Comprehensive Study Guide for General Insurance and Risk Management

Definition of Insurance

A contract in which one party (insurance company) agrees to indemnify the insured against loss from an unknown event.

Law of Large Numbers

A principle stating that as the number of exposure units increases, the more predictable the loss experience becomes.

Pure Risk

A situation that can only result in a loss or no change; there is no opportunity for financial gain.

Speculative Risk

Involves the potential for loss or gain; examples include gambling, which is not insurable.

Exposure

A unit of measurement used to determine the rates charged for insurance coverage.

Physical Hazards

Hazards arising from material or structural features of a risk that exists independently of its owners.

Moral Hazards

Conditions where applicants may deceive insurers or have a history of fraudulent claims.

Peril

The causes of loss that are insured against in an insurance policy.

Avoidance

Eliminating exposure to a loss as a method of managing risk.

Retention

The planned assumption of risk by an insured, often using deductibles or self-insurance.

Transfer of Risk

The process of shifting the financial burden of a loss from an individual to an insurance company.

Definition of Insurance

A contract in which one party, known as the insurance company, agrees to indemnify (make whole) the insured party against loss, damage, or liability arising from an unknown event.

Law of Large Numbers

A fundamental principle that allows insurance companies to calculate rates based on the behavior of a large group.

Pure Risk

Refers to situations that can only result in either a loss or no change with no opportunity for financial gain. Only pure risk is insurable.

Speculative Risk

Involves the opportunity for either loss or gain. An example is gambling, which is not insurable.

Transfer of Risk

The mechanism through which risk of loss is transferred from individuals or entities to an insurer, spreading costs among many.

Hazards

Conditions or situations that increase the probability of an insured loss occurring, such as slippery floors.

Peril

The specific cause of loss insured against in an insurance policy, such as fire, theft, or natural disasters.

Avoidance

The method of dealing with risk by eliminating exposure to loss, but it may not be practical (e.g., avoiding all car travel to prevent accidents).

Retention

The planned assumption of risk by an insured, involving the use of deductibles or copayments.

Reduction

An attempt to lessen the possibility or severity of a loss, such as installing smoke detectors.

Memory Trick for Pure Risk

Think of 'pure as in simple.' Pure risk is simply facing loss or no change; no potential gain!

Exam Tip for Hazards

Remember that hazards increase the likelihood of a loss occurring - think of them as 'risk amplifiers.'

Tip for Understanding Perils

Perils are specific threats; remember that understanding what can cause a loss is key for insurance assessments.