Introduction to Risk Management and Insurance, 7E - Dorfman
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Transcript of Introduction to Risk Management and Insurance, 7E - Dorfman
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1Instructor’s Manual with Transparency Mastersto Accompany Introduction to Risk Management and Insurance, 7E - Dorfman
© 2002 by Prentice Hall, Inc.A Simon & Schuster CompanyUpper Saddle, NJ 07458
Introduction to Risk Management and Insurance, 7E - DorfmanChapter 1:Fundamentals and Terminology
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2Instructor’s Manual with Transparency Mastersto Accompany Introduction to Risk Management and Insurance, 7E - Dorfman
© 2002 by Prentice Hall, Inc.A Simon & Schuster CompanyUpper Saddle, NJ 07458
OVERVIEW OF COURSE
LIFE CONTINGENCIES
CONTRACTS & PERSONAL INSURANCE
SOCIAL PROGRAMS
COMMERCIAL INS. & ADVANCED RISK MANAGEMENT
TERMINOLOGY PRINCIPLES INSURANCE AND RISK MANAGEMENT
COMPANIES(MACRO)
COMPANIESOCCUPATIONS CONSUMERS Government
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3Instructor’s Manual with Transparency Mastersto Accompany Introduction to Risk Management and Insurance, 7E - Dorfman
© 2002 by Prentice Hall, Inc.A Simon & Schuster CompanyUpper Saddle, NJ 07458
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4Instructor’s Manual with Transparency Mastersto Accompany Introduction to Risk Management and Insurance, 7E - Dorfman
© 2002 by Prentice Hall, Inc.A Simon & Schuster CompanyUpper Saddle, NJ 07458
Insurance Benefits to Society
Stability of familiesAids planning ability to businessesFacilitates credit transactionsAnti-monopoly deviceReduces credit costsIncreases efficiency of capital
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5Instructor’s Manual with Transparency Mastersto Accompany Introduction to Risk Management and Insurance, 7E - Dorfman
© 2002 by Prentice Hall, Inc.A Simon & Schuster CompanyUpper Saddle, NJ 07458
Costs to SocietyThe costs of operating the insurance mechanism Commissions Overhead of the company Exaggerated claims Intentional losses (moral) General indifference about the way we treat
our property, etc. (morale)Does not include losses that would have occurred anyway
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6Instructor’s Manual with Transparency Mastersto Accompany Introduction to Risk Management and Insurance, 7E - Dorfman
© 2002 by Prentice Hall, Inc.A Simon & Schuster CompanyUpper Saddle, NJ 07458
The Problem of ArsonIllustration of Loss Costs
What is Arson?What is Arson-for-Profit?What are the costs?Who really pays for Arson?Should insurance companies be substituted for the role of public law enforcement authorities?
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7Instructor’s Manual with Transparency Mastersto Accompany Introduction to Risk Management and Insurance, 7E - Dorfman
© 2002 by Prentice Hall, Inc.A Simon & Schuster CompanyUpper Saddle, NJ 07458
INTRODUCTIONDefinitions and terms
Insurance Two main elements
1) Financial intermediation2) Contractual relationship
Loss (definition of) Types of losses
Direct Loss Indirect Loss
Chance of Loss Number expected / Total exposed = Fraction
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8Instructor’s Manual with Transparency Mastersto Accompany Introduction to Risk Management and Insurance, 7E - Dorfman
© 2002 by Prentice Hall, Inc.A Simon & Schuster CompanyUpper Saddle, NJ 07458
INTRODUCTIONDefinitions and terms
Peril - The cause of a loss or contingency that causes a loss “Named peril” or Specified peril contracts ”Open-peril" contracts
burden of proofHazard Something that increases the probability of
loss or increases the severity when a loss occurs physical, moral, morale
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9Instructor’s Manual with Transparency Mastersto Accompany Introduction to Risk Management and Insurance, 7E - Dorfman
© 2002 by Prentice Hall, Inc.A Simon & Schuster CompanyUpper Saddle, NJ 07458
INTRODUCTIONDefinitions and terms
Proximate cause of the loss Also known as Doctrine of proximate
cause First insured peril in an unbroken
chain of events leading to the loss - all is paid.
