Page 48 - DCOM309_INSURANCE_LAWS_AND_PRACTICES

Unit 3: Nature and Scope of Insurance

3.5 Insurance and some Related Terms Notes

You will be surprised to know that insurance is associated with the terms such as loss, chance of
loss, peril, hazard and risk. These words take on particular meaning when used to describe
insurance:
1. Loss: Loss is commonly used term which means being without something previously
possessed. Insurable losses are categorized as direct or indirect losses. Direct losses are the
immediate, or first, result of an insured peril. Indirect losses are a secondary result of an
insured peril.

Example: If fire destroys a home, the loss of the home is the direct loss. The expenses of
living in a hotel while the home is being rebuilt are an indirect loss.
There must be a direct loss before there can be an indirect loss.
2. Chance of Loss: The concept of chance of loss refers to a fraction. The numerator is either
the actual or the expected number of losses; the denominator represents the number
exposed to loss. The chance of loss is the probability of loss that creates the need for
insurance.
3. Peril and Hazard: Peril is defined as the cause of the loss. Insurance policies provide
financial protection against losses caused by perils. Insurers call policies that specifically
identify a list of covered perils as specified perils contracts. Those not specified comes
under open perils contract.
Hazards are conditions that increase the frequency or the severity of losses. If an individual
causes or exaggerates a loss to collect insurance proceeds, this is insurance fraud, and the
loss results from the moral hazard. If a person remains unnecessarily in a hospital to
collect health insurance benefits rather than returning to work is a morale hazard. Morale
hazard is responsible for the increased severity of the loss.

Task With the help of the internet, find out more terms related to insurance and prepare
a chart.

Insurers try to eliminate the moral hazard and minimize morale hazard by carefully
selecting the insurers and by including contractual provisions causing the insured to
regret the loss, despite the insurance coverage.
4. Risk: Risk has been the subject of study by scholars for many centuries and a great deal of
thought and effort has gone into defining the concept. It is defined as the variation in
possible outcomes of an event based on chance. That is the greater the number of different
outcomes that may occur the greater the risk. Another definition of risk is the uncertainty
concerning a possible loss. This definition of risk helps to explain why people purchase
insurance. The insurance company will pay for such uncertain losses.

Self Assessment

Fill in the blanks:

13. ………………………. is commonly used term which means being without something
previously possessed.

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