Personal Risk Management Overview

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Questions and Answers

What best describes proximate cause in regards to responsibility for injury or loss?

Any act that may contribute to the outcome of the loss.

The primary action taken by the insured.

The initial act that leads to a natural sequence of events resulting in loss. (correct)

The last negligent act leading to the injury or loss.

What is a key characteristic of co-insurance in insurance policies?

It guarantees full coverage of all losses.

It eliminates all deductibles for insured events.

It involves shared loss between the insured and insurer after a deductible. (correct)

It requires the insured to pay a higher premium.

Which statement accurately defines the concept of insurable interest?

A legal representation needed to ensure a policy payout.

A requirement that prevents adverse selection in contracts.

The financial stake a policyholder has in the insured item or individual. (correct)

The benefit received upon successful completion of a life insurance contract.

What is the purpose of co-ordination of benefits (COB) in insurance policies?

To avoid duplicate payments and establish a sequence for coverage application. Signup and view all the answers

In an insurance policy, what do exclusions refer to?

Specific instances or events that are not covered by the policy. Signup and view all the answers

How does adverse selection impact the insurance market?

It results in insurers attracting higher-risk clients than intended. Signup and view all the answers

What do declarations in an insurance policy typically specify?

The who, what, when, and where of the particular policy. Signup and view all the answers

Which of the following best describes the relationship between coinsurance and deductibles?

Coinsurance sharing occurs after the deductible is satisfied. Signup and view all the answers

What is the definition of pure risk?

Chance of loss or no change with no chance of gain Signup and view all the answers

Which term describes the actual cause(s) of a loss?

Perils Signup and view all the answers

What type of hazard is associated with physical properties like location or chemical composition?

Physical Hazard Signup and view all the answers

Which of the following best describes adverse selection in insurance?

A tendency for people with higher risk to seek insurance more often Signup and view all the answers

What does the term 'insurable interest' refer to?

A financial stake in the subject matter of the insurance policy Signup and view all the answers

How does co-insurance typically function within an indemnity contract?

It requires policyholders to share in the risk of loss Signup and view all the answers

What role do hazards play in risk management?

They can increase the likelihood or severity of a peril arising Signup and view all the answers

Which of the following represents a speculative risk?

Investing in stocks with potential gains or losses Signup and view all the answers

Which risk management strategy involves passing the financial burden to another party?

Transfer Signup and view all the answers

What is a common feature of an indemnity contract?

It compensates the insured for actual losses. Signup and view all the answers

Which factor is essential to establish insurable interest?

A financial loss would occur. Signup and view all the answers

What effect does adverse selection typically have on insurance markets?

It can result in higher premiums for all insureds. Signup and view all the answers

Co-insurance generally requires the insured to share in the expenses after what point?

The deductible limit is reached. Signup and view all the answers

In the context of property risk, what would likely be classified as a critical severity risk?

Premature death from skydiving. Signup and view all the answers

Which of the following best describes the term 'proximate cause' in insurance?

It is the actual event leading to a loss. Signup and view all the answers

In the risk property matrix, which action is taken when the risk is of low severity and low frequency?

