Chapter 2 Nature of Insurance

Which of these statements regarding insurance is false?

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

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

Homogeneous Exposure Units

Risk Pooling

Loss sharing, spreads risk by sharing possibility of loss over a large number of people. Transfer risk from an individual to a group

Which of the following is NOT an example of risk retention?

Not doing a business deal after deciding it would be too risky-Not doing a business deal after deciding it would be too risky is an example of risk avoidance, not retention Retention- self insure, used when losses are highly predictable and the worst possible loss is not serious

Which of the following can be defined as a cause of a loss?

Peril- Defined as the cause of the loss

The Law of Large numbers enables an insurer to

Predict losses

What type of risk involves the potential for loss with no possibility for gain?

Pure Risk

_________ are the only insurable risks and present a potential for loss only with no possibility of gain, such as injury, illness, and death.

Pure 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 term describes the elimination of a hazard?

Risk Avoidance

What is the process of analyzing exposures that create risk and design programs to handle them?

Risk Management

ABC Company is attempting to minimize the severity of potential losses within its company. The company is engaged in risk

Risk Reduction-Risk reduction can reduce the chance that a particular loss will occur, or it can reduce the amount of a potential loss if it occurs (smoke alarms , stop smoking)

A business becoming incorporated is an example of risk

Risk Transfer

What kind of risk cannot be insured?

Speculative risk- presents chance for both loss and gain, for example gambling, cannot be insured

An insurable risk requires

that the chance of loss be calculable-loss must be calculable, predictable, due to chance(accident), definite and measurable