Chapter 2: Nature of Insurance Vocabulary

Key vocabulary terms and definitions from Chapter 2: Nature of Insurance.

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.

Risk

The uncertainty regarding the possibility of loss.

Speculative Risk

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