Retain Signup and view all the answers

Study Notes

Personal Risk Management

Risk is the possibility of harm, injury, loss, damage, or destruction. Risk impacts earnings (death/disability), personal liability (action/inaction), property (fire/theft), and investments.
Two basic types of risk:
- Speculative risk: Involves a chance of loss, gain, or no change.
- Pure risk: Involves a chance of loss or no change; there is no chance of gain.
Risk terminology:
- Perils: The actual cause(s) of a loss.
- Hazards: Acts or conditions that increase the likelihood of a peril or the severity of the loss.
Three types of hazards:
- Physical: Results from physical property (location, chemical composition).
- Moral: Incentive to take additional risk, not fully bearing the consequences of one's actions. This can relate to insurance/finance/government policy.
- Morale: Complacency and negligence from a perceived lack of risk; altered perception of risk when risk mitigation is in place (examples include automatic car door opener, house keys).
Adverse Selection: Those at greater risk are more likely to purchase insurance to cover their risk.
Nature of Contract: Valued/non-indemnity contracts determine payment amounts in advance, unaffected by the individual's actual loss. Indemnity contracts base payment amounts on the individual's actual loss.
Insurable Interest: If loss or damage to an insured entity would result in actual financial loss. Financial interest, like ownership, and non-ownership cases matter. Relationships like dependency, emotional distress, and legal obligation factor into interest, affecting insurability. Insurable interest is necessary for property and liability insurance, as well as life insurance.
Proximate Cause: The initial act that sets off a natural and continuous sequence of events resulting in injury or loss. Responsibility for the injury lies with the last negligent act.
Co-insurance: A policy provision where both the insured and insurer share the loss, typically in a fixed proportion after a deductible is met.
Co-ordination of Benefits (COB): A policy provision eliminating duplicate payments, providing coverage sequence (primary and secondary), when an individual is insured under multiple contracts.
Structure of Insurance Policies:
- Declarations: Who, what, when, and where of the particular policy.
- Insuring Agreements: What the insurer agrees to do.
- Exclusions: What the insurer will not do.
- Conditions: Acts required for coverage from the policyholder.
- Endorsements: Amendments to the original policy contract.
Types of Pure Risk:
- Personal Risks: Death/disability of individuals/family members, and unemployment.
- Property Risks: Theft, damage, destruction of property, and direct/indirect effects.
- Liability Risks: Damages through the legal system from carelessness/negligence, affecting personal injury, property damage, and punitive damages.
- Failure of Others to Perform.
Key Properties of Personal Risk:
- Severity: Critical (serious financial consequences, bankruptcy), Material (serious financial consequences, reduction in SOL), and Minor (little financial consequences, minor effect on income/expenses).
- Frequency: High, Medium, Low (likelihood of occurrence).
- Risk Property Matrix: A depiction of severity and frequency's combined effect on risk assessment, to help assess risk and manage it appropriately.
Risk Management Strategies:
- Risk Control: Control Exposure to Risk, Control Severity of Loss, Avoidance, Reduction.
- Risk Financing: Arrange for Funds to Cover Potential Loss, Transfer Financial Burden to Others, Sharing/Transferring, Retention, Safety Procedures, Pooling, Segregation, Diversification, Informal Deductibles, Waiting Periods, Co-Insurance, Exclusions
Managing Personal Risk:
- Steps (or phases) to manage personal risk: Define the Risk Management Objectives; Identify & Evaluate the Risks; Identify Appropriate Risk Management Strategies; Implementation; Review & Update
Typical Objectives: Preserve household income during death/disability, Protect assets from theft/destruction, Personal liability from actions/inactions.
Identify & Evaluate the Risks: Review financial statements (property at risk, income loss if death/disability). Review lifestyle/family situations (occupation, personal activities, legal liability, professional/volunteer activities, health conditions).
Identify Appropriate Risk Management Strategies: Use Risk Matrix (severity/frequency).
Implementation: Executing chosen risk management strategies
Review & Update: Examining the effectiveness of the risk management process, and factors like job security, dependents, health, hobby/job changes, real assets value, cost of living, or beneficiary changes. Reviewing significant environmental changes.
Risk Identification & Insurance Needs of Clients: (examples include Reed Chalmers, Schmendrick the Magician, Brian M., Salvatore Cuchimel, Eustace Wingtip)
Essential questions about risk, and how to approach it.

Subheadings

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Description

This quiz covers the fundamentals of personal risk management, including different types of risk and terminology associated with risk. Learn about speculative and pure risks, and discover the three types of hazards that can affect your personal and financial well-being. Test your knowledge on how risk impacts earnings, liabilities, properties, and investments.