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10Instructor’s Manual with Transparency Mastersto Accompany Introduction to Risk Management and Insurance, 7E - Dorfman
© 2002 by Prentice Hall, Inc.A Simon & Schuster CompanyUpper Saddle, NJ 07458
INTRODUCTIONDefinitions and terms
Risk - many definitions - the term is used in a variety of ways1) To describe that there is a possibility of loss2) To identify the probability of loss3) To identify the cause of loss - peril4) To identify conditions that increase frequency
of severity of loss - hazard5) To identify the property or person exposed6) To identify the potential $ amount of loss7) To describe the variation in potential losses –
the ability to predict
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11Instructor’s Manual with Transparency Mastersto Accompany Introduction to Risk Management and Insurance, 7E - Dorfman
© 2002 by Prentice Hall, Inc.A Simon & Schuster CompanyUpper Saddle, NJ 07458
Objective Risk - relative variation from expected
Degree of risk – the ability to predictNot the same thing as probability of lossLaw of large numbersCoefficient of variation = s/x = % of variation expected relative to the meanOBJECTIVE RISK V. THE PROBABILITY OF LOSS
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12Instructor’s Manual with Transparency Mastersto Accompany Introduction to Risk Management and Insurance, 7E - Dorfman
© 2002 by Prentice Hall, Inc.A Simon & Schuster CompanyUpper Saddle, NJ 07458
OBJECTIVE RISK V. THE PROBABILITY OF LOSS
OBJECTIVE RISK V THE PROBABILITY OF LOSSBINOMIAL DISTRIBUTION
Numbe r Probability S tandard Expe cte d Coe ficie ntIn Pool of the e ve nt 1-P De viation Value of Variation
N P Q SQRT(NPQ) NP CV10,000 0.000 1.000 0.0000 0 0.000010,000 0.010 0.990 9.9499 100 0.099510,000 0.100 0.900 30.0000 1000 0.030010,000 0.200 0.800 40.0000 2000 0.020010,000 0.300 0.700 45.8258 3000 0.015310,000 0.400 0.600 48.9898 4000 0.012210,000 0.500 0.500 50.0000 5000 0.010010,000 0.600 0.400 48.9898 6000 0.008210,000 0.700 0.300 45.8258 7000 0.006510,000 0.800 0.200 40.0000 8000 0.005010,000 0.900 0.100 30.0000 9000 0.003310,000 1.000 0.000 0.0000 10000 0.0000
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13Instructor’s Manual with Transparency Mastersto Accompany Introduction to Risk Management and Insurance, 7E - Dorfman
© 2002 by Prentice Hall, Inc.A Simon & Schuster CompanyUpper Saddle, NJ 07458
OBJECTIVE RISK V. THE PROBABILITY OF LOSS
Obje c tive Ris k v. Pro ba bility o f Lo s s
P ro b a b ility o f Lo s s
0.00000.01000.02000.03000.04000.05000.06000.07000.08000.09000.1000
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14Instructor’s Manual with Transparency Mastersto Accompany Introduction to Risk Management and Insurance, 7E - Dorfman
© 2002 by Prentice Hall, Inc.A Simon & Schuster CompanyUpper Saddle, NJ 07458
OBJECTIVE RISK V. THE NUMBER OF EXPOSURES
OBJECTIVE RISK V THE NUMBER OF EXPOSURESBINOMIAL DISTRIBUTION
Numbe r Probability S tandard Expe cte d Coe ficie ntIn Pool of the e ve nt 1-P De viation Value of Variation
N P Q SQRT(NPQ) NP CV10 0.030 0.970 0.5394 0.3 1.7981
100 0.030 0.970 1.7059 3 0.56861,000 0.030 0.970 5.3944 30 0.1798
10,000 0.030 0.970 17.0587 300 0.0569100,000 0.030 0.970 53.9444 3000 0.0180
1,000,000 0.030 0.970 170.5872 30000 0.0057
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15Instructor’s Manual with Transparency Mastersto Accompany Introduction to Risk Management and Insurance, 7E - Dorfman
© 2002 by Prentice Hall, Inc.A Simon & Schuster CompanyUpper Saddle, NJ 07458
OBJECTIVE RISK V. THE NUMBER OF EXPOSURES
Obje c tive Ris k v Numbe r o f Expo s ure s
Numbe r o f Expo s ure s
0.00000.20000.40000.60000.80001.00001.20001.40001.60001.8000
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16Instructor’s Manual with Transparency Mastersto Accompany Introduction to Risk Management and Insurance, 7E - Dorfman
© 2002 by Prentice Hall, Inc.A Simon & Schuster CompanyUpper Saddle, NJ 07458
Risk - types
Subjective Risk - individual’s mental attitude concerning lossPure Risk - exposure that can only result in a loss or no change (two possible outcomes)Speculative Risk - exposure that can only result in a loss, no change, or gain (three possible outcomes)
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17Instructor’s Manual with Transparency Mastersto Accompany Introduction to Risk Management and Insurance, 7E - Dorfman
© 2002 by Prentice Hall, Inc.A Simon & Schuster CompanyUpper Saddle, NJ 07458
Risk Management
Logical process used by firms and individuals to deal with exposures to loss.Involves pre-loss planning concerning the use of post-loss resources to minimize overall costs.Continuous process that identifies exposures and decides how to deal efficiently with them.Post-loss activities puts the plans into action.
