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| Known as 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. |
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Term
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| The law of large numbers states that 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. |
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Term
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Definition
something that can cause a financial loss, such as an
earthquake or tornado. Perils can also be referred to as the
accident itself. |
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Definition
| the unintentional decrease in the value of an asset due to a peril. |
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| Homogeneous exposure units |
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Definition
| similar objects of insurance that are exposed to the same group of perils. |
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| a risk that presents the chance for both loss and gain. Gambling is an example. Speculative risks are not insurable. |
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| the only insurable risks and present a potential for loss only with no possibility of gain, such as injury, illness, and death. |
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| Treatment of Risk – how people deal with risk: |
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Definition
► Avoidance – Don’t do anything - the elimination of a hazard is an example of risk avoidance
► Reduction – Minimizing the severity of a potential loss – smoke alarms, stop smoking
► Retention – Self insure - Used when losses are highly predictable and the worst possible loss is not serious.
► Transfer – Buying insurance is the best way to transfer risk
► Sharing- Each party assumes a portion of the risk receiving benefits under the system |
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Term
| Elements of Insurable Risk: |
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Definition
► Loss must be due to chance (accident) – Outside the insured’s control
► Loss must be definite and measurable – Time, place, amount, and when payable
► Loss must be predictable – Estimate the average frequency and severity
► Loss cannot be catastrophic – Must be reasonable, 1 trillion dollar policy is not reasonable
► Loss exposure to be insured must be large – Insurance company must be able to predict loss
► Loss must be randomly selected – Adverse selection |
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Definition
| The process of analyzing exposures that create risk and designing programs to handle them is called risk management. |
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| The principle of indemnity involves making an insured whole by restoring them to the same condition as before a loss. |
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nsurers must minimize adverse selection, which is defined as the tendency for poorer than average
risks to seek out insurance. For example, a person who takes 12 prescriptions is a poor risk. If an insurer cannot
compensate poor risks with better than average risks, then its loss experience will increase and its ability to pay
claims may be compromised. |
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One way insurers deal with catastrophic loss is through reinsurance, which is defined as spreading risk from one
insurer to one or more other insurers. Many insurers are able to minimize exposure to loss by reinsuring risks. |
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Definition
A condition or situation that creates or increases a chance of loss is called a hazard.
Hazard Examples: Icy roads, driving while intoxicated, improperly stored toxic waste. |
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Term
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Definition
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 |
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