Hazard
A condition or situation that creates or increases a chance of loss. For example, icy roads, driving while
intoxicated, improperly stored toxic waste
Physical
poor health, overweight, blind
Moral
Dishonesty, drugs, alcohol abuse
Morale
Careless attitude - reckless driving, jumping off a cliff, stealing, racing motorcycles, carefree, careless
lifestyle. This attitude causes an indifference to loss.
Loss
is the unintentional decrease in the value of an asset due to a peri
Peril
an immediate, specific event which causes loss, such as an earthquake or tornado. Perils can also be referred to as the accident itself.
Risk
he potential for loss
Speculative Risk
is a risk that presents both the chance for loss or gain. Gambling is an example. Speculative risks are
not insurable.
Pure Risk
is the only insurable risk and present a potential for loss only, such as injury, illness, and death.
Elements of Insurable Risk
loss must be due to chance, definite & measurable, predictable, catastrophic, cannot to be insured must be large, & randomly selected
Loss must be due to chance
Causeless, outside the insured's control
Lost must be definite & measurable
time, place, amount, and when payable.
List must be predictable
Statistically able to estimate the average frequency and severity
Lost cannot be catastrophic
Must be reasonable, 1 trillion-dollar policy is not reasonable
Loss exposure to be insured must be large
Ideally, common enough that the insurer can pool many homogeneous, or similar, exposure units (law of large numbers
Lost must be randomly selected
Fair proportion of good and poor risks (adverse selection)
Law of large numbers
The larger the amount of exposures that are combined into a group, the more certainty there is to the amount of loss incurred in any given period
The Law of Large Numbers allows:
1. Prediction of individual and group losses based on past experience
2. An increased degree of accuracy in predicting losses in large groups