Fundamentals of Insurance and Risk Management

Comprehensive vocabulary flashcards covering the fundamentals of insurance, risk classification, principles, and the risk management process based on the lecture notes.

Risk

The possibility that actual outcomes differ from expected outcomes; formulated as $Risk = Probability \times Impact$.

Uncertainty

Conditions that are difficult to measure and usually not insurable, such as the COVID-19 pandemic before 2020.

Insurance

A social and co-operative device providing financial compensation for the effects of misfortune, where the insurer compensates losses in return for a premium.

Insurer

The agency or insurance company involved in the insurance business that undertakes to make good the loss.

Insured (or Assured)

The person who gets their property or life protected by insurance.

Premium

The fixed amount of money paid by the insured as consideration in exchange for the insurer's undertaking to cover a risk.

Policy

The formal agreement or contract of insurance that is put in writing.

Sum Assured/Sum Insured

The fixed amount of money to be paid on the happening of a certain event or to cover the actual loss when it takes place.

Reinsurance

Insurance for insurance companies to reduce catastrophic losses, improve solvency, and increase underwriting capacity.

Utmost Good Faith

A fundamental principle of insurance requiring full disclosure of all material facts by both the insurer and the insured.

Indemnity

A principle ensuring the insured person is compensated for the actual loss suffered, providing financial protection without profit.

Subrogation

The right of the insurer to take over the legal rights of the insured to recover the loss from a third party after the claim is settled.

Proximate Cause

The most immediate or dominant cause that leads to a loss, used to determine if a loss is covered.

Peril

The specific event whose occurrence actually leads to the loss; it is the cause of loss (e.g., fire, storm, or car accident).

Hazard

A condition that influences or increases the risk or the possibility of loss.

Physical Hazard

Hazards relating to the characteristics and qualities of the subject matter to be insured.

Moral Hazard

Hazards relating to the character, honesty, and attitude of the person seeking insurance.

Pure Risk

A category of risk where there is only the possibility of loss or no loss, with no possibility of gain.

Speculative Risk

A category of risk which offers the possibility of either a loss or a gain.

Law of Large Numbers

A principle stating that the accuracy of loss predictions depends on the size of the data—greater numbers of similar units lead to more accurate predictions.

Maximum Possible Loss (MPL)

The term used to refer to a situation involving a total loss of the subject matter.

Probable Maximum Loss (PML)

A value calculated by multiplying the Maximum Possible Loss by the probability of the peril striking ($MPL \times \text{Probability of Peril}$).

Consequential Loss

Indirect losses resulting from a peril, such as loss of rent, production, revenue, profits, or expenses for debris removal.

Risk Management Process

A six-step cycle consisting of: 1. Identify, 2. Analyze, 3. Evaluate, 4. Treat, 5. Monitor, and 6. Review.

Risk Treatment Options

The four main methods for handling risks: Avoid, Reduce, Transfer (Insurance), or Retain.

Nominee

The designated beneficiary of an insurance policy.

Proposal

The formal application submitted to an insurance company for coverage.