Principles of Insurance and Risk Management 100% VERIFIED ANSWERS 2024/2025 CORRECT, Exams of Business Management and Analysis

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Principles of Insurance and

Risk Management 100%

VERIFIED ANSWERS

2024/2025 CORRECT

Risk Management Process The process of identifying and managing risks associated with a business. Pure Risks Risks that involve the chance of loss with no opportunity for gain. Insurance A method of transferring risk to an insurance company in exchange for payment. Insurable Interest A stake in the subject of insurance such that the insured would suffer a financial loss if the insured event occurs. Subrogation The process by which an insurer takes over the rights of the insured after paying a claim, to pursue recoveries from third parties. Risk Reduction Decreasing the total amount of uncertainty present in a particular situation. Pooling Sharing total losses among a group to reduce individual risk.

Insurance Premium The payment made by the insured to the insurer in exchange for insurance coverage. Indemnity The principle that the insured should not collect more than the actual loss suffered. Moral Hazards Risks that arise from the insured's lack of incentive to prevent a loss. Valued Policy Laws Laws that require the insurer to pay the entire face amount of a policy in the event of total loss of the insured object. Valued Basis Transportation policies where insured must take out insurance equal to object's full value Principle of Indemnity Not applicable in life insurance; full amount paid upon insured's death Moral Hazard Exists if insureds could collect without having an insurable interest Insurable Interest Criteria Determining who can have insurable interests, beyond ownership Subrogation Principle Entitles recovery from liable third parties after indemnifying another's loss Life Insurance Insurable Interest Presumed for self-insured persons; required for insuring another's life Insurable Interest Examples

Legal owner, leaseholder, oil royalty holder, secured creditors, building contractors Insurable Interest Limits Practical limits on the amount of life insurance an individual may obtain Insurable Interest Timing Must exist at the inception of a life insurance policy but not necessarily at the time of loss Insurable Interest in Property Insurance Need only exist at the time of loss, not necessarily at policy inception Insurable Interest Transfer Insurance follows the person, not the property, in property insurance Insurable Interest in Life Insurance Must exist at the inception of the policy, not necessarily at the time of loss Insurable Interest Continuation Not necessary to have a continuing insurable interest in life insurance Indemnify Compensate for loss or damage Salvage Recoverable value of damaged property Waiver of Subrogation Voluntary surrender of right to recover costs Hold-Harmless Agreement Legal promise to absolve another party from liability Forfeit

Surrender or lose rights due to violation Legal Expenses Costs incurred in pursuing legal action Underinsured Having inadequate insurance coverage Ethical Issues Moral dilemmas or conflicts in decision-making Utmost Good Faith Higher standard of honesty in insurance contracts Representations Statements made by insurance applicants before policy issuance Misrepresentation False statement affecting contract validity. Material Misrepresentation Significant false statement impacting contract terms. Inconsequential Misrepresentation Minor false statement not affecting contract. Voidable Contract Contract that can be affirmed or avoided due to misrepresentation. Innocent Misrepresentation Unintentional false statement with legal consequences. Avoidance of Contract

Insurer's right to cancel due to misrepresentation. Warranties in Insurance Contract clauses stating specific conditions for coverage. Express Warranties Stated conditions in the insurance contract. Implied Warranties Assumed conditions not explicitly stated in the contract. Promissory Warranty Insured agrees to uphold a condition during the contract. Affirmative Warranty Condition that must exist at the contract's inception. Concealment in Insurance Withholding material facts affecting the risk. Materiality Test Determining if concealed fact would impact contract terms. Fraudulent Concealment Intentional hiding of material facts to deceive. Mistakes in Insurance Contracts Correctable errors in written insurance agreements. Mutual Mistake Agreement error known by both parties after contract signing Error of Judgment

Personal decision mistake, not contractual Insurer's Error Misplacement of decimal point in policy Social Insurance Government-backed insurance for uninsurable risks Law of Large Numbers Statistical theory for large, similar exposure units Risk Transferee Insurer acting as a risk receiver without reducing risk Accidental Loss Unintentional loss with uncertainty Adverse Selection Insureds with higher risk seeking more insurance Asymmetric Information Insured knowing more about potential losses than insurer Underwriting Process of selecting and classifying insureds Death Spiral Insurance failure due to adverse selection and high-risk clients Determinable Loss Loss with definite time and place