Introduction to Insurance Concepts

These flashcards cover key vocabulary and concepts related to insurance principles, risks, and methods used to manage them.

Risk

The uncertainty regarding the possibility of loss.

Adverse Selection

The tendency of higher-risk individuals to seek insurance coverage more frequently than lower-risk individuals.

Hazard

A condition that increases the likelihood of a loss occurring.

Law of Large Numbers

The principle that the larger the number of similar risks insured, the more accurately future losses can be predicted.

Loss

An unintentional decrease in value due to a covered peril.

Peril

The specific event or cause that results in a loss.

Pure Risk

A risk that involves only the possibility of loss, with no chance of gain; the only type of risk that is insurable.

Speculative Risk

A risk that involves the possibility of both loss and gain; not insurable.

Indemnity

The principle that aims to restore an insured to the same financial position they were in prior to the loss.

Risk Pooling

The process of spreading the cost of potential losses over a large number of similar risks to make them manageable.

Physical Hazard

Tangible conditions that increase the likelihood of a loss occurring.

Moral Hazard

A hazard that occurs when a person's dishonest character increases the likelihood of a loss.

Morale Hazard

A hazard arising from an indifference to loss prevention, often due to existing insurance.

Methods of Handling Risk

The strategies used to manage risk, including sharing, transfer, avoidance, reduction, retention, and prevention.

Underwriting

The process used by insurers to evaluate risks and set appropriate premiums.

Risk Transfer

The act of moving the financial risk of loss from one party to another, typically through insurance.

Risk Avoidance

Eliminating activities or conditions that expose an individual to a specific risk.

Risk Reduction

Actions taken to decrease the likelihood or impact of a loss.

Risk Retention

Choosing to maintain a certain amount of risk, often in the form of deductibles or self-insurance.

Loss Prevention

Actions taken to eliminate or mitigate the potential for damages or losses.