Insurance
A contract in which one party (the insurer) agrees to indemnify another (the insured) against loss, damage, or liability arising from an unknown event. Insurance spreads the cost of losses across a pool of similar risk exposures.
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Practice This Concept
In insurance terminology, "risk" is most accurately defined as:
The uncertainty or chance of financial loss — Risk is the uncertainty regarding financial loss. It is not the loss itself, not the cause of a loss (that is a peril), and not a condition that increases the chance of loss (that is a hazard). Insurance works by transferring risk from the individual to a group: the law of large numbers lets the insurer predict group losses with reasonable accuracy even though each individual outcome remains uncertain. Understanding this distinction is foundational to classification, rating, and underwriting.
National insurance concept
A windstorm tears the roof off a house and the homeowner files a claim. For insurance classification purposes, the windstorm is the:
Peril — A peril is the actual cause of loss: wind, fire, theft, or accident. Here the windstorm is the event that caused the damage, so it is the peril. Hazards are conditions that increase the chance of a peril occurring, such as icy roads or faulty wiring. The policy defines which perils are covered, and coverage attaches when a named peril actually causes the loss.
National insurance concept
- General InsuranceIn insurance terminology, "risk" is most accurately defined as:
- General InsuranceA windstorm tears the roof off a house and the homeowner files a claim. For insurance c…
- General InsuranceA small business decides to absorb minor equipment repairs out of pocket but buys comme…
- General InsuranceThe doctrine of utmost good faith in an insurance contract requires:
- General InsuranceLife insurance is a "valued" contract rather than a strict indemnity contract. This mea…
- General InsuranceThe primary purpose of underwriting in life insurance is to:
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