insurancs study set 1

Depreciation

A decrease in value resulting from age, deterioration, or wear and tear (e.g., an older roof being worth less than a brand-new roof).

Exposure

The state of being susceptible or vulnerable to a possible financial loss (e.g., a home situated next to a river facing flood risk).

Implied warranty

An unwritten guarantee that a product is fit, safe, and suitable for its intended purpose.

Insurance policy

A legally binding contract between the policyowner and an insurer outlining coverage, exclusions, rights, and responsibilities.

Insurer

The insurance carrier or company that issues a policy and assumes the financial risk.

Obsolescence

A decline in asset usefulness and value occurring because it has become technologically or practically outdated (e.g., an obsolete computer).

Premium

The consideration or monetary amount paid by the insured to keep an insurance policy in effect.

Tort

A civil wrongful act that causes harm or injury to another party and creates legal liability.

Insurance

A risk-management mechanism used to transfer the financial burden of potential loss to an insurance company.

Law of large numbers

A mathematical principle stating that as the number of similar exposure units increases, the insurer's ability to accurately forecast aggregate losses improves.

Insurable interest

A legitimate financial or economic stake in preserving property or a life to prevent financial suffering if damage or death occurs.

Three insurable-interest relationships

Financial interest, blood relations (family), and business ties (e.g., business partners).

Timing of insurable interest in property/casualty insurance

Must exist at the time of loss (unlike life insurance, which requires it at inception).

Risk

The uncertainty or chance that a financial loss may occur.

Two primary categories of risk

Pure risk and speculative risk.

Pure risk

A situation where there is only a possibility of loss or no loss, with no chance of financial gain (e.g., a home catching fire).

Speculative risk

A situation that presents the chance for either financial gain or financial loss (e.g., investing in the stock market).

Hazard

An underlying condition, behavior, or circumstance that increases the likelihood or severity of a loss.

Physical hazard

A tangible, visible, or material condition that increases risk (e.g., a broken stairway or icy sidewalk).

Moral hazard

Dishonesty, fraudulent character, or intentional misbehavior that increases risk (e.g., falsifying an insurance claim).

Morale hazard

An attitude of carelessness, apathy, or indifference arising because insurance coverage exists (e.g., leaving keys in an unlocked car).

Peril

The specific, immediate cause of a loss (e.g., fire, hail, windstorm, or theft).

Four primary classes of insurance

Life, health, property, and casualty.

Protection provided by life insurance

Protects surviving beneficiaries against financial hardship resulting from an individual's death.