The Fundamentals of Risk

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Chapter 37

• The Fundamentals of Risk

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Risk

• Risk - can be thought of as the possibility of
  incurring a loss.
• There are 4 main types of Risk -
• Economic Risk
• Personal Risk
• Property Risk
• Liability Risk

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Types of Risk

• Economic Risk - can be related to property
  liability and ones own personal well being.
• Personal Risk - are risks associated with
  illness, disability, loss of income,
  unemployment, old age, and premature death.
• Property Risk - risk of damage to or loss of
  property due to theft, wind, fire, flood, or
  other hazard.
• Liability Risk - are potential losses to others
  that occur as a result of injury or damage that
  you may have caused

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Sharing Economic Risk

• Golf Club Insurance Association -
• 10 members
• Average set of clubs 300.00
• Cost to replace a set of clubs to a nonmember
  300.00
• Cost to replace a set of clubs for a member
  30.00 per member.

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Insurance

• Insurance is the planned protection provided by
  sharing economic losses.
• Insurance provides peace of mind in knowing that
  you are protected from economic loss.
• Many bad things could happen that would normally
  give you some economic difficulties, yet with
  Insurance, you should not have any difficulties.

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Insurance

• Insurance Companies - business that provide
  planned protection against economic loss.
• Insured or Policyholder - the person for whom the
  risk is assumed.
• Policy - the contract issued by the insurance
  company for coverage for the policyholder.

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More Insurance Vocabulary

• Premium - the amount of money that the
  policyholder must pay for insurance coverage.
• The premium is normally paid in payments once a
  month, once every six months, or once a year.
• The premiums from all of the policies for a
  company, make up the funds for which the company
  pays its claims.
• Claim - is a policyholders request for payment
  for a loss that is covered by the insurance
  company.
• Deductible - The amount you must pay before the
  insurance company pays a claim.

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Things to be insured

• At the extremes
• Violinist can insure his/her fingers
• Professional Athletes can get insurance against
  injury
• Writers can insure their manuscripts
• Businesses are able to insure against the loss of
  rent from property damaged by fire, injury to
  consumers caused by a faulty product, or theft by
  employees.
• For the normal people
• Insurance for automobiles and homes, life
  insurance, health insurance, and insurance for
  income security.

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Self Insurance

• Self Insurance - means that the individual,
  family, or business assumes the total risk of
  economic loss.
• A family might regularly place money in a savings
  account to cover possible financial losses.
• This is obviously difficult to do, since it would
  be very difficult to prepare for a catastrophe
  like replacing a house lost to a fire.

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Coinsurance

• Coinsurance is the sharing of expenses by the
  policyholder and the insurance company.
• The policyholder normally pays the deductible and
  then shares the remaining balance with the
  insurance company.
• For example, the insurance company may pay 80 of
  the amount remaining after the deductible is
  paid, leaving that 20 to be paid by the
  policyholder.

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Cost of Insurance

• The premium of a policy is determined partly by
  the past experiences of insurance companies in
  paying for the kinds of losses that are covered
  in the policy.
• For example - 20-year-old drivers are greater
  risks than 40-year-old drivers, and due to this,
  the 20-year-old pays more of a premium.

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Cost of Insurance

• The item being insured determines how much the
  premium is as well.
• If you want to in sure a luxury car, the premium
  will be higher than if it was a low end car.
• Then the number and size of claims that the
  insurance company has to deal with also helps in
  determining premium.
• By locking doors and driving defensively, losses
  associated with thefts and automobile accidents
  can be reduced. Practicing good health habits
  will reduce life and health insurance costs.

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Purchasing Insurance

• Insurance from your employer
• Employers may pay part of life and or health
  insurance premiums for their employees.
• Otherwise, an Insurance Agent will sell you
  insurance.
• Large Insurance Company Agent - sells policies
  written by the company which they are employed
  by.
• Independent Agent - sells many different policies
  from many different companies.

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Insurance for Economic Security

• Insurance is important to everyone because it
  provides economic security.
• Insurance also helps our economy. Insurance
  makes it possible for many people to do things
  they otherwise could not do.
• Buying a housein order to get a loan, the house
  better be insured.
• Buying a carin order to get a loan, the car has
  to be insured as well.