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Life, Health, and Variable Annuity
CH. 1 Principals of Life and Health Insurance Key Concepts
15
Insurance
Professional
10/23/2012

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Term
Speculative Risk
Definition
The chance of both loss and gain. For example gambling.
Term
Pure Risk
Definition
The chance of only loss; there is never a possibility of gain or profit. For example accident from an injury. The only insurable form of risk.
Term
Law of Large Numbers
Definition
Given a large enough pool of risks, an insurer can predict with reasonable accuracy the number of claims it will face during a given time.
Term
Elements of Insurable Risk
Definition
Loss must be due to chance. Loss must be definite and measurable. Loss must be predictable. Loss cannot be catastrophic. Loss exposures to be insured must be large. Loss exposure to be sure must be randomly selected.
Term
Hazard
Definition
Any factor that gives rise to a peril. Three types: physical, moral, and morale.
Term
Peril
Definition
The immediate specific event causing loss and giving rise to risk. For example fire or death.
Term
Risk Pooling
Definition
Also known as loss sharing. The transference of risk from an indivual to a group, each member of which shares the losses and has the promise of a future benefit.
Term
Risk Avoidance
Definition
The method of handling risk that involves avoiding it as much risk as possible.
Term
Adverse Selection
Definition
A tendency for less favorable insurance risks to seek or continue insurance to a greater extent than other risks.
Term
Physical Hazard
Definition
Individual characteristics that increase the chance of peril. For example Blindness.
Term
Moral Hazard
Definition
Tendencies that people may have that increase risk and the chance of loss. For example Drug Addiction.
Term
Morale Hazard
Definition
Individual tendencies that arise from an attitude or state of mind causing indifference to loss. For example having the habit of driving recklessly.
Term
Risk Reduction
Definition
The method of handling risk that involves attempting to lessen the possibility of loss by taking action to reduce the risk. For example installing a smoke alarm to reduce the risk of loss from fire.
Term
Risk Retention
Definition
The method of handling risk that involves accepting the risk and confronting it if and when it occurs. For example self-insurance.
Term
Risk Transference
Definition
The most effective method of handling risk that involves trasnferring the risk so that the loss is borne by another party. Insurance is the most common method of transferring risk.
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