The Nature of Insurance Review

A comprehensive set of 30 vocabulary flashcards covering the fundamental concepts of insurance, risk types, hazards, and risk management methods based on the lecture material.

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

A statistical principle stating that as the number of similar and independent exposure units increases, the more closely the actual loss experience will match the expected loss experience.

Loss

An unintended and unforeseen reduction or destruction of financial or economic value due to a peril.

Peril

The immediate, specific event or cause that results in a loss.

Pure Risk

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

Risk

The potential for, or uncertainty regarding, the possibility of loss.

Speculative Risk

A type of risk that involves the possibility of both loss and gain; these risks are not insurable.

Risk pooling

A fundamental insurance concept, also known as loss sharing, that distributes risk by spreading the cost of possible losses over a large number of similar (homogeneous) exposure units.

Principle of Indemnity

A principle stating that the goal of insurance is to restore an insured to the same financial position they were in prior to a loss without allowing them to profit.

Valued contracts

Insurance policies, such as life insurance, that pay a predetermined amount regardless of the actual loss incurred.

Property insurance

A line of insurance that covers losses caused by perils such as fire, lightning, windstorm, hail, earthquake, and vandalism.

Liability insurance

Coverage for an insured's legal obligation to compensate a third party for harm caused by the insured's negligence.

Mortality

The covered peril for life insurance and annuities where life insurance protects against premature death.

Annuities

Financial products that provide protection when death is delayed and the insured would otherwise outlive his assets.

Named perils

Insurance contracts that individually list each specific peril they cover, defining covered losses narrowly.

Open perils

Also known as special perils, these policies cover all direct causes of loss except for those specifically identified as excluded.

Direct loss

A loss that occurs when a person or property is damaged, destroyed, or killed by a peril without any intervening cause.

Indirect loss

Also referred to as consequential loss, it is a loss that results from or is a consequence of a direct loss.

Accident

An unforeseen, unexpected, unintended, and sudden event that occurs at a specific time and specific place.

Occurrence

Any event that causes a loss, including sudden accidents as well as losses caused by repeated or continuous exposure to conditions over time.

Physical hazards

Tangible conditions that are observable—such as poor health, icy roads, or faulty wiring—that make a loss more likely to occur.

Moral hazards

Hazards arising from the dishonest character of the insured, such as lying on an application or faking medical symptoms.

Morale hazards

Hazards resulting from an insured's state of mind or indifference to loss because they have insurance, often manifesting as carelessness.

Standard risks

Risk exposures judged to have an average potential for loss and insured in return for a predetermined standard premium.

Substandard risks

Risk exposures judged to be poor risks with a higher-than-average potential for loss, often requiring an increased premium or offering lower benefits.

Preferred risks

Risk exposures judged to be better than average with a lower potential for loss, qualifying for lower-than-average premiums.

Risk management

The process of analyzing exposures that create risk and designing programs to handle them via tools like the acronym STARR.

Reinsurance

The practice of transferring risk from one insurer to one or more other insurers to prevent catastrophic loss.

Risk retention

A conscious strategy in which a person maintains reserves to address unexpected expenses, often through deductibles or self-insurance.