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18Instructor’s Manual with Transparency Mastersto Accompany Introduction to Risk Management and Insurance, 7E - Dorfman
© 2002 by Prentice Hall, Inc.A Simon & Schuster CompanyUpper Saddle, NJ 07458
Insurance works well when:
Many individuals purchaseFew people collect Keeps rates affordable
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19Instructor’s Manual with Transparency Mastersto Accompany Introduction to Risk Management and Insurance, 7E - Dorfman
© 2002 by Prentice Hall, Inc.A Simon & Schuster CompanyUpper Saddle, NJ 07458
Mathematical Basis for insurance - Example
Houses in pool 10,000 Avg. value of each $ 80,000 Total property value $ 800 million Predicted losses = 1.5% of value $12
million Predicted Loss per house $
1,200 Rate per $100 of value $ 1.50
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20Instructor’s Manual with Transparency Mastersto Accompany Introduction to Risk Management and Insurance, 7E - Dorfman
© 2002 by Prentice Hall, Inc.A Simon & Schuster CompanyUpper Saddle, NJ 07458
Mathematical Basis for insurance - Example continued
Insurance Premium Cost of losses $ 1.50 Admin. costs .45 Reserves for unexpected losses .10 Investment Earnings (0.07) Rate per $100 value $ 1.98
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21Instructor’s Manual with Transparency Mastersto Accompany Introduction to Risk Management and Insurance, 7E - Dorfman
© 2002 by Prentice Hall, Inc.A Simon & Schuster CompanyUpper Saddle, NJ 07458
Concepts:
Cash flow underwritingLoss ratioExpense ratioCombined ratioSalvage
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22Instructor’s Manual with Transparency Mastersto Accompany Introduction to Risk Management and Insurance, 7E - Dorfman
© 2002 by Prentice Hall, Inc.A Simon & Schuster CompanyUpper Saddle, NJ 07458
Insurance Benefits to Society
Stability of familiesAids planning ability to businessesFacilitates credit transactionsAnti-monopoly deviceReduces credit costsIncreases efficiency of capital
![Page 23: Introduction to Risk Management and Insurance, 7E - Dorfman](https://reader033.fdocuments.in/reader033/viewer/2022061600/56815e1f550346895dcc7be9/html5/thumbnails/23.jpg)
23Instructor’s Manual with Transparency Mastersto Accompany Introduction to Risk Management and Insurance, 7E - Dorfman
© 2002 by Prentice Hall, Inc.A Simon & Schuster CompanyUpper Saddle, NJ 07458
Costs to SocietyThe costs of operating the insurance mechanism Commissions Overhead of the company Exaggerated claims Intentional losses (moral) General indifference about the way we treat
our property, etc. (morale)Does not include losses that would have occurred anyway
![Page 24: Introduction to Risk Management and Insurance, 7E - Dorfman](https://reader033.fdocuments.in/reader033/viewer/2022061600/56815e1f550346895dcc7be9/html5/thumbnails/24.jpg)
24Instructor’s Manual with Transparency Mastersto Accompany Introduction to Risk Management and Insurance, 7E - Dorfman
© 2002 by Prentice Hall, Inc.A Simon & Schuster CompanyUpper Saddle, NJ 07458
The Problem of ArsonIllustration of Loss Costs
What is Arson?What is Arson-for-Profit?What are the costs?Who really pays for Arson?Should insurance companies be substituted for the role of public law enforcement authorities?