Terms Definitions

Objective Risk relative variation of actual loss from expected loss.

Measureable
statistically calculated.

Subjective Risk Uncertainty based on a persons mental condition or state of mind

Chance of loss probability that an event will occur

objective probability long-run relative frequency of an event assuming an infinite number of observations and no
change in the underlying conditions
Hint:
flipping a coin.

Subjective probability individuals personal estimate of the chance of loss

Hint:
Buying a lottery ticket on your birthday

Peril Cause of loss.

Hint:
In an auto accident, the collision.

Hazard Condition that increases the chance of loss

physical hazard icy roads, defective wiring, texting

Moral hazard dishonesty or character defects

Morale hazard Carelessness or indifference to a loss because of the existences of insurance.

Legal Hazard Characteristics of the legal system or regulatory environment that increase the chance loss
Hint:
Large damage awards in liability lawsuits. 3rd party bad faith.

Pure Risk only is the possibility of loss or no loss

Hint:
earthquake

Speculative Risk one in which both profit or loss are possible

Hint:
Gambling

fundamental Risk affect the entire economy

Hint:
hurricane

Particular Risk affects only the individual

Enterprise Risk encompasses all major risks faced by a business firm.

Includes: pure, speculative, strategic, operational and financial
Personal Risk Type of Pure Risk that involves the possibility of a loss or reduction in income, extra expenses
or depletion of financial assets
Hint:
Premature death of family head. Insufficient income in retirement. Poor Health.

Property Risk Type of Pure Risk. Involves the possibility of losses associated with the destruction or theft of
property.
Hint:
physical damage to home and personal property from fire, tornado, vandalism

Direct Loss Type of Pure Risk. Financial loss that results from the physical damage, destruction or theft.
Hint:
Think a destroyed road

Indirect Loss Type of Pure Risk. Results indirectly from the occurrence of a direct physical damage or theft
loss.
Hint:
Think of a business losing profits from the destroyed road.

Liability risk Type of Pure Risk. possibility of being held liable for bodily injury or property damage to
someone else
Hint:
No Max upper limit. Liens can be placed. Large defense cost.

Loss Prevention Activities that reduce the frequency of losses. Thinks Handrails

Loss Reduction Activities to reduce the severity of losses. Think security Cameras

Definition of insurance. pooling of fortuitous losses by transfer of such risk to insurers, who agree to indemnify
insureds for such losses.

Law of Large Numbers Spreading losses incurred by the few over the entire group. This says that the more we spread it
out the loss cost per indemnification.

What is Indemnification? when the insured is restored to his or her approximate financial position prior to the occurrence
of the loss.

What are the requirements of an 1) Large Number of exposure units

insurable risk? 2) Accidental and unintentional loss
3) determinable and measurable loss.
4) No catastrophic loss.
5) Calculable chance of loss
6) economically feasible premium

What is adverse Selection? tendency of persons with a high-than-average loss to seek insurance at standard rates.

What is underwriting? Selection and classification of applicants for insurance.

Adverse Selection is controlled 1) Underwriting
by? 2) policy provisions
Hint:
careful selection. suicide clause.

Difference between Insurance and Both benefit from insurance. Someone loses in gambling.
Gambling? Gambling creates a new speculative risk.

Difference between Insurance and Hedging involves risks that are typically uninsurable.
Hedging? Hedging does not result in reduced risk.
Hedging = AIG w/ home prices / commodities.

What is Life Insurance? pays a death benefit to beneficiaries when the insured dies

What is health insurance? covers medical expenses because of sickness or injury

What is a disability plan? pays income benefits

What is property insurance? indemnifies property owners against the loss or damage of real or personal property

What is liability insurance? covers legal liability arising out of property damage or bodily injury to others

What is casualty insurance? insurance that covers what is not covered by fire, marine and life insur.

What are the two major groups of 1. Personal lines = Real estate & personal property of families + legal liability
Private Insurance? What do they 2. Commercial lines = Business firms, nonprofit and gov't agencies.
do?

What do you know about social Favors low-income groups

insurance?

What are the 5 social benefits of 1. Indemnification of loss

insurance? 2. Reduction of worry and fear.
3. Source of investment funds
4. loss prevention
5. enhancement of credit

What are the social costs of 1. cost of doing business

insurance? 2. Fraudulent and inflated claims

What is expense loading? amount needed to pay all expenses, including commissions, general administrative expenses,
state premium taxes.....