Chapter 21: Introduction to Risk Management

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

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