NC Property and Casualty State Exam Graded A+

Insurance - ANSWER-- a plan of spreading the risk of possible loss over a large number of people (Law of Large Numbers) - protects against the risk (uncertainty) of when a financial loss might occur Speculative Risk - ANSWER-- when there is a chance of gain as well as a chance of loss (ex: buying a stock, gambling) - insurance IS NOT intended to protect against this Pure Risk - ANSWER-- when there is a chance of loss only - not all pure risks are insurable Insurable Risk - ANSWER-- a risk the insurance company is willing to accept - characteristics of an insurable risk 1. Low probability of a loss occurring 2. Less than catastrophic results 3. The loss must be measurable 4. The loss must be significant 5. The loss must be accidental and unintended Law of Large Numbers - ANSWER-- makes it possible to predict future losses based upon prior experience - law states that as a large # of events are included, the difference between actual and expected results become smaller Spread of Risk - ANSWER-- involves spreading the company's policies over a broad geographical area in order to avoid large losses in the event of a catastrophic event Adverse Selection - ANSWER-- occurs when insureds with a high risk of loss attempt to purchase insurance and are successful in doing so - insurers attempt to PREVENT THIS (bad risk) - prevented by: 1. refusal to write 2. rating up 3. insurability standards *** deductibles do not prevent this Retention - ANSWER-- when liability for a loss is maintained by an individual by NOT PURCHASING INSURANCE - deductible is an example of retention