Insurance Chapter 1 Test

Risk

Uncertainty about whether a loss will occur.

Objective risk

The relative difference between actual losses and expected losses.

Subjective risk

Uncertainty based on a person’s feelings or mental state.

Loss exposure

Any situation where a loss could occur.

Chance of loss

The probability that a loss will occur.

Objective probability

Probability based on facts, calculations, or past data.

Subjective probability

A person’s estimate of how likely an event is.

Law of large numbers

As the number of similar exposure units increases, actual losses become easier to predict.

Peril

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

Hazard

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

Physical hazard

A physical condition that increases the chance of loss.

Moral hazard

Dishonesty or bad character that increases the chance of loss.

Attitudinal hazard

Carelessness or indifference toward a loss because insurance exists.

Legal hazard

Characteristics of the legal system that increase the chance or size of a loss.

Pure risk

A situation where loss or no loss are the only possible outcomes.

Speculative risk

A situation where loss, no loss, or profit are possible.

Diversifiable risk

A risk that affects individuals or small groups and can be reduced through diversification.

Nondiversifiable risk

A risk that affects an entire economy or large group.

Systemic risk

The risk that one major failure spreads throughout an entire system.

Enterprise risk

All major risks faced by a business.

Enterprise risk management

A program that manages all major business risks together.

Strategic risk

Uncertainty about a company’s goals, plans, or competitive decisions.

Operational risk

Risk resulting from failed processes, employees, systems, or external events.

Financial risk

Uncertainty caused by financial factors such as interest rates, debt, or currency values.

Personal risks

Risks that directly affect a person or family.

Premature death

Death of a family income earner before financial responsibilities are met.

Human life value

The present value of a person’s future earnings used to support a family.

Property risks

Risks involving damage to or loss of property.

Direct loss

A financial loss caused directly by a peril.

Indirect loss

A financial loss that results from an earlier direct loss.

Consequential loss

Another name for an indirect loss caused by a direct loss.

Liability risks

Risks of being legally responsible for injury or damage to another person.

Risk control

Methods that reduce the frequency or severity of losses.

Avoidance

Eliminating an activity or condition so the loss cannot occur.

Loss prevention

Actions that reduce how often losses occur.

Risk financing

Methods used to pay for losses that occur.

Retention

Keeping all or part of a risk and paying the loss yourself.

Self-insurance

A planned form of retention used to pay predictable losses.

Noninsurance transfers

Transferring risk to another party through a method other than insurance.

Hold-harmless clause

A contract provision in which one party agrees to assume another party’s liability.

Hedging

Using a financial transaction to reduce the risk of price changes.

Incorporation

Forming a corporation to protect the owners’ personal assets from business liabilities.

Duplication

Keeping backups or copies to reduce the effect of a loss.

Separation

Spreading assets or operations across different locations.

Diversification

Spreading risk among different investments, products, or activities.

Loss reduction

Actions that reduce the severity of a loss after it occurs.

Insurance

Transferring risk to an insurer in exchange for a premium.