KENTUCKY INSURANCE EXAM 2025/2026 GRADED A+
Financial risk - strictly with the potential for monetary loss. Insurance deals with financial
risks.
Nonfinancial risk - Nonfinancial risks are all the non-monetary situations that have a
potential for loss. One example of a nonfinancial risk is a blind date.
Static risk - independent of changes to the economy and are more consistent over time.
A static loss may be an unintended change in ownership due to theft, destruction of an
asset or a result of human error.
Dynamic risk - caused by a changing economy, and include changes in product price,
purchasing trends and technology. Dynamic risks typically result in gain and societal
advancement.
Fundamental risk - involve an entire population or group of people, and include risks
that everyone may be susceptible to, such as natural disasters, war or unemployment.
Because fundamental risks are not the fault of individuals, society is held to deal with
them. Most often, the government provides insurance for fundamental risks, such as
national flood insurance.
Particular risk - specific to individuals and are often managed through insurance.
Personal risk - those that jeopardize an individual's greatest asset, their earning power.
What are the four categories of personal risk? - Premature death, sickness/accident,
unemployment and dependent old age.
Property risks - Potential for loss caused by destruction or theft of property. Losses
associated with property risk include property loss and loss of income generated by a
property.
Liability risks - Potential for financial loss caused by injury to other people and damage
or destruction to others' property. The type of insurance doctors and Mac truck drivers
need. Ex: casualty insurance and Errors and Omissions coverage.
Risks due to the failure of others - Potential for financial loss caused by individuals who
agree to perform a service or follow throughout on an agreement and fail to complete
the task.
Loss - The UNINTENTIONAL decrease in values of an asset due to a peril.
Peril - The cause of the loss and the event insured against. In life and health insurance,
perils are premature death, dependency during old age, accident and sickness. In
property and casualty insurance, it's fire, wind, hail, etc.
,Exposure - Condition of being prone to loss due to a hazard or uncertain event.
Exposure unit - Economic value of the life and well being of the insured individual.
These are used as the basis for determine premium rates and usually represented in
units or dollars.
Hazard - Anything that increases the chance of loss occurring from a particular peril.
Conditions such as icy roads, driving while intoxicated, etc.
Physical hazard - Physical characteristic that raises the loss potential for particular peril.
Ex: poorly constructed roofs, uneven sidewalks, etc.
Moral hazard - Predisposition, character, habits and values of a person that increase
the chance of loss occurring. Ex: purposefully incurs loss in order to receive benefits
from the insurer.
Morale hazard - Insured careless attitude, indifference or lack of responsibility, which
increase the chance of loss occurring. Ex: it doesn't matter if I sick, because I have
health insurance, and skipping out on flu shot.
Legal hazard - Application of laws, regulations and legal court rulings that increase the
chance or amount of loss. Ex: a person who files a lawsuit without any real evidence of
infliction or damage suffered from another party.
Elements of insurable risks - - loss must occur by chance or accident
- loss is definite and measurable
- loss must be predictable
- large number of similar units (law of large numbers comes into play here)
- loss exposures must be chosen randomly (doesn't concentrate on gender, age, race,
occupation, etc.)
- loss must be significant, causing economic hardship
- loss must not be catastrophic (ex: war)
Methods of handling risk - Avoidance, retention, sharing, reduction and transfer
Avoidance - Deliberately steering clear of exposure to a risk. Ex: staying off airplane.
Retention - Person chooses not to take proactive steps to transfer, avoid or reduce the
risk. Instead, person deals with the risk when it happens. Ex: self-insurance, covering
things when they happen, when it's a smaller loss.
Sharing - When the insured and the insurance company share the cost of the risk. Ex:
deductibles
, Reduction - Actively finding ways to minimize the loss exposure to a risk. Characterized
by two methods: loss prevention and loss control. Ex: annual wellness exams and
fitness memberships paid by the employer.
Transfer - Essence of insurance. Risk is transferred from one party to another. Insurer
charges a small premium in exchange for providing benefits to the party relieved of the
risk in the event of a covered loss.
Adverse selection - Tendency for poorer than average risks to seek out insurance. Ex:
smokers
Reinsurance - Spreading risk from one insurer to one or more insurers. This is the way
insurers cooperate to prevent bankruptcy. The insurer that accepts the additional risk is
termed the reinsurer.
Ceding company/Primary insurer - The insurer that gives the risk to the reinsurer
Claim - Insured's notification to the insurer that a payment is requested for a covered
loss.
Indemnity - Insurance that compensates the beneficiaries of the policies for their actual
economic losses, up to the limiting amount of the insurance policy. "To make whole."
Beneficiaries - Named individuals or entities designated by the policy owner to receive
the policy proceeds.
Limit of liability - The tots amount the insurer will pay for an insured risk. Health
insurance, it would be considered the lifetime maximum benefit.
Lifetime maximum benefit - The company sets an amount (ex: 1 million) for which the
insurer will pay to a maximum in claims. It can also include things such as: sub limits,
termed inside limits, etc.
Inside limits - Limits placed on certain medical coverages within a policy
Premium - Amount to be charged for a certain amount of insurance coverage. The
amount charged is established by the insurer and is based on the degree of the risk
insured.
Deductible - Amount the insured must pay before the insurer will pay for the claim.
Coinsurance - Cost-sharing mechanism between the insurer and the insured, and
applies only to medical insurance. Typical is 80/20. So the patient pays 20%, and the
company pays 80%.
