Chapter 2: Nature of Insurance Vocabulary

Fundamental Concepts of Risk

• Risk: The uncertainty regarding the possibility of 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.
• Speculative Risk: A risk that involves the possibility of both loss and gain; not insurable.

Causes and Conditions of Loss

• Loss: An unintentional decrease in value due to a covered peril.
• Peril: The specific event or cause that results in a loss.
• Hazard: A condition that increases the likelihood of a loss occurring.

Underwriting and Predictive Principles

• Law of Large Numbers: The principle that the larger the number of similar risks insured, the more accurately future losses can be predicted.
• Adverse Selection: The tendency of higher-risk individuals to seek insurance coverage more frequently than lower-risk individuals.