Principles of Risk Management and Insurance - Review Flashcards

Vocabulary flashcards covering core concepts, risk management techniques, insurance fundamentals, and insurer operations based on Chapters 1, 2, 3, and 6.

Risk

Uncertainty concerning the occurrence of a loss.

Loss Exposure

Any situation or condition in which a loss is possible.

Pure Risk

A risk situation where the only possibilities are loss or no loss.

Speculative Risk

A risk situation where loss, no loss, or gain is possible.

Objective Risk

Actual variation of actual losses from expected losses.

Subjective Risk

Uncertainty based on a person's perception or state of mind.

Diversifiable Risk

A risk that can potentially be reduced by spreading exposure.

Nondiversifiable Risk

A risk that affects broad populations or the economy; also known as systemic risk.

Peril

The cause of loss, such as fire, theft, or collision.

Hazard

A condition that increases the chance or severity of loss.

Physical Hazard

A physical condition that increases the chance or severity of loss.

Moral Hazard

Dishonesty or character defects in an individual that increase the chance or severity of loss.

Morale Hazard

Carelessness or indifference to a loss; also known as attitudinal hazard.

Legal Hazard

Legal or regulatory conditions that increase the chance or severity of loss.

Direct Loss

Damage to the property itself.

Indirect Loss

Financial consequences that follow a direct loss; also known as consequential loss.

Insurance

A system designed to transfer financial consequences of specified risks in exchange for a premium.

Adverse Selection

The tendency of people with a higher-than-average chance of loss to seek insurance at standard rates.

Loss Frequency

The probable number of losses during a period.

Loss Severity

The probable size of the losses.

Maximum Possible Loss

The worst loss that could happen during the firm's lifetime.

Probable Maximum Loss

The worst loss likely to happen.

Avoidance

A risk control technique where an exposure is not undertaken or is abandoned so that the chance of loss is reduced to zero.

Loss Prevention

A risk control technique aimed at reducing the frequency of losses.

Loss Reduction

A risk control technique aimed at reducing the severity of a loss after it occurs.

Duplication

A risk control technique of maintaining backups or copies of important property or information.

Separation

A risk control technique of dividing assets so one event causes less total damage.

Diversification

A risk control technique of spreading exposure across parties, securities, or transactions.

Retention

Retaining part or all of a loss, which is appropriate when losses are predictable and the worst loss is manageable.

Noninsurance Transfer

Transferring financial consequences of risk using contracts, leases, or hold-harmless agreements.

Deductible

An amount subtracted from an otherwise payable loss, representing retained risk.

Ratemaking

The insurance operation of pricing insurance and calculating premiums.

Underwriting

The insurance operation process of selecting, classifying, and pricing applicants.

Rate

The price per unit of insurance.

Exposure Unit

The unit of measurement used in insurance pricing.

Reinsurance

The transfer of part or all of a primary insurer's risk to another insurer.

Public Adjuster

A claims adjuster who represents the insured.

Facultative Reinsurance

Reinsurance formed on a case-by-case basis.

Treaty Reinsurance

An agreement that automatically covers business within the scope of the treaty.

Pro Rata Reinsurance

Reinsurance where premiums and losses are shared according to an agreed proportion.

Quota Share Reinsurance

Reinsurance where a specified proportion of premiums and losses is shared.

Surplus Share Reinsurance

Reinsurance where the reinsurer takes insurance above the primary insurer's retention, subject to the treaty.

Excess-of-Loss Reinsurance

Reinsurance where the reinsurer pays when losses exceed a specified attachment point, commonly used for catastrophic protection.

Ceding Company

The primary insurer transferring risk in a reinsurance arrangement.

Reinsurer

The insurer accepting transferred risk in a reinsurance arrangement.