Law of large numbers
is a basic principle of insurance that the larger the number of individual risks combined into a group, the more certainty there is in predicting the degree or amount of loss that will be incurred in any given period.
Risk
is the uncertainty regarding loss; the probability of loss occurring for an insured or prospect.
Peril
is the immediate specific event causing loss and giving rise to risk.
Speculative risk
is a type of risk that involves the chance of both loss and gain; it is not insurable.
Pure risk
is type of risk that involves the chance of loss only; there is no opportunity for gain; insurable.
Risk Avoidance
occurs when individuals evade risk entirely. It is the act of not doing something that could possibly cause a loss or the inactivity of participation in an event that may potentially cause a loss situation. An example would be driving an automobile. If yo
Risk Reduction
takes place when the chances of loss are lessened. Changing one's lifestyle to minimize a known risk is an example of risk reduction. You decide you cannot stay in the house all day, every day, so avoiding the risk of an auto accident is not possible. You
Risk Retention
is being aware of the risks involved and taking precautions for financial protection. You decide that public transportation cannot get you everywhere you want to go when you want to go there. Now you must decide what limits to put on your financial respon
Risk Transfer
is the act of shifting the responsibility of risk to another in the form of an insurance contract. Through the insurance contract, the burden of carrying the risk and indemnifying the financial loss is transferred from the individual to the insurance comp
Adverse selection
is selection "against the company." Tendency of less favorable insurance risks toseek or continue insurance to a greater extent than others. Also, tendency of policy owners to take advantage of favorable options in insurance contracts.
Reinsurance
is the acceptance by one or more insurers, called reinsurers, of a portion of the risk underwritten by another insurer who has contracted for the entire coverage.
Hazard
is any factor that gives rise to a peril.
Moral hazard
is the effect of personal reputation, character, associates, personal living habits, financial responsibility, and environment, as distinguished from physical health, upon an individual's general insurability.
Morale hazard
is hazard arising from indifference to loss because ofthe existence of insurance.