insurance
transfer of risk from 1 party to another through a legal contract
risk
the uncertainty or chance of financial loss
pure risk
the only type of risk that may be insured bc it involves the chance of loss only
speculative risk
the type of risk that cannot be insured bc it possesses the chance for loss or financial gain
loss
the decrease or disappearance of economic value
risk management
___________ is a process used by an insurer of treating and managing loss exposures.
Accomplished by: detecting the potential loss exposure, selecting a method or tool to reduce risk, executing a course of action, and periodically reviewing the measures t
exposure
a hazardous condition brought about by the nature of an insured's activities
peril
the cause of loss
hazard
a condition present that increases the chance of a loss occurring
types of ____: physical, moral, morale
physical hazard
a type of hazard. Ex. slippery floor, icy steps, faulty wiring, leaving matches out for children
moral hazard
a type of hazard. Ex. criminal or dishonest actions by a policyowner/insured
morale hazard
a type of hazard. Ex. Driving under the influence, apathetic attitudes, reckless driving
true
True or false:
The methods of risk management available to handle risk are avoidance, sharing, retention, reduction, and transfer
true
true or false:
in order for a pure risk to be insurable the chance of loss must be accidental, measureable, and definable.
life insurance
________ involves the transfer of the risk of premature death from 1 party (policyowner) to another party (insurer)
estate
(When a life insurance contract is payable upon the death of the insured, it instantly creates funds for the named beneficiary)
a life insurance contract instantly creates an _____
insurable interest
An individual may not buy life insurance covering the life of another person unless he possesses an _____________ in that person. __________ must exist in life insurance at the time of application, however it does not have to exist at the time of loss (de
D
(risk is an unknown event. To be insurable, a risk must be unexpected).
All of the following regarding risk are true except:
A. risk is transferred in an insurance transaction
B. speculative risk involves the chance for loss or gain
C. insurance provides a known benefit against an unknown event
D. risk is a known event
C
(Insurance is not designed to allow the policyowner to profit from their loss. An indemnity policy will make the insured "whole" again, or bring them back to the financial position that they enjoyed before the loss, without profiting from the loss. Even
Which of the following insurance concepts means that an insured or policyowner will only receive the actual amount of loss, even though the insurance contract allows for, or could pay, an even greater amount of benefit?
A. Blanket Coverage
B. Insurable In
C
(The loss must not be catastrophic i.e. loss due to war, the loss must be large enough to cause a financial hardship i.e. death, the cost for coverage must not be unreasonable, and the loss must be accidental and definable)
Which of the following statements is not a characteristic of an "ideally insurable" risk?
A. The loss must not be catastrophic to the insurer.
B. Premiums charged must be reasonable.
C. The loss does not necessarily have to cause financial hardship.
D. Th
D
(one can never replace risk, there is always a possibility for risk to occur, regardless of the steps taken to manage risk)
Methods of managing risk include all of the following except:
A. Retention of risk
B. Transfer or risk
C. Avoidance of risk
D. Replacement of risk
B
(one can never avoid even the most carefully avoided risk)
Which of the risk management techniques is most difficult to manage?
A. Retention
B. Avoidance
C. Reduction
D. Sharing
B
(An applicant provides both a premium and application information in exchange for insurance protection. When both items of consideration are provided, the risk associated with the loss has been transferred to the insurance company. In other words, the f
insurance is described as the _______ of risk
A. avoidance
B. transfer
C. retention
D. reduction