Life Insurance Chapter 2

Speculative risk

is a type of risk that involves the chance of both loss and gain; it is not insurable

Hazard

is any factors that gives rise to a peril

Risk retention

is being aware of the risks involved and raking reactions for financial protection. You decide that public transportation cannot get you everywhere you want to go when you want go there. Now you must decide what limits to put on your financial responsibility by choosing your deductible.

Principle of indemnification

is designed to "restore: the insured to the same financial position that he or she was in prior to the loss occurrence

Morale Hazard

is hazard arising from indifference to loss because of the existence of insurance. used to describe an insured person's attitude about his or her belongings.

Special or open peril

insurance policies do not name the perils they cover but instead begin by saying they cover all direct causes of loss. These policies then list any perils which are excluded from coverage.

Principle of indemnity

Accident, health, property, and casualty insurance contracts are all contracts of indemnity. Their purpose if to make the insured "whole" agin financially; to reimburse the loss while not making the insured better off than they were prior to the loss.

Law of large numbers

is a basic principle of insurance that the larger the number of individual risks combined into a group, the more certainty there is in predicting the degree or amount of loss that will be incurred in any given period

Risk pooling

also 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.

Loss Exposure

any situation that presents the possibility of a loss is known as a loss exposure

Substandard risks

are considered to be a poor risk for the insurance company and have a higher potential for loss. Substandard risks may be insured with an increased premium, a lower benefit, or could be declined altogether

Preferred risks

are considered to be great for the insurance company and have a lower potential for loss. Preferred risks may be offered a lower premium for the transfer of their risk

Standard risks

are considered to have an average potential for loss. Standard risks are typically insured with a predetermined standard premium.

Adverse selection

is selection "against the company." Tendency of less favorable insurance risks to seek or continue insurance to a greater extent than others. Also, tendency of policy owners to take advantage of favorable options in insurance contracts.

Reinsurance

is the acceptance by one or more insurers, called reinsurers, of a portion of the risk underwritten by another insurer who has contracted for the entire coverage.

Risk transfer

is the act of shifting the responsibility of risk to another in the form of an insurance contract. Through the insurance contract, the burden of carrying the risk and indemnifying the financial loss is transferred from the individual to the insurance company.

Moral hazard

is the effect of personal reputation, character, associates, personal living habits, financial responsibility, and environment, as distinguished from physical health, upon an individual's general insurability

Peril

is the immediate specific event causing loss and giving rise to risk

Risk

is the uncertainty regarding loss; the probability of loss occurring for an insured or prospect

Pure risk

is type of risk that involves the chance of loss only; there is no opportunity for gain; insurable

Risk avoidance

occurs when individuals evade risk entirely. It is the act of not doing something that could possible cause a loss or the inactivity of participation in an event that may potentially cause a loss situation.

Risk reduction

takes place when the chances of loss are lessened. Changing one's lifestyle to minimize a known risk is an example of risk reduction. You decide you cannot stay in the house all day, ever day, so avoiding the risk of an auto accident is not possible.