Insurance Concepts and Principles

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Risk

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The chance of loss. Example: Driving a car involves the risk of an accident.

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Exposure

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The condition or situation that presents a possibility of loss. Example: A house in a flood zone has flood exposure.

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Hazard

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A condition that increases the chance of loss. Example: Faulty wiring is a physical hazard.

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Peril

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The actual cause of loss. Example: Fire is a peril that damages property.

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Loss

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The reduction in value due to a covered event. Example: A totaled vehicle after a collision.

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Methods of Handling Risk: Avoidance

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Eliminating the risk entirely. Example: Not driving to avoid car accidents.

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Methods of Handling Risk: Retention

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Accepting the risk and paying out-of-pocket. Example: Choosing a high-deductible health plan.

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Methods of Handling Risk: Sharing

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Distributing risk among multiple parties. Example: Group health insurance pools.

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Methods of Handling Risk: Reduction

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Minimizing the severity or frequency of loss. Example: Installing smoke detectors.

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Methods of Handling Risk: Transfer

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Shifting risk to another party, typically an insurer. Example: Buying auto insurance.