Risk Management and Insurance test 1

Res Ipsa Loquitur

"the thing speaks for itself"- the accident would not have occurred if the defendant had not been careless

Pooling Implies

(1) the sharing of losses by the entire group, (2) prediction of future losses with some accuracy based on the law of large numbers

Avoidance

a certain loss exposure is never acquired, or an existing loss exposure is abandoned

Hazard

a condition that creates or increases the chance of loss

Direct Loss

a financial loss that results from the physical damage, destruction, or theft of the property

Indirect or Consequential Loss

a financial loss that results indirectly from the occurrence of a direct physical damage or theft loss

Principle of Utmost Good Faith

a higher degree of honesty is imposed on both parties to an insurance contract than is imposed on parties to other contracts

Tort

a legal wrong for which the law allows a remedy in the form of money damages

Fortuitous Loss

a loss that is unforeseen and unexpected and occurs as a result of chance (accidental)

Physical Hazard

a physical condition that increases the chance of loss (icy roads, defective wiring)

Risk Management

a process that identifies loss exposures faced by an organization and selects the most appropriate techniques for treating such exposures

Risk Transfer

a pure risk is transferred from the insured to the insurer, who typically is in a stronger financial position to pay the loss

Noninsurance Transfers

a risk may be transfered to another party through contracts, hedging, or incorporation

Particular Risk

a risk that affects only individuals and not the entire community (car thefts, bank robberies, fires)

Fundamental Risk

a risk that affects the entire economy or large numbers of persons or groups within the economy (rapid inflation, war, natural disasters)

Speculative Risk

a situation in which either profit or loss is possible, not insurable

Pure Risk

a situation in which there are only the possibilities of loss or no loss, insurance is available for these risks (law of large numbers can be applied more easily

Legal Wrong

a violation of a person's legal rights, or a failure to perform a legal duty owed to a certain person or to society as a whole

Loss Reduction

activities to reduce the severity of losses

Loss Prevention

aims at reducing the probability of loss so that the frequency of losses is reduced

Retention

an individual or business firm retains all or part of a given risk

Loss Exposure

any situation or circumstance in which a loss is possible, regardless of whether a loss occurs

Punitive Damages

awards designed to punish people and organizations so that others are deterred from committing the same wrongful act

Compensatory Damages

awards that compensate injured victims for the losses actually incurred

Morale Hazard

carelessness or indifference to a loss because of the existence of insurance (leaving car keys in unlocked car)

Legal Wrongs Include:

crime, breach of contract, and a tort

Moral Hazard

dishonesty or character defects in an individual that increase the frequency or severity of loss (faking accident)

Post-Loss Objectives

ensure survival of the firm, continue operations, stabilize earnings, maintain growth

Risk Management Process

identify potential losses, evaluate potential losses, select appropriate risk management technique, implement and monitor risk man. program

Comparative Negligence

if both the plaintiff and defendant contribute to the plaintiffs injury, the financial burden of the injury is shared by both parties according to their respective degrees of fault

Contributory Negligence

if the injured person's conduct falls below the standard of care required for his or her protection, and such conduct contributed to the injury, the injured person cannot collect damages

Coinsurance Clause

in a property insurance contract encourages the insured to insure the property to a stated percentage of its insurable value

Principle of Indemnity

insurer agrees to pay no more than the actual amount of the loss

Concealment

intentional failure to the applicant for insurance to reveal a material fact to the insurer

Torts fall into 3 categories:

intentional, strict liability, and negligence

Liability Risks

involve the possibility of being held liable for bodily injury or property damage to someone else

Definitions

key words or phrases that have quotation marks around them or are in blodface

6 Requirements for Insurable Risk

large number of exposures, accidental, measurable, not catastrophic, calculable, and premium must be economically feasible

Strict Liability

liability is imposed regardless of negligence or fault

Private Insurance includes:

life and health insurance and property and liability insurance

4 Types of Hazard:

physical, moral, morale, legal

Pre-Loss Objectives

prepare for potential losses in the most economical way, reduce anxiety, and meet any legal obligation

Types of Insurance

private and government

Legal Hazard

refers to characteristics of the legal system or regulatory environment that increase the frequency of severity of losses (large damage awards in liability lawsuits)

Personal Risks

risks that directly affect an individual

Joint and Several Liability Rule

several people may be responsible for the injury, but a defendant who is only slightly responsible may be required to pay the full amount of damages

Government Insurance Includes:

social insurance

Declarations

statements that provide information about the particular property or activity to be insured

Law of Large Numbers

states that as the number of exposure units increases, the more closely the actual loss experience will approach the expected loss experience

Subrogation

substitution of the insurer in place of the insured for the purpose of claiming indemnity from a third person for a loss covered by insurance

Insuring Agreement

summarizes the major promises of the insurer

Peril

the cause of loss (house burns down, fire is the...)

Collateral Source Rule

the defendant cannot introduce any evidence that shows the injured party has received compensation from other collateral sources.

Indemnification

the insured is restored to his approximate financial position prior to the occurrence of the loss

Insurance

the pooling of fortuitous losses by transfer of such risks to insurers, who agree to indemnify insureds for such losses, to provide other pecuniary benefits on their occurence, or to render services connected with the risk

Chance of Loss

the probability that an event will occur

Objective Risk (degree of risk)

the relative variation of actual loss from expected loss, declines as the number of exposures increases

Property Risks

the risk of having property damaged or lost from numerous causes

Pooling

the spreading of losses incurred by the few over the entire group

Adverse Selection

the tendency of persons with a higher than average chance of loss to seek insurance at standard (average) rates, which if not controlled by underwriting, results in higher than expected loss levels

Subjective Risk

uncertainty based on a person's mental condition or state of mind

Risk

uncertainty concerning the occurrence of a loss

Imputed Negligence

under certain conditions, the negligence of one person can be attributed to another (employer-employee)

Objective

uses data

Subjective

when you use your own opinion