LOMA 280 - INTRODUCTION TO RISK AND
INSURANCE
Objectives - Answers - After studying this chapter, you should be able to
- Distinguish between speculative risk and pure risk
- Describe four methods used to manage financial risk
- Identify the five characteristics of insurable risks
- Define antiselection and give examples of two factors that can increase or decrease
the likelihood that an individual will suffer a loss
- Identify four risk classes for proposed insureds
- Define insurable interest and determine in a given situation whether the insurable
interest requirement is met
Speculative risk - Answers - Speculative risk involves three possible outcomes: loss,
gain, or no change. For example, when you purchase shares of stock, you are
speculating that the value of the stock will rise and that you will earn a profit on your
investment. At the same time, you know that the value of the stock could fall and you
could lose some or all of the money you invested. Finally, you know that the value of the
stock could remain the same—you might not lose money, but you might not make a
profit.
Pure risk - Answers - Pure risk involves no possibility of gain; either a loss occurs or no
loss occurs. An example of pure risk is the possibility that you may become disabled. If
you do become disabled, you are likely to experience a financial loss due to lost income
and the costs incurred for your medical care. If, on the other hand, you never become
disabled, then you will incur no loss from that risk. This possibility of financial loss
without the possibility of gain—pure risk—is the only kind of risk that can be insured.
The purpose of insurance is to compensate for financial loss, not to provide an
opportunity for financial gain.
Risk management - Answers - Risk management is the process in which individuals and
businesses identify and assess the risks they face and determine how to deal with their
exposure to these risks. Four general methods can be used to manage risk: (1) avoiding
the risk, (2) controlling the risk, (3) transferring the risk, and (4) accepting the risk.
accepting a risk can be an unconscious decision - Answers - Any risk you face that is
not managed by other methods is always accepted, whether you are aware of it or not.
For example, for a number of years, many people and businesses were unaware that
hackers could gain access to the data on their computers. Because they were unaware
of this risk and therefore took no steps to manage it, they often suffered significant
financial losses if their information systems were hacked. People and businesses can
prevent the inadvertent acceptance of poten- tially disastrous risks through risk
,management, which requires identifying all sig- nificant potential risks and then
determining the methods to use to manage them.
Insurance - Answers - In simple terms, insurance is a method in which an individual or
entity transfers to another party the risk of financial loss from events such as accident,
illness, prop- erty damage, or death. A company that accepts risk and makes a promise
to pay a policy benefit if a covered loss occurs is an insurer or an insurance company.
A policy benefit - Answers - A policy benefit is a specific amount of money the insurer
agrees to pay under an insurance policy when a covered loss occurs.
An insurance policy - Answers - An insurance policy, also known as a policy or
insurance contract, is a written document that contains the terms of the agreement
between the insurer and the owner of the policy
The premium is - Answers - The premium is the specified amount of money an insurer
charges in exchange for agreeing to pay a policy benefit when a covered loss occurs.
Life and health insurance companies - Answers - Life and health insurance companies
issue and sell products that insure against the financial losses that result from personal
risks.
Personal risk is - Answers - Personal risk is the risk of economic loss associated with
death, poor health, injury, and outliving one's economic resources
Property damage risk is - Answers - Property damage risk is the risk of economic loss
resulting from damage to or loss of a person's property
Liability risk is - Answers - Liability risk is the risk of economic loss that results when a
person is held legally responsible for harming others or their property. For example, you
can be held liable for damage you cause to another person's vehicle in an automobile
accident. A business can be held liable for injury to an individual who slips and falls
while walking through the building.
Liability insurance - Answers - Liability insurance provides a benefit payable on behalf of
a covered party who is legally respon- sible for unintentionally harming others or their
property.
property/casualty (P&C) insurance companies - Answers - Property insurance and
liability insurance (also referred to as property and casualty insurance) are commonly
marketed together in one policy. In the United States, insurers that issue and sell
insurance policies to provide financial security from prop- erty damage risk and liability
risk are known as property/casualty (P&C) insurance companies or property and liability
insurers.
, The applicant is - Answers - The applicant is the person or business that applies for an
insurance policy.
A third-party policy is - Answers - A third-party policy is a policy purchased by one
person or business on the life of another person
The beneficiary is - Answers - The beneficiary is the person or party the policyowner
names to receive the life insurance policy benefit.
a claim - Answers - A request for payment under the terms of an insurance policy is
called a claim.
Term life insurance - Answers - Term life insurance provides a policy benefit only if the
insured dies during the period specified in the policy.
Life insurance: - Answers - Life insurance: Insurance that provides protection against
the economic loss caused by the death of the person whose life is insured.
Cash value life insurance - Answers - Cash value life insurance, also known as
permanent life insurance, provides life insurance coverage throughout the insured's
lifetime and also provides a savings element.
As premiums are paid for these policies, an accumulated savings amount—known as
the policy's cash value—gradually builds. A policy's cash value is a valuable asset that
the policyowner can use in a number of ways.
Endowment insurance - Answers - • Endowment insurance provides a policy benefit that
is paid either when the insured dies or on a stated date if the insured is still alive on that
date.
Annuity contract: - Answers - A contract under which an insurer promises to make a
series of periodic payments to a named individual in exchange for a premium or series
of premiums.
Health insurance: - Answers - Insurance that provides protection against the
risk of financial loss resulting from illness, injury, or disability.
An individual insurance policy is - Answers - is a policy that insures the life or health of a
named person. Some individual policies also insure the named person's immediate
family or a second named person.
A group insurance policy is - Answers - • a policy that insures the lives or health of a
specific group of people, such as a group of employees.