Financial risk - strictly with the potential for monetary loss. Insurance deals with financial
risks.
Nonfinancial risk - Nonfinancial risks are all the non-monetary situations that have a
potential for loss. One example of a nonfinancial risk is a blind date.
Static risk - independent of changes to the economy and are more consistent over time.
A static loss may be an unintended change in ownership due to theft, destruction of an
asset or a result of human error.
Dynamic risk - caused by a changing economy, and include changes in product price,
purchasing trends and technology. Dynamic risks typically result in gain and societal
advancement.
Fundamental risk - involve an entire population or group of people, and include risks
that everyone may be susceptible to, such as natural disasters, war or unemployment.
Because fundamental risks are not the fault of individuals, society is held to deal with
them. Most often, the government provides insurance for fundamental risks, such as
national flood insurance.
Particular risk - specific to individuals and are often managed through insurance.
Personal risk - those that jeopardize an individual's greatest asset, their earning power.
What are the four categories of personal risk? - Premature death, sickness/accident,
unemployment and dependent old age.
Property risks - Potential for loss caused by destruction or theft of property. Losses
associated with property risk include property loss and loss of income generated by a
property.
Liability risks - Potential for financial loss caused by injury to other people and damage
or destruction to others' property. The type of insurance doctors and Mac truck drivers
need. Ex: casualty insurance and Errors and Omissions coverage.
Risks due to the failure of others - Potential for financial loss caused by individuals who
agree to perform a service or follow throughout on an agreement and fail to complete
the task.
Loss - The UNINTENTIONAL decrease in values of an asset due to a peril.
Peril - The cause of the loss and the event insured against. In life and health insurance,
perils are premature death, dependency during old age, accident and sickness. In
property and casualty insurance, it's fire, wind, hail, etc.
,Exposure - Condition of being prone to loss due to a hazard or uncertain event.
Exposure unit - Economic value of the life and well being of the insured individual.
These are used as the basis for determine premium rates and usually represented in
units or dollars.
Hazard - Anything that increases the chance of loss occurring from a particular peril.
Conditions such as icy roads, driving while intoxicated, etc.
Physical hazard - Physical characteristic that raises the loss potential for particular peril.
Ex: poorly constructed roofs, uneven sidewalks, etc.
Moral hazard - Predisposition, character, habits and values of a person that increase
the chance of loss occurring. Ex: purposefully incurs loss in order to receive benefits
from the insurer.
Morale hazard - Insured careless attitude, indifference or lack of responsibility, which
increase the chance of loss occurring. Ex: it doesn't matter if I sick, because I have
health insurance, and skipping out on flu shot.
Legal hazard - Application of laws, regulations and legal court rulings that increase the
chance or amount of loss. Ex: a person who files a lawsuit without any real evidence of
infliction or damage suffered from another party.
Elements of insurable risks - - loss must occur by chance or accident
- loss is definite and measurable
- loss must be predictable
- large number of similar units (law of large numbers comes into play here)
- loss exposures must be chosen randomly (doesn't concentrate on gender, age, race,
occupation, etc.)
- loss must be significant, causing economic hardship
- loss must not be catastrophic (ex: war)
Methods of handling risk - Avoidance, retention, sharing, reduction and transfer
Avoidance - Deliberately steering clear of exposure to a risk. Ex: staying off airplane.
Retention - Person chooses not to take proactive steps to transfer, avoid or reduce the
risk. Instead, person deals with the risk when it happens. Ex: self-insurance, covering
things when they happen, when it's a smaller loss.
Sharing - When the insured and the insurance company share the cost of the risk. Ex:
deductibles
, Reduction - Actively finding ways to minimize the loss exposure to a risk. Characterized
by two methods: loss prevention and loss control. Ex: annual wellness exams and
fitness memberships paid by the employer.
Transfer - Essence of insurance. Risk is transferred from one party to another. Insurer
charges a small premium in exchange for providing benefits to the party relieved of the
risk in the event of a covered loss.
Adverse selection - Tendency for poorer than average risks to seek out insurance. Ex:
smokers
Reinsurance - Spreading risk from one insurer to one or more insurers. This is the way
insurers cooperate to prevent bankruptcy. The insurer that accepts the additional risk is
termed the reinsurer.
Ceding company/Primary insurer - The insurer that gives the risk to the reinsurer
Claim - Insured's notification to the insurer that a payment is requested for a covered
loss.
Indemnity - Insurance that compensates the beneficiaries of the policies for their actual
economic losses, up to the limiting amount of the insurance policy. "To make whole."
Beneficiaries - Named individuals or entities designated by the policy owner to receive
the policy proceeds.
Limit of liability - The tots amount the insurer will pay for an insured risk. Health
insurance, it would be considered the lifetime maximum benefit.
Lifetime maximum benefit - The company sets an amount (ex: 1 million) for which the
insurer will pay to a maximum in claims. It can also include things such as: sub limits,
termed inside limits, etc.
Inside limits - Limits placed on certain medical coverages within a policy
Premium - Amount to be charged for a certain amount of insurance coverage. The
amount charged is established by the insurer and is based on the degree of the risk
insured.
Deductible - Amount the insured must pay before the insurer will pay for the claim.
Coinsurance - Cost-sharing mechanism between the insurer and the insured, and
applies only to medical insurance. Typical is 80/20. So the patient pays 20%, and the
company pays 80%.
