Sjd Chapter 1: Purpose Of Life And Health Insurance

Insurance is a mechanism that spreads financial risk over a large group of individuals in order to minimize the potential loss to any one person. By pooling resources and premiums from many policyholders, insurance companies are able to provide coverage and compensation in the event of unforeseen events such as accidents, illnesses, or damages. This system allows individuals to transfer the risk of potential financial loss to the insurance company, providing them with a sense of security and protection.

The law of large numbers is a statistical principle that states that as the number of observations or trials increases, the average result will approach the expected value. In the context of insurance, it means that by analyzing a large group of people, insurers can accurately predict the approximate number of deaths or frequency of disability within that group over a specific period of time. This principle allows insurers to calculate premiums and set aside reserves to cover potential claims. It helps ensure that insurance companies can operate effectively and provide coverage to policyholders.

Paying insurance premiums is not an example of risk avoidance because it is a risk transfer strategy. By paying the premium, Pat is transferring the risk of potential financial loss to the insurance company. In the event of an insured event, the insurance company will cover the financial costs, reducing the risk to Pat. Risk avoidance, on the other hand, involves completely avoiding the activity or situation that poses a risk, such as not flying in an airplane or not driving a car.

Insurable risks refer to risks that can be covered by insurance policies. Pure risks are those risks that involve only the possibility of loss or no loss. These risks are typically insurable because they involve events that are beyond the control of the insured and can result in financial loss. Speculative risks, on the other hand, involve the possibility of loss, gain, or no change. Since speculative risks involve the potential for gain, they are generally not insurable. Therefore, the statement "Only pure risks are insurable" is correct.

A moral hazard refers to the risk that individuals may behave in an unethical manner when they are not held accountable for their actions. In this scenario, the owner of the camera store is concerned that her new employees may take items from inventory without paying for them, indicating a potential moral hazard. The employees may feel tempted to engage in such behavior if they believe they can get away with it without facing any consequences. This highlights the importance of implementing proper controls and monitoring systems to mitigate the risk of moral hazards in the workplace.

This scenario represents risk reduction because Mary is taking steps to minimize the potential risks associated with owning a valuable diamond ring. By keeping it in a safe deposit box at a local bank when she is not wearing it, she is reducing the chances of loss, theft, or damage to the ring. This action helps to decrease the level of risk involved in owning such a valuable item.

Risk in the insurance business refers to the uncertainty or possibility of experiencing a financial loss. Insurance companies provide coverage to individuals or businesses to protect them from potential financial losses that may arise from unforeseen events or circumstances. Therefore, the correct answer in this context is "uncertainty regarding financial loss."