Chapter 2

Peril

CAUSE of a loss

According to the law of large numbers, how would losses be affected if the number of similar insured units increases

Predictability of losses improved

Risk

The POTENTIAL for loss

Risk avoidance

The elimination of a hazard

Speculative Risk

This type of risk cannot be insured

A hold-harmless clause is an example of risk

Transfer. (It shifts liability for loss from one party to another)

As the number of insured units increases, the number of losses _______

decreases

An insurable risk requires

that the chance of loss be calculable

A condition that increases the possibility of financial loss is called a ________

Hazard

For insurance purposes, similar objects which are exposed to the same group of perils are referred to as _______

Homogeneous exposure units

Characteristics of the Law of Large Numbers

Larger groups provide better loss predictions. The higher the exposure, the more likely the event can be PREDICTED

A business becoming incorporated is an example of risk _______

Transfer

Which of the following involves sharing an uncertain risk with another similar group?

Transfer

Purchasing insurance is an example of risk ______

Transference (Transfer)

Which of the following types of risk is insurable?

Pure

An insurer has a contractual (contract) agreement which transfers a portion of its risk exposure to another insurer. What type of contractual arrangement is this?

Reinsurance contract

How can an insurance company minimize exposure to loss?

Reinsuring risks