C11 Ch1

What is the general definition of risk in insurance?

The chance of loss or destruction of property, or incurring a legal liability.

What is speculative risk?

A situation involving the possibility of either financial loss or financial gain.

Why is speculative risk generally uninsurable?

Because it involves the potential for profit, unlike pure risk.

What is pure risk?

A situation involving a chance of loss or no loss, but no gain.

Which type of risk is insurance specifically concerned with?

Pure risk.

What are the two key questions used to test if a risk is insurable?

Is there a chance of loss? Is there a chance of profit?

What are the three broad categories of insurable pure risks?

Personal risks, property risks, and liability risks.

What does a personal risk involve?

The chance of bodily injury, loss of life, or income loss for an individual.

What is the difference between direct and indirect property loss?

Direct loss involves physical damage to property; indirect loss occurs as a consequence.

What is a liability risk?

The chance of loss from a legal obligation to pay damages to others.

What are the two primary broad categories of insurance?

General insurance and life insurance.

What three classes fall under general insurance?

Personal lines, commercial lines, and special risks.

What is a peril in insurance?

The specific event that causes a loss covered by the policy.

What distinguishes burglary from robbery?

Burglary requires visible forcible entry; robbery involves violence or threat of violence.

How is theft defined in property insurance?

The broad wrongful taking of property belonging to another.

What is legal negligence?

Failing to use the degree of care expected of a reasonable, prudent person.

What is a hazard in insurance?

A condition that causes a peril or increases loss severity.

What is a physical hazard?

A hazard arising from physical characteristics or conditions of the insured object.

What is a moral hazard?

A hazard arising from dishonesty, bad character, or intentional fraud by the insured.

What is a morale hazard?

A hazard stemming from an attitude of carelessness because property is insured.

Who in an insurance company decides whether to accept or reject a risk?

An underwriter.

What is proximate cause?

The unbroken, direct cause that naturally produces an event leading to loss.

What is a remote cause?

A cause separate from the proximate cause in a chain of events.

What is an immediate cause?

The last link or final event in a chain leading to loss.

Why must a peril be the proximate cause of loss for coverage?

To establish that an insured peril directly produced the financial loss.

What are pre-loss objectives in risk management?

Objectives set to be met before a loss event occurs.

What are the four primary pre-loss objectives?

Social responsibility, externally imposed obligations, peace of mind, and cost of risk.

What does the cost of risk include?

All costs to manage pure risk, including premiums and uninsured loss recovery.

What are post-loss objectives in risk management?

Objectives aimed at managing consequences after a loss event occurs.

What are the five primary post-loss objectives?

Social responsibility, survival, operational continuity, stable earnings, and sustained growth.

Which post-loss objective is the minimum critical financial threshold for an organization?

Survival.

Why might risk management objectives conflict with one another?

Achieving one goal, like operational continuity, often increases total operating costs.

What is the first step in the risk management process?

Identifying and analyzing loss exposures.

What are four common methods used to identify risk exposures?

Surveys, flow charts, financial statements, and physical inspections.

What qualification is specifically required in Canada to inspect wood-heating installations?

WETT (Wood Energy Technology Transfer) designation.

What are the three distinct elements of a loss exposure?

Assets subject to loss, potential causes (perils), and financial consequences.

What are the five categories of assets subject to loss?

Physical assets, loss of use, legal liabilities, intangible assets, and human assets.

What three categories describe the origins of perils?

Human, natural, and economic.

What is step two of the risk management process?

Formulating risk management options.

What are the two major classifications of risk management options?

Loss control techniques and loss financing techniques.

What is avoidance in loss control?

Eliminating an exposure entirely by not engaging in the risky activity.

What is the difference between loss prevention and loss reduction?

Loss prevention reduces loss frequency; loss reduction lessens loss severity when it occurs.

What is risk retention?

Absorbing all or part of a financial loss internally instead of transferring it.

When does risk retention work best?

For losses that are low in severity and high in frequency.

What is a captive insurance company?

An insurance company created and controlled by its parent company to cover internal risks.

What is a hold-harmless agreement?

A contractual clause where one party assumes the legal liability of another.

How is insurance defined from a loss financing perspective?

Transferring uncertain future loss expenses in exchange for a fixed premium payment.

What is step three of the risk management process?

Selecting the best risk management techniques for each exposure.

What is step four of the risk management process?

Implementing the selected risk management plan.

What is step five of the risk management process?

Monitoring results and modifying the plan continuously.