Ch 2 THE NATURE OF INSURANCE - Keywords

Adverse Selection

This is broadly defined as selection against the company or the tendency of people with higher risks to seek/continue insurance to a greater extent than those with little or less risk.

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.

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.

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.

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.

Morale Hazard

This is a hazard that arises from an insured's indifference to loss because of the existence of insurance.

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.

Primary Insurance Company

As it relates to reinsurance, the primary insurance company writes a policy to cover a risk in the marketplace.

Primary Insurance Company

This primary insurer then surrenders a portion of the risk to a reinsurer and the reinsurer assumes the excess risk for a reinsurance premium.

Pure Risk

This is a type of risk that involves the chance of loss only; there's no opportunity for gain.

Pure Risk

Pure risks are the only form of insurable risks.

Reinsurance

This is the acceptance by one or more insurers—referred to as reinsurers—of a portion of the risk underwritten by another insurer that has contracted with an insured to provide coverage for the total value of a loss exposure.

Reinsurer

This is an insurance company that assumes a portion of the risk underwritten by a primary insurance company.

Risk

This is the uncertainty regarding loss.

Risk

Risk is the probability of a loss occurring for an insured or prospect.

Risk Avoidance

This occurs when individuals evade risk entirely.

Risk Avoidance

It's the act of NOT participating in an activity that could possibly cause a loss.

Risk Management

This is the process of analyzing exposures that create risk and then designing programs to address them.

Risk Reduction

This is the risk management strategy that focuses on taking actions which decrease the chances of a loss occurring.

Risk Reduction

It also refers to action taken to lessen the severity of a loss if one occurs.

Risk Retention

This is the act of analyzing the loss exposure presented by a risk and determining that the potential loss is acceptable.

Risk Retention

Risk retention is often associated with self-insurance.

Risk Selection

This is not a risk management technique that's used by consumers.

Risk Selection

Instead, 'risk selection' describes the insurance company's process for determining whether to cover a new loss exposure.

Risk Selection

If done correctly, the ratio of losses to premium should reflect what actuaries predicted when they created the product, established the price, and set the underwriting criteria.

Risk Sharing (Risk Pooling or Loss Sharing)

This is the risk management technique that manages an individual's risk by sharing the possibility of loss with others and spreading the cost over a large number of individuals.

Risk Sharing (Risk Pooling or Loss Sharing)

This technique transfers risk from an individual to a group.

Risk Transfer

This is the act of exchanging the responsibility for a significant potential loss (risk) to another party in exchange for a smaller, preset cost or premium.

Self-Insurance

This is a risk retention process.

Self-Insurance

A self-insuring individual or organization maintains monetary reserves to cover potential costs in the event of a financial loss occurring.

Speculative Risk

This is a type of risk that involves the chance of both loss and gain; it's not insurable.