Risk Management Temple Exam 2 Practice

Losses have to be accidental or unintentional so the risk being insured is genuinely random and not under the insured’s control. When losses could be guaranteed or caused by the insured, people would have incentives to cause a loss or to take bigger risks hoping to collect a payout. That moral hazard, and the possibility of gambling on whether a loss occurs, undermines the very idea of transferring risk to a shared pool. If losses are truly accidental, insurers can pool many similar risks, estimate expected losses from statistics, and set premiums that cover claims plus expenses and a profit. The other choices miss this fundamental idea: premiums aren’t fixed to exact expected losses, payout timing isn’t the core issue, and insurability isn’t about maximizing profits.