Insurance Concepts Quiz

Adverse Selection

• Adverse selection is when higher-risk individuals are more likely to seek or maintain insurance than lower-risk individuals.
• It occurs when the proportion of bad risks among insured policies exceeds actuarial predictions.
• Policyholders also tend to exploit favorable insurance policy options.

Hazard

• A hazard is any factor increasing the possibility of a peril occurring.
• It could be a situation, condition, or factor.

Homogeneous Exposure Units

• These are similar objects (people, businesses, or property) exposed to the same perils.
• Each unit represents a similar risk.

Indemnify

• To indemnify is to restore someone to their financial position before a loss.

Indemnity

• Indemnity is the amount needed to restore someone financially to their pre-loss state.
• It can be reimbursement or a fixed amount.

Indemnity Contract

• An indemnity contract aims to return the insured to their pre-loss financial condition.

Law of Large Numbers

• This insurance principle states that combining many individual risks leads to more accurate prediction of overall losses.

Loss

• Loss, in insurance, is the unintentional decrease in asset value due to a peril.

Loss Exposure

• Loss exposure is the risk of potential loss.

Loss Exposure Unit

• A loss exposure unit is an individual, organization, or asset exposed to potential loss from a specific peril.
• Aggregating units reveals overall loss exposure.

Moral Hazard

• Moral hazard arises from an insured's reputation, character, habits, or financial responsibility, including criminal activity.

Morale Hazard

• Morale hazard occurs when insurance encourages carelessness and indifference towards loss.

Peril

• A peril is the immediate event (cause) of a loss.

Physical Hazard

• A physical hazard is a tangible condition that increases the likelihood of a loss.

Primary Insurance Company

• In multiple policies covering one claim, the primary insurer pays first.
• In reinsurance, the primary insurer underwrites the risk and transfers a part to reinsurers.

Pure Risk

• Pure risk involves only the chance of loss, no gain.
• It's the only insurable risk.

Reinsurance

• Reinsurance is when one or more insurers (reinsurers) take a portion of another insurer's risk.
• The primary insurer transfers part of the risk to the reinsurer.

Reinsurer

• A reinsurer is an insurer that takes a portion of another insurer's risk.

Risk

• Risk is the uncertainty of loss, the chance of loss for someone.

Risk Avoidance

• Risk avoidance is entirely evading a risk, not engaging in something risky.

Risk Management

• Risk management analyzes risk exposures and develops plans to address them.

Risk Reduction

• Risk reduction decreases the chance of loss or minimizes the severity.

Risk Retention

• Risk retention is accepting potential loss.
• This is often associated with self-insurance.

Risk Selection

• Risk selection is how insurance companies decide on insuring a new risk.
• The ratio of losses to premium should match actuarial predictions.

Risk Sharing (Risk Pooling or Loss Sharing)

• Risk sharing is pooling risk and loss costs among many individuals.
• This transfers risk from the individual to a group.

Risk Transfer

• Risk transfer involves shifting the loss responsibility to another party.
• The cost is a preset premium.

Self-Insurance

• Self-insurance is a risk retention strategy.
• Money is set aside to cover potential losses.

Speculative Risk

• Speculative risk involves the chance of both loss and gain.
• It's not insurable.

Test your knowledge on essential insurance concepts such as adverse selection, hazards, and indemnity. This quiz covers various fundamental terms and principles that shape the insurance landscape. Ideal for students and professionals looking to reinforce their understanding of insurance terminology.