What is risk Pooling?
Loss sharing, spreads risk by sharing the possibility of loss over a large number of people. It transfers risk from an individual to a group.
What is the law of large numbers
The larger groups provide an increased degree of accuracy in loss predictions based on past experience. The higher the exposure the more likely the event can be predicted.
Define Risk
Potential for loss
Define Loss
Unintentional decrease in the value of an asset due to a peril
What is loss exposure?
is any situation that presents the possibility of a loss
What is homogeneous exposure units?
similar objects of insurance that are exposed to the same group of perils.
What two types of Risk?
Speculative Risk
Pure Risk
What is Speculative Risk?
A risk that present the chance for both loss and gain. EX: Gambling Speculative risks are not insurable
What is Pure Risk?
The only insurable risk and present a potential loss only with no possibility of gain. (Ex: injury, death, illness)
Treatment of Risks-How people deal with risks
Avoidance
Reduction
Retention
Transfer
Sharing
What is risk avoidance?
Don't do anything, the elimination of a hazard
What is Reduction
Minimizing the severity of a potential loss (smoke alarms)
What is Retention
Self insure- Used when losses are highly predictable and the worst possible loss is not serious.
What is risk sharing mean?
Each party assumes a portion of the risk receiving benefits under system
Elements of insurable risk
-the loss must be due to chance
-the loss must be definite and measurable
-the loss must be predictable
-the loss cannot be catastrophic
-the loss exposures to be insured must be large
-the loss exposures to be insured must be randomly selected
What is Risk Management?
The process of analyzing exposures that create risk and designing programs to handle them
What is the Principle of Indemnity?
making an insured whole by restoring them to the same condition as before a loss.
What is Adverse Selection?
Poorer than average risks to seek out insurance.
Reinsurance
Spreading risk from one insurer to one or more other insurers, to deal with catastrophic loss.
What consider to be hazard?
a condition that increases the chance of loss (Ice, toxic waste, intoxication)
List types of Hazards
Physical, Moral, Morale
What consider to be physical risk?
Poor health, overweight, blind
What consider to be moral risk?
Dishonesty, drugs, alcohol abuse
What consider to be Morale risk?
Careless attitude-reckless driving, cliff jumping, stealing, etc.
What is defined as "the potential for loss"?
Risk
An insurer has a contractual agreement which transfers a portion of its risk exposure to another insurer. What type of contractual arrangement is this?
Reinsurance Contract
Which of the following is not an example of risk retention?
A) Becoming aware of a risk and taking no action
B) Self-insuring a given risk
C) Deciding a business deal is risky but going through with it anyways
D) Not doing a business deal after deciding i
D) Not doing a business deal after deciding it would be too risky
According to the law of large numbers, how would losses be affected if the number of similar insured units increases?
Predictability of losses would be improved
Purchasing insurance is an example of risk
Transference
ABC Company is attempting to minimize the severity of potential losses within its company. The company is engaged in risk
Reduction
Risk ____ is the process of analyzing exposures that create risk and designing programs to handle them
management
An insurable risk requires
The chance of loss be calculable
What describes the act of insuring a risk against possible loss?
Risk Transfer
Which term describes the elimination of a hazard?
Risk Avoidance
Rates can be calculated to compensate for losses is an example of the law of large numbers.
True or False
False
Purchasing insurance is an example of risk
transference
How can an insurance company minimize exposure to loss
re insuring risks
A business becoming incorporated is an example of risk ____.
transfer
Insurance represents the process of risk
A. Selection
B. Avoidance
C. Transference
D. Assumption
C. Transference
What is known at the immediate specific event causing loss and giving rise to risk?
A. Peril
B. Hazard
C. Loss Factor
D. Liability
A. Peril
How do insurers predict the increase of individual risks?
A. Law of large numbers
B. U.S. census
C. Average mortality incidents
D. Experience of morbidity
A. Law of large numbers
The cause of a loss in referred to as a(n).
A. Hazard
B. Adversity
C. Peril
D. Risk
C. Peril
Which of the following is considered to be an event or condition that increase the probability of an insured's loss?
A. Risk
B. Hazard
C. Indemnity
D. Peril
B. Hazard
People with higher loss exposure have the tendency to purchase insurance more often than those at average risk. This is called
A. Risk retention
B. Preexisting conditions
C. Law of large numbers
D. Adverse Selection
D. Adverse Selection
An example of risk sharing would be
A. Adding more security to a high-risk building
B. Choosing not to invest in the stock market
C. Doctors pooling their money to cover malpractice exposures
D. Buying an insurance policy to cover potential liabilties
C. Doctors pooling their money to cover malpractice exposures
Insurance companies determine risk exposure by which of the following?
A. Insurable interest
B. Insurance exchanges
C. Law of large numbers and risk pooling
D. Population table data.
C. Law of large numbers and risk pooling
An individual who removes the risk of losing money in the stock market by never purchasing stocks is said to be engaged in
A. Risk Reduction
B. Risk transference
C. Risk avoidance
D. Risk retention
C. Risk avoidance
All of the following are example of pure risk EXCEPT
A. Losing money at a casino
B. Injured while playing football
C. Falling at a casino and breaking a hip
D. Jewelry stolen during a home robbery
A. Losing money at a casino