CHAPTER 1 /RISK IN OUR SOCIETY
KEY CONCEPTS AND TERMS
Fundamental risk: A fundamental risk is a risk that affects the entire economy or large numbers of persons or groups within the economy.
Hazard: A hazard is a condition that creates or increase the chance of loss.
Law of large number: As the number of exposure units increase, the more closely the actual loss experience will approach the expected loss experience.
Liability risks: you can be held legally liable if you do something that results in bodily injury or property damage to someone else.
Moral hazard: Moral hazard is dishonesty or character defects in an individual that increase the frequency or severity of loss.
Morale hazard: Morale hazard is carelessness or indifference to a loss because of the existe
nce of insurance.
Physical hazard: A physical hazard is a physical condition that increase the chance of loss.
Premature death: Premature death is defined as the death of a household head with unfulfilled financial obligations.
Pure risk: Pure risk is defined as a situation in which there are only the possibilities of loss or no loss.
Speculative risk: Speculative risk is defined as a situation in which either profit or loss is possible.deductible
REVIEW QUESTIONS
1. How does objective risk differ from subjective risk?
Objective risk is defined as the relative variation of actual loss from expected loss. Objectiv
e risk declines as the number of exposures increases. Objective risk can be measured.
Subjective risk is defined as uncertainty based on a person’s mental condition or state of mind. The impact of subjective risk varies depending on the individual. High subjective risk often results in conservative and prudent behavior, while low subjective risk may result in less conservative behavior.
2. Define peril, hazard, physical hazard, moral hazard, morale hazard, and legal hazard.
Peril: peril is defined as the cause of loss.
Physical hazard: A physical hazard is a physical condition that increase the chance of loss.
Moral hazard: Moral hazard is dishonesty or character defects in an individual that increase the frequency or severity of loss.
Morale hazard: Morale hazard is carelessness or indifference to a loss because of the existence of insurance.
Legal hazard: Legal hazard refers to characteristics of the legal system or regulatory environment that increase the frequency or severity of losses.
3. Explain the difference between pure and speculative risk and between fundamental and particular risk.
pure and speculative risk:
First, private insurers generally insure only pure risk. Second, the law of large numbers can be applied more easily to pure risk than to speculative risk. Finally, society may benefit from a speculative risk even though a loss occurs, but it is harmed if a pure risk is present and a loss occurs.
fundamental and particular risk:
Government assistance may be necessary to insure a fundamental risk.
4. Identify the major types of pure risk that are associated with great financial insecurity. (P 5)
The major types of pure risk that can create great financial insecurity include Personal risks, property risks, and liability risks.
Personal risks are risks that directly affect an individual.
 
5. Describe briefly the five major methods of handling risk. Give example of each method.(P 9)
APPLICATION QUESTIONS
Several methods are available for handling risk. However, certain techniques are more appropriate than others in a given situation.
a. (1)  Should retention be used in those situations where both loss frequency and loss severity are high? Explain your answer. (P 11)
(2) Explain why loss control is a highly desirable method for handling risk.(P 10)
b. Explain why chance of loss and risk are not the same thing.(P 3)
CHAPTER 2 / INSURANCE AND RISK
KEY CONCEPTS AND TERMS
Adverse selection: Adverse selection is the tendency of persons with a higher-than-average chance of loss to seek insurance at standard (average) rates, which if not controlled by underwriting, results in higher-than-expected loss levels.
Fortuitous loss: A fortuitous loss is one that is unforeseen and unexpected and occurs as a result of chance.
Indemnification：Indemnification means that the insured is restored to his or her approximate financial position prior to the occurrence of the loss.
Insurance: Insurance is the pooling of fortuitous losses by transfer of such risks to insurers, who agree to indemnify insureds for such losses, to provide other pecuniary benefits on their occurrence, or to render services connected with the risk.

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