III IC-86 key terms

A condition or source of potential harm that exists independent of any specific loss event. It increases the chance or severity of a loss if an incident occurs.

The actual cause of a loss, such as fire, flood, theft, or collision. A peril is what produces the damage; a hazard is what makes that peril more likely or more severe.

The uncertainty about outcomes that matters because those outcomes affect objectives. In insurance terms it is the chance of loss, measured by combining likelihood and consequences.

The structured process of identifying, analyzing, treating, and monitoring risks so that an organization meets its objectives at an acceptable level of uncertainty and cost.

A situation offering only the possibility of loss or no loss, with no chance of gain. Insurers traditionally focus on pure risks because they are measurable and accidental.

A situation that can produce loss, gain, or no change, such as investing or launching a product. It is generally not insurable because the outcome is chosen and not purely accidental.

The units, values, or activities that can be affected by a loss event. Exposure is what an underwriter or risk manager counts and measures to estimate potential losses.

The measurable unit used to express exposure, such as payroll, sales, square footage, vehicle count, or number of employees. Premiums and loss estimates are often stated per unit of this base.

How often losses occur over a defined period, usually expressed as a count or a rate per exposure unit. Frequency drives the expected cost of routine, recurring claims.

The size or cost of an individual loss when it occurs. Severity drives the need for limits, reinsurance, and capital, and matters most for rare but large events.

The average loss predicted over time, commonly estimated by multiplying loss frequency by average loss severity. It forms a baseline for pricing and for setting retention levels.

The step of finding and documenting the risks an organization faces, using checklists, inspections, financial statements, flowcharts, and historical claims data before any analysis or treatment begins.

Techniques that reduce the chance or size of a loss rather than pay for it. Examples include avoidance, prevention, reduction, separation, and duplication.

Techniques that provide funds to pay for losses after they occur, such as retention, insurance, and other risk transfer arrangements. It addresses the cost side, not the cause.

Eliminating an activity or exposure entirely so the associated risk cannot occur. It removes the risk but also removes any benefit the activity would have produced.

Measures that reduce the probability that a loss will happen, such as safety training, maintenance schedules, and security systems. It targets frequency rather than the size of a loss.

Measures that lessen the severity of a loss once it has begun, such as sprinkler systems, firewalls, and emergency response plans. It targets the size of the loss, not its likelihood.

Accepting the financial consequences of a loss rather than transferring them. Retention may be deliberate and planned, or unconscious when a risk is simply overlooked.

Shifting the financial consequences of a risk to another party, most commonly through insurance or contractual hold-harmless agreements. The underlying activity and its hazards usually remain.

A formal, funded program in which an organization sets aside money and administers claims for its own retained losses instead of buying conventional insurance for them.

An insurance company owned by a non-insurance parent and formed mainly to insure that parent's own risks. It gives the parent direct access to reinsurance and greater control over claims.

The amount the insured pays out of pocket on each covered loss before the insurer pays. A larger deductible lowers premium and increases the insured's retained risk.

A stated amount the insured pays on a loss before a liability policy responds, often used with large commercial accounts. Unlike a deductible, it may carry duties such as claim handling.

A sharing arrangement in which the insured and insurer split covered losses by a stated percentage. In property policies the term also refers to a minimum insurance-to-value requirement.

Carrying a limit of insurance that reasonably matches the replacement or actual cash value of the property. Underinsurance can trigger a coinsurance penalty at the time of loss.

A financial stake in the subject matter such that a loss would cause genuine economic harm. It must exist at the time of loss for property coverage and supports the principle of indemnity.

The idea that insurance should restore the insured to roughly the same financial position as before the loss, neither better nor worse. It limits recovery to the actual loss, subject to policy terms.

A valuation method equal to replacement cost minus physical depreciation. It reflects what the damaged property was worth just before the loss rather than what new property would cost.

The cost to repair or rebuild damaged property with new materials of like kind and quality, without deducting depreciation. It usually produces a higher settlement than actual cash value.

The tendency for insureds to behave less carefully, or to exaggerate claims, because insurance will absorb the cost. Underwriters counter it with deductibles, conditions, and claim investigation.

Carelessness or indifference toward loss that arises from the mere existence of insurance, without any intent to profit. It raises loss frequency and is addressed through incentives and education.

The tendency for applicants with higher-than-average risk to seek or keep coverage more actively than low-risk applicants. Underwriting and pricing aim to limit it so rates stay adequate.

Grouping similar exposures into rating categories so each group pays a premium reflecting its own expected losses. It supports fairness among insureds and helps prevent adverse selection.

The process of evaluating an applicant's exposures and selecting which risks to accept, at what terms and price. It applies eligibility rules, rating plans, and conditions to control the insurer's book.

The price of insurance per unit of exposure, such as a dollar amount per $100 of payroll or per vehicle. Multiplying the rate by the exposure base produces the manual premium.

The amount an insured pays for coverage over a policy period. It reflects the rate, the exposure base, and any credits, debits, or minimum premiums applied by the insurer.

Insurance bought by an insurer to transfer part of its risk to another insurer. It protects the ceding company's capital against large or frequent losses and supports capacity growth.

In reinsurance, the amount of loss an insurer keeps for its own account before reinsurance responds. It is set by management based on capital, surplus, and risk appetite.

A contract clause in which one party accepts responsibility for certain liabilities that would otherwise fall on another party. It transfers risk contractually and is often backed by insurance requirements.

The amount and type of risk an organization is willing to accept in pursuit of its objectives. It guides decisions on retention levels, limits purchased, and which activities to avoid.