Chapter 21: Introduction to Risk Management

Pure Risk
A chance of loss with no chance for gain
Insurable Risk
A pure risk that is faced by a large number of people and for which the amount of the loss can be predicted
Insurance
A method of spreading individual risk among a large group of people to make losses more affordable for all
Insurable Interest
Any financial interest in life or property such that, if the life or property were lost or harmed, the insured would suffer financially
Personal Risk
The chance of loss involving your income and standard of living
Property Risk
The chance of loss or harm to personal or real property
Liability Risk
The chance of loss that may occur when your errors or actions result in injuries to others or damages to their property
Economic Risk
May result in gain or loss because of changing economic conditions
Speculative Risk
May result in either gain or loss; not accidental or random
Hedging
Making an investment to help offset against loss
Actuarial Table
A table of premium rates based on ages and life expectancies
Actuary
A specialist in insurance calculations and statistics
Beneficiary
Sums of money to be paid for specific types of losses under the terms of an insurance policy
Cash Value
The amount of money payable to a policyholder upon discontinuation of a life insurance policy
Claim
A policyholder’s request for reimbursement for a loss under the terms of an insurance policy
Coverage
Protection provided by the terms of an insurance policy
Deductible
The specified amount of a loss that the policyholder pays before the insurer is obligated to pay anything; the insurance company pays only the amount in excess of the deductible
Exclusions
Specified losses that the insurance policy does not cover
Face Amount
The amount stated in a life insurance policy to be paid upon death
Grace Period
The additional time after the premium due date that the insurer allows the policyholder to make the payment without penalty (usually 30 days)
Hazard
A condition that creates or increases the likelihood of some loss; for example, defective house wiring can increase the likelihood of a fire
Insurance Agent
A professional insurance salesperson who acts for the insurer in negotiating, servicing, or writing an insurance policy
Insured
The person or company protected against loss (not always the owner of the policy)
Insurer
The insurance company who provides insurance coverage for a policyholder
Loss
An unexpected reduction in value of the insured’s property caused by a covered peril; the basis of a valid claim for reimbursement under the terms of an insurance policy
Peril
An event whose occurrence can cause a loss; people buy policies for protection against such perils as a fire, storm, explosion, accident, or robbery
Probability
The mathematics of chance or statistical likelihood that something will happen
Proof of Loss
The written verification of the amount of a loss that must be provided by the insured to the insurer before a claim can be settled
Standard Policy
The contract form that has been adopted by many insurers, approved by state insurance departments, or prescribed by law (modifications are made to suit the needs of an individual)
Unearned premium
The portion of a paid premium that the insurer has not yet earned because the policy term has not ended; the unearned premium is returned to the policyholder when a policy is cancelled
Indemnification
The process of putting the policyholder back in the same financial condition he or she was in before the loss occurred
Risk Management
An organized strategy for controlling financial loss from pure risks
Risk Shifting/Risk Transfer
Occurs when you buy insurance to cover financial losses caused by damaging events, such as fire, theft, injury, or death
Risk Avoidance
Lowers the chance for loss by not engaging in the activity that could result in the loss
Risk Reduction
Lowers the chance of loss by taking measures to lessen the frequency or severity of losses that may occur
Risk Assumption
The process of accepting the consequences of risk