You may wonder how an insurance company can afford to be financially responsible for
the economic risks of its insureds. Insurers use a concept known as - Answers - risk
pooling
INSURANCE
Objectives - Answers - After studying this chapter, you should be able to
- Distinguish between speculative risk and pure risk
- Describe four methods used to manage financial risk
- Identify the five characteristics of insurable risks
- Define antiselection and give examples of two factors that can increase or decrease
the likelihood that an individual will suffer a loss
- Identify four risk classes for proposed insureds
- Define insurable interest and determine in a given situation whether the insurable
interest requirement is met
Speculative risk - Answers - Speculative risk involves three possible outcomes: loss,
gain, or no change. For example, when you purchase shares of stock, you are
speculating that the value of the stock will rise and that you will earn a profit on your
investment. At the same time, you know that the value of the stock could fall and you
could lose some or all of the money you invested. Finally, you know that the value of the
stock could remain the same—you might not lose money, but you might not make a
profit.
Pure risk - Answers - Pure risk involves no possibility of gain; either a loss occurs or no
loss occurs. An example of pure risk is the possibility that you may become disabled. If
you do become disabled, you are likely to experience a financial loss due to lost income
and the costs incurred for your medical care. If, on the other hand, you never become
disabled, then you will incur no loss from that risk. This possibility of financial loss
without the possibility of gain—pure risk—is the only kind of risk that can be insured.
The purpose of insurance is to compensate for financial loss, not to provide an
opportunity for financial gain.
Risk management - Answers - Risk management is the process in which individuals and
businesses identify and assess the risks they face and determine how to deal with their
exposure to these risks. Four general methods can be used to manage risk: (1) avoiding
the risk, (2) controlling the risk, (3) transferring the risk, and (4) accepting the risk.
accepting a risk can be an unconscious decision - Answers - Any risk you face that is
not managed by other methods is always accepted, whether you are aware of it or not.
For example, for a number of years, many people and businesses were unaware that
hackers could gain access to the data on their computers. Because they were unaware
of this risk and therefore took no steps to manage it, they often suffered significant
financial losses if their information systems were hacked. People and businesses can
prevent the inadvertent acceptance of poten- tially disastrous risks through risk
,management, which requires identifying all sig- nificant potential risks and then
determining the methods to use to manage them.
Insurance - Answers - In simple terms, insurance is a method in which an individual or
entity transfers to another party the risk of financial loss from events such as accident,
illness, prop- erty damage, or death. A company that accepts risk and makes a promise
to pay a policy benefit if a covered loss occurs is an insurer or an insurance company.
A policy benefit - Answers - A policy benefit is a specific amount of money the insurer
agrees to pay under an insurance policy when a covered loss occurs.
An insurance policy - Answers - An insurance policy, also known as a policy or
insurance contract, is a written document that contains the terms of the agreement
between the insurer and the owner of the policy
The premium is - Answers - The premium is the specified amount of money an insurer
charges in exchange for agreeing to pay a policy benefit when a covered loss occurs.
Life and health insurance companies - Answers - Life and health insurance companies
issue and sell products that insure against the financial losses that result from personal
risks.
Personal risk is - Answers - Personal risk is the risk of economic loss associated with
death, poor health, injury, and outliving one's economic resources
Property damage risk is - Answers - Property damage risk is the risk of economic loss
resulting from damage to or loss of a person's property
Liability risk is - Answers - Liability risk is the risk of economic loss that results when a
person is held legally responsible for harming others or their property. For example, you
can be held liable for damage you cause to another person's vehicle in an automobile
accident. A business can be held liable for injury to an individual who slips and falls
while walking through the building.
Liability insurance - Answers - Liability insurance provides a benefit payable on behalf of
a covered party who is legally respon- sible for unintentionally harming others or their
property.
property/casualty (P&C) insurance companies - Answers - Property insurance and
liability insurance (also referred to as property and casualty insurance) are commonly
marketed together in one policy. In the United States, insurers that issue and sell
insurance policies to provide financial security from prop- erty damage risk and liability
risk are known as property/casualty (P&C) insurance companies or property and liability
insurers.
, The applicant is - Answers - The applicant is the person or business that applies for an
insurance policy.
A third-party policy is - Answers - A third-party policy is a policy purchased by one
person or business on the life of another person
The beneficiary is - Answers - The beneficiary is the person or party the policyowner
names to receive the life insurance policy benefit.
a claim - Answers - A request for payment under the terms of an insurance policy is
called a claim.
Term life insurance - Answers - Term life insurance provides a policy benefit only if the
insured dies during the period specified in the policy.
Life insurance: - Answers - Life insurance: Insurance that provides protection against
the economic loss caused by the death of the person whose life is insured.
Cash value life insurance - Answers - Cash value life insurance, also known as
permanent life insurance, provides life insurance coverage throughout the insured's
lifetime and also provides a savings element.
As premiums are paid for these policies, an accumulated savings amount—known as
the policy's cash value—gradually builds. A policy's cash value is a valuable asset that
the policyowner can use in a number of ways.
Endowment insurance - Answers - • Endowment insurance provides a policy benefit that
is paid either when the insured dies or on a stated date if the insured is still alive on that
date.
Annuity contract: - Answers - A contract under which an insurer promises to make a
series of periodic payments to a named individual in exchange for a premium or series
of premiums.
Health insurance: - Answers - Insurance that provides protection against the
risk of financial loss resulting from illness, injury, or disability.
An individual insurance policy is - Answers - is a policy that insures the life or health of a
named person. Some individual policies also insure the named person's immediate
family or a second named person.
A group insurance policy is - Answers - • a policy that insures the lives or health of a
specific group of people, such as a group of employees.
You may wonder how an insurance company can afford to be financially responsible for
the economic risks of its insureds. Insurers use a concept known as - Answers - risk
pooling
