Questions and Answers
What is the process called where risk is eliminated by removing a hazard?
How is risk commonly spread from one insurer to one or more other insurers?
What involves taking actions to eliminate damage or loss?
How can risk be passed from one party to another?
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What is the method called where risk is reduced by minimizing the potential severity of loss?
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Which of the following is a principle that states the higher the number of risks insured, the more predictable losses become?
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What term best describes the unintentional decrease in the value of an asset due to a peril?
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Which type of hazard involves conditions that increase the chances of loss due to the dishonest nature of the insured?
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What is another term for an indirect loss?
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Which risk treatment strategy involves spreading the risk of loss over a large number of people?
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What term is used for any event that causes a loss?
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Which type of insurance policy begins by stating it covers all direct causes of loss?
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What is the process called that involves analyzing exposures that create risk and designing programs to handle them?
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Study Notes
Insurance Contracts
- Insurance contracts, including accident, health, property, and casualty, are contracts of indemnity.
Principles of Actuarial Science
- The Law of Large Numbers states that the higher the number of risks insured in the same risk pool, the more predictable losses become.
Perils and Losses
- A peril is something that can cause a financial loss.
- Specified or Named Perils individually list perils that they cover.
- Special or Open Peril insurance policies cover all direct causes of loss without naming the perils.
- A loss is an unintentional decrease in the value of an asset due to a peril.
- Direct loss results when a person or property is damaged, destroyed, or killed by a peril, without any intervening cause.
- An indirect loss is also known as a Consequential Loss.
- An Occurrence is any event that causes a loss.
Hazards
- A hazard is a condition or situation that creates or increases a chance of loss.
- Physical Hazards are physical or tangible conditions existing in a manner that makes a loss more likely to occur.
- Moral Hazards make the loss more likely to occur due to the dishonest or villainous character of the insured.
- Morale Hazard is created based on the personal or subjective thought process of the insured.
Risk
- Risk is defined as the potential for loss.
- There are two types of risks: Speculative Risk and Pure Risk.
- Standard risks are considered to have an average potential for loss.
- Substandard risks are considered to be a poor risk for the insurance company and have a higher potential for loss.
Risk Management
- Risk Pooling, also known as loss sharing, spreads risk by sharing the possibility of loss over a large number of people.
- Insurers must minimize adverse selection, which is the tendency for poorer than average risks to seek out insurance.
- Sound and competent underwriting may reduce the chance of adverse selection.
- The process of analyzing exposures that create risk and designing programs to handle them is called risk management.
- Treatment of risk includes implementing the following strategies: Risk Avoidance, Risk Reduction, Risk Retention, Risk Transfer, and Risk Sharing.
- Risk can be avoided by eliminating a hazard.
- Risk can be reduced by minimizing the severity of a potential loss.
- Risk can be retained through self-insurance.
- Risk can be transferred or passed from one party to another through an insurance contract.
- Risk can be shared by multiple parties.
- Reinsurance is the spreading of risk from one insurer to one or more other insurers.
- Loss prevention involves taking actions to eliminate damage or loss.
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Description
This quiz covers the basics of insurance contracts, including types of insurance, the Law of Large Numbers, and perils. Understand the principles of indemnity and how they apply to different types of policies.
