HS 311 Fundamentals of Insurance Planning Chapter 1


something could occur. A possibility either exists or does not exist; it cannot be measured.


the possibility of loss


the proportion of times that events will occur in the long run. The probability of some occurence can be expressed numerically as a number between 0 and 1 or as a percentage from 0.0 to 100 percent.


a decline in value, usually in an unexpected or relatively unpredictable manner

loss exposure

a loss that might occur

direct loss

the first loss or losses that arise immediately from the occurence of a peril. For example, the cost to repair a dented fender is a direct loss following an auto accident.

indirect loss

a loss that occurs as a secondary result following the occurence of a peril. An example is the additional living expenses a family might incur to pay for substitute living accomodations following fire damage to their home.


a state of mind that arises from teh presence of risk and is characterized by not being sure about something. Uncertainty often is characterized by worry and fear.


a cause of loss. Fire, earthquake, and flood are examples.


an act or condition that increases the likelihood of the occurence of a loss and/or increases the severity of a loss. The three types of hazards are physical hazards, moral hazards, and attitudinal hazards.

physical hazard

a physical condition relating to location, structure, occupancy, exposure, and the like

moral hazard

a dishonest tendency that is likely to increase loss frequency and/or severity

attitudinal hazard

a condition of carelessness or indifference on the part of an individual as to whether a loss occurs and/or the size of a loss if one does occur.

law of large numbers

a mathematical principle stating that as the number of independent trials or events is increased, the actual results from those trials or events will come closer and closer to teh results that one would expect to occur based on the underlying probability


as a characteristic of a statistical group or an insured group, sufficient size within such a group as to allow the true underlying probability to emerge


the quality or state of being of the same or similar kind or nature


a requirement of the law of large numbers that the occurrence of a loss to one exposure unite should not affect the likelihood of loss to another exposure unit

financial risk

a category of risk for which the possibility of loss involves a decrease or a disappearance of monetary value, usually in an unexpected or relatively unpredictable manner

nonfinancial risk

a category of risk for which the possibility of los does not represent a reduction in monetary value, although sometimes such losses are compensated by the award of money. An example is pain and suffering.

particular risk

a loss possibility that affects only individuals or small groups of individuals at the same time, rather than a large segment of society. An example is the possibility of loss due to the theft of one's wallet.

fundamental risk

a loss possibility that can affect a large segment of society at the same time. An example is the possibility of widespread unemployment during an economic downturn.

static risk

in contrast with dynamic risk, a possibility of loss that exists even in the absence of changes in society. Hurricanes are an example.

dynamic risk

a possibility of loss that resulsts from changes in society or in the economy. An example of a dynamic risk is the possibility that a retailer's inventory will become obsolete because of a sudden change in consumer tastes.

pure risk

a possibility of loss that involves only two outcomes, loss or no loss

speculative risk

a possibility of loss with three possible outcomes: loss, no loss/no gain, or gain


a procedure to protect against losses from price fluctuations. An example of hedging is the simultaneous taking of a "long" position and a "short" position in shares of common stock.


the deliberate creation of a speculative risk by betting on a uncertain outcome. Playing poker for money is an example of gambling.

personal risk

a loss possibility associated with death, injury, illness, old age, or unemployment

property risk

a loss possibility associated with teh loss or destruction of property

liability risk

a possibility of loss as a result of being held legally responsible for an injury to another, usually for bodily injury or damage to his or her property

insurable risk

a risk that substantially meets the following requirements: (1) the amount of loss must be important, (2) the loss must be of an accidental nature, (3) future loss must be calculable, (4) the loss must be definite, and (5) the risk cannot be excessively c

risk tolerance level

the degree to which an individual is attracted or adverse to the possibility of loss


an economic system that reduces financial risks when policyowners transfer risks to an insurer that combines their potential losses

adverse selection

selection against the insurance company. It is the tendency for those who know that they are highly vulnerable to specific pure risks to be most likely to acquire and to retain insurance to cover related losses

private insurance

all forms of insurance that privately owned insurers provide. Contrast with government insurance.

government insurance

various types of insurance operated by state or federal governments. Includes both social insurance programs and other programs.

social insurance

government-run or government-regulated insurance programs designed primarily to solve major social problems that affect a large portion of society. Distinguishing characteristics are compulsory employment-related coverage, partial or total employer financ

individual equity

the principle that each individual's insurance premium payments are based on an actuarial analysis that reflects the insurer's cost of providing benefits for the risks faced by that individual

individual insurance

in contrast with group insurance, insurance purchased and owned by individuals and families

group insurance

in contrast with individual insurance, all types of private insurance that cover many people under one master contract issued to a sponsoring organization, such as an employer

master contract

a contract issued to someone other than the persons insured that provides benefits to a group of individuals who have a specific relationship to the policyowner

certificate of insurance

a description of the group insurance coverage provided to employees. It is given to the employees, but it is not part of the master contract

evidence of insurability

documentation or other evidence submitted to the insurance company regarding the physical condition or other attributes of the applicant for insurance coverage, which is taken into account when the insurer determines whether to accept the risk


the person or organization that applies for insurance


the person or entity that owns an insurance policy. The policyowner generally has the right to change, renew, or cancel the policy and the obligation to comply with policy conditions, such as premium payments.


a party to whom or on whose behalf insurance benefits may be payable

line of insurance

a type of insurance, such as life, medical expense, disability income, homeowner, or auto liability