also consists of the tendency of policy owners to take advantage of favorable options in insurance contracts.

Hazard

  This is any factor, condition, or situation that creates an increased possibility that a peril (a cause of a loss) will actually occur.

Homogeneous Exposure Units

  These are similar “objects of insurance” that are exposed to the same group of perils. An “object of insurance” can be a person, a business, or a piece of property. Each “unit” represents one of many similar risks that are undertaken to be insured by an insurance company.

Indemnify

This is the act of restoring insureds to the financial condition that existed prior to a loss.

Indemnity

This is the amount needed to restore an individual to the financial condition he was in before he suffered a loss.  An indemnity can be a reimbursement or a fixed dollar amount.

Indemnity Contract

  This is a contract that attempts to return the insured to her original financial position.

Law of Large Numbers

This is a fundamental principle of insurance. The larger the number of individual risks that are 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.

Loss

The insurance industry defines the word “loss” as the unintentional decrease in the monetary value of an asset due to a peril.

Loss Exposure

This is the risk of a possible loss.

Loss Exposure Unit

 This refers to each individual, organization, or asset that’s exposed to the potential of financial loss due to a defined peril. When loss exposure units are aggregated together, the maximum potential loss expresses the overall loss exposure.

Moral Hazard

This is the type of hazard that exists because of the effect of an insured’s personal reputation, character, associates, personal living habits, or degree of financial responsibility. This also includes criminal activity.

Morale Hazard

This is a hazard that arises from an insured’s indifference to loss because of the existence of insurance. Morale hazards are often associated with having a careless attitude.

Peril

A peril is the immediate, specific event that causes loss and gives rise to risk.

Physical Hazard

This is a physical or tangible condition that exists in a manner which makes a loss more likely to occur.

Primary Insurance Company

• When more than one policy covers the same claim, the term “primary insurance company” refers to the first policy to pay.

• As it relates to reinsurance, the primary insurance company writes a policy to cover a risk in the marketplace. This primary insurer then surrenders a portion of the risk to a reinsurer and the reinsurer assumes the excess risk for a reinsurance premium.