An Introduction to Insurance and Risk Management

1
Chapter 8

• An Introduction to Insurance and Risk Management

2
What is Risk?

• The chance of loss
• There must be a chance of loss for risk to exist.

3
Risk Defined

• Chance/possibility of loss
• Uncertainty
• Variation of actual from expected results

4
Understanding Risk

• Pure vs. Speculative
• Dynamic vs. Static
• Subjective vs. Objective
• Particular vs. Fundamental
• Financial vs. Nonfinancial
• Probability of Loss
• Law of Large Numbers

5
Responses to Pure Risk

• Risk avoidance
• Risk reduction
• Risk retention or assumption
• Risk transfer

6
Causes of Insured Losses

• Perils
• Hazards
• Physical hazard
• Moral hazard
• Morale hazard
• Adverse Selection

7
Insurable Losses

• Insurance vs. Gambling
• Requisites for an Insurable Risk
• Large Number of Exposure Units Must Exist
• Insured Losses Must Be
• Accidental from Insureds Standpoint
• Measurable and Determinable
• Losses Must Not Pose Catastrophic Risk for Insurer

8
Elements of a Valid Contract

• Offer and Acceptance
• Legal Competency of all Parties
• Legal Consideration
• Lawful Purpose

9
Legal Principles of the Insurance Contract

• The Principle of Indemnity
• Subrogation Clause
• The Principle of Insurable Interest
• The Principle of Utmost Good Faith
• Warranty
• Representation
• Concealment

10
Distinguishing Characteristics of Insurance
Contracts

• Adhesion (Take it or Leave it)
• Aleatory (Unequal Money Exchange)
• Unilateral (Only One Promise, Made By Insurer)
• Conditional (Conditioned on Paying the Premium)

11
The Law of Agency

• Agents Brokers
• Agency Relationships
• Express authority
• Implied authority
• Apparent authority

12
Important Features of Insurance Contracts

• Exclusions
• Riders and Endorsements
• Valuation of Insured Losses
• Replacement Cost
• Actual Cash Value (ACV)
• Agreed-upon Value
• Deductibles and Copayments
• Coinsurance

13
Individual Loss Exposures and Insurance Coverages

• Perils that Can Reduce and/or Eliminate the
  Ability to Earn Income
• Dying too soon
• Living too long
• Disability
• Perils that Can Destroy or Deplete Existing
  Assets
• Damage to property
• Legal liability for injuries inflicted upon others

14
Selecting an Insurance Company

• Rating agencies
• A. M. Bests
• Fitch
• Moodys Standard and Poors
• Weiss
• NAIC Criteria

15
Characteristics of Insurance Companies

• Type of Ownership
• Capital Stock Insurance
• Mutual Insurance
• Insurance Underwriting
• Reinsurance
• Federal State Regulation

16
The Risk Management Process

• Determining the objectives of the risk management
  program
• Identifying the risk exposure
• Evaluating identified risks as to the probability
  of outcome and potential loss

17
The Risk Management Process (cont.)

• Determining and selecting the best risk
  management alternative
• Risk Avoidance
• Loss Control
• Risk Retention or Assumption
• Risk Transfer
• Implementing a risk management plan based on
  selected alternatives
• Periodically evaluating and reviewing the risk
  management program