FIN 340 test 1 terms

Risk

The possibility of loss.

Possibility

Something that could occur but may or may not happen; cannot be measured or insured.

Probability

The proportion of times an event is expected to occur in the long run.

Loss

The undesirable result of risk; a decline, depreciation, or depletion in value.

Loss Exposure

A loss that might occur.

Direct Loss

A loss that arises immediately following the occurrence of a peril.

Indirect (Consequential) Loss

A loss that occurs as a secondary result following a peril.

Uncertainty

A subjective state of not being sure about something.

Peril

A cause of loss.

Hazard

An act or condition that increases the likelihood or severity of a loss.

Physical Hazard

A physical condition that increases the chance of loss (e.g., high blood pressure, gasoline storage).

Moral Hazard

A dishonest tendency that increases loss frequency or severity.

Attitudinal Hazard (Morale Hazard)

A condition of carelessness or indifference regarding loss occurrence or size.

Law of Large Numbers

As the insured population increases, actual losses approximate expected probabilities.

Mass

The requirement that a sample be large enough for accurate predictions.

Homogeneity

The requirement that exposure units have similar characteristics.

Independence

The requirement that a loss to one exposure unit does not affect another.

Financial Risk

A risk involving a loss of money.

Nonfinancial Risk

A risk that does not directly involve a loss of money.

Particular Risk

A risk affecting individuals or small groups.

Fundamental Risk

A risk affecting large segments of society.

Static Risk

A risk that exists apart from changes in society or the economy.

Dynamic Risk

A risk resulting from changes in society or the economy.

Pure Risk

A risk involving either loss or no loss.

Speculative Risk

A risk involving the possibility of loss, no gain/no loss, or gain.

Hedging

A technique used to offset speculative risks and ensure at least a break-even outcome.

Gambling

Creates a risk that would not otherwise exist and can result in gain or loss.

Insurance

The transfer of existing risks that can result in loss.

Personal Risks

Loss possibilities associated with death, injury, illness, old age, or unemployment.

Property Risks

Loss possibilities associated with the loss or destruction of property.

Liability Risks

Loss possibilities resulting from being legally responsible for injury or property damage to others.

Characteristics of Insurable Risk

Loss must be important, accidental, calculable, definite, and not excessively catastrophic.

Risk-Tolerance Level

The degree to which an individual is attracted to or averse to the possibility of loss.

Indemnification

Payment for actual losses; attempting to make the insured whole.

Adverse Selection

The tendency of people most vulnerable to loss to purchase and retain insurance.

Social Insurance

Government programs addressing major social problems through employment-related coverage.

Social Adequacy

Benefits provided regardless of economic status and not necessarily proportional to contributions.

Individual Equity

Insurance benefits that are actuarially related to contributions.

Master Contract

A group insurance contract issued to someone other than the insured individuals.

Certificate of Insurance

A description of group insurance coverage provided to employees; not part of the master contract.

Applicant

A person or organization that applies for insurance.

Policyowner (Policyholder)

The person or entity that owns an insurance policy.

Insured

A person whose life, health, or property is covered by an insurance contract.

Line of Insurance

A specific type of insurance.

Views of Insurance

Economic system, legal contract, regulatory contract, business institution, social device, actuarial system, and risk management technique.

Key Elements of Insurance

Indemnification, estimating future losses, definite monetary losses, and random events outside the insured's control.

Benefits of Insurance

Pays claims, provides peace of mind, supports credit, stimulates saving, encourages specialization, and promotes loss prevention.

Costs of Insurance

Operating costs, insurer profits, opportunity costs, increased losses, and adverse selection.

Group Insurance

Insurance covering many people under one master contract through a common relationship.

Individual Coverage

Insurance owned by and primarily covering one person or family.

Group Coverage

Insurance covering many individuals under a single master contract, usually through an employer or organization.

Risk Management,

A systematic process for dealing with risks through identification, measurement, treatment, and administration

Risk Management Process,

The steps of risk management: identification, measurement, treatment (avoidance, control, retention, transfer), and administration

Objectives of Risk Management,

To preserve assets and income against accidental loss; applies to all assets including property and people

Risk Management Goals,

Survival, peace of mind, lower costs/higher income, stable earnings, minimal interruption, continued growth, social responsibility

Avoidance,

Eliminating or not incurring a loss exposure; often impractical

Loss Prevention,

Reducing the probability that a loss will occur

Loss Reduction,

Reducing the severity of a loss

Noninsurance Transfer,

Contractually transferring risk through agreements other than insurance (e.g., subcontracting)

Retention,

Keeping the financial consequences of risk; includes emergency funds, deductibles, self‑insurance, captive insurers

Risk Transfer,

Shifting financial consequences of risk to another party (usually an insurer); includes insurance, reinsurance, hold‑harmless agreements

Insurance Equation,

Premiums + investment earnings + other income = losses + expenses + profit

Credibility,

The reliability of past results as predictors of future outcomes

Mortality,

The relative incidence of death shown in mortality tables

Morbidity,

The relative incidence of disease shown in morbidity tables

Risk Identification,

Systematic discovery of all risks using surveys, financial analysis, inspections, contract review, and fact‑finding

Risk Measurement,

Measuring loss frequency, severity, and variability; includes maximum possible and maximum probable loss

Risk Treatment Selection,

Choosing risk control or financing based on frequency and severity

High Frequency High Severity,

Avoidance

High Frequency Low Severity,

Retention

Low Frequency High Severity,

Insurance

Low Frequency Low Severity,

Retention

Social Insurance,

Government‑provided insurance programs

Employer‑Sponsored Insurance,

Insurance provided by employers including group plans, cafeteria plans, FSAs, and premium conversion plans

Third‑Party Administrator,

An outside entity that manages employer insurance plans

Individual Insurance,

Insurance purchased personally rather than through an employer

Risk Administration,

Continuous review of risk management activities including obtaining and managing insurance coverage