Chapter 2 - Nature of Insurance, Risk, Perils and Hazards

what are the elements of insurable risk?

-loss must be due to chance - causeless, outside of the insured's control -loss must be definite and measurable - time, place, amount, and when payable -loss must be predictable - statistically able to 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 - ideally, common enough that the insurer can pool many homogenous, or similar, exposure units (law of large numbers) -loss must be randomly selected - fair proportion of good and poor risks (adverse selection)

a hazard can be described as -the potential for loss -the tendency for poorer than average risk to seek out insurance -a condition that may increase the likelihood of a loss occurring -a risk that has the potential for both a loss and gain

a condition that may increase the likelihood of a loss occurring

people with higher loss exposure have the tendency to purchase insurance more often than those at average risk. this is called -risk retention -preexisting conditions -law of large numbers -adverse selection

adverse selection

which of the following is NOT a type of hazard? -physical -moral -morale -financial

financial

which of the following is considered to be an event or condition that increases the probability of an insured's loss? -risk -hazard -indemnity -peril

hazard

which of the following is defined as a condition or situation that creates or increases a chance of a loss? -hazard -loss -peril -risk

hazard

which of the following refers to a condition that may increase the chance of a loss? -adverse selection -hazard -risk -peril

hazard

moral hazard is described as the -increase chance of loss because of an insured's recklessness -increased ability to predict loss because of a higher exposure to loss -increased risk of adverse selection -increased chance of a loss because of an insured's dishonest tendencies

increased chance of loss because of an insured's dishonest tendencies

how do insurers predict the increase of indie risks? -law of large numbers -US Census -average mortality incidents -experience of morbidity

law of large numbers

which of the following best describes the statement "the more times an event is repeated, the more predictable the outcome becomes"? -law of large numbers -adverse selection -average variance -speculative retention

law of large numbers

all of the following are examples of pure risk EXCEPT -losing money at a casino -injured while playing football -falling at a casino and breaking a hip -jewelry stolen during home robbery

losing money at a casino

which of the following is defined as the unintentional decrease in the value of an asset due to a peril? -hazard -loss -peril -risk

loss

which of the following is considered to be any situation that has the potential for loss? -law of large numbers -adverse selection -loss exposure -risk transfer

loss exposure

Which of the following is NOT an element of an insurable risk? -loss must be due to chance -loss frequency must be predictable -loss must be measurable -loss must be catastrophic

loss must be catastrophic

which of the following describes the increase in the probability of a loss due to an insured's dishonest tendencies? -morale hazard -physical hazard -moral hazard -speculative hazard

moral hazard

the cause of a loss is referred to as a(n) -hazard -adversity -peril -risk

peril

which of the following is an immediate, specific event which causes loss, such as an earthquake or tornado? -hazard -loss -peril -risk

peril

restoring an insured to the same condition as before a loss is known as -law of large numbers -fiduciary retention -adverse selection -principle of indemnity

principle of indemnity

all of the following circumstances must be met for loss retention to be an effective risk management technique, EXCEPT -loss cannot be catastrophic -probability of loss is unknown -highly predictable losses -loss must be measurable

probability of loss is unknown

which of the following is NOT considered to be a definition of the term "loss" -probability that an event will occur -an insurable event that takes place which results in a payment made by the insurance company -unintentional decrease in the value of an asset due to a peril -the amount an insurance company must pay because of an insurable event

probability that an event will occur

a situation in which there is ONLY a chance of loss or no loss is a -pure risk -particular risk -speculative risk -fundamental risk

pure risk

which of these statements correctly describes risk? -pure risk is the only insurable risk -speculative risk is the only insurable risk -an example of pure risk would be a legal wager -pure and speculative risks are both insurable

pure risk is the only insurable risk

which of the following is the potential for a loss? -hazard -loss -peril -risk

risk

an individual who removes the risk of losing money in the stock market by never purchasing stocks is said to be engaging in -risk reduction -risk transference -risk avoidance -risk retention

risk avoidance

which of the following would NOT be accomplished with the purchase of an insurance policy? -greater peace of mind -risk is eliminated -payments made for covered losses -uncertainty is reduced

risk is eliminated

what is homogenous exposure unit

similar objects of insurance that are exposed to the same group of perils

Which type of risk is gambling? -pure risk -risk transfer -risk pooling -speculative risk

speculative risk

which of the following is a situation where there is a possibility of either a loss or a gain? -hazard -pure risk -speculative risk -peril

speculative risk

which of the following is NOT considered a definition of risk? -the potential for loss -the cause of a loss -exposure to danger -uncertainty

the cause of a loss

An insurer having a large number of similar exposure units is considered important because -the insurer can decrease its reserves -the greater the number insured, the more accurately the insurer can predict losses and set appropriate premiums -its financial rating will improve -the greater the number insured, the more premiums it collects

the greater the number insured, the more accurately the insurer can predict losses and set appropriate premiums

what is risk management?

the process of analyzing exposure that create risk and designing programs to handle them

insurance represents the process of risk -selection -avoidance -transference -assumption

transference