Risk Management Risk Management

Introduction to Risk and Introduction to Risk and InsuranceInsurance

DefinitionsDefinitionsRisk - Unpredictable Outcome

In terms of insurance, risk is the chance of financial loss from perils (causes) to people or property.

Pure Risk Loss / No Loss

Speculative RiskLoss / No Loss / Gain

Type of Risk - ExampleType of Risk - Example

Which of the following risks represents Speculative Risk?A Your car being stolenB Your mutual fund going down in valueC Flunking a courseD Getting a speeding ticketE None of the above

Definitions (Cont.)Definitions (Cont.)Risk Neutral - Indifferent Toward Risk

Value of Risky Situation is Expected Loss

Risk Averse - Prefer to Avoid RiskWilling to Pay More than Expected Loss to Avoid Risk

Risk Seeker - Prefer RiskWould Pay More than Expected Return to Engage in Risky Situation

Risk Attitudes - ExampleRisk Attitudes - ExampleEngaging in a wager when the odds are in your favor is something that which of the following risk types would do?

I Risk NeutralII Risk AverseIII Risk Seeker

A I only B II onlyC III only D I and IIIE None of the above

Insurance Versus GamblingInsurance Versus Gambling

Gambling Creates RiskInsurance Transfers Existing RiskGambling is Speculative RiskInsurance Deals with Pure Risk

Methods of Handling Pure Methods of Handling Pure RiskRiskAvoidance Loss Control (reduce risk)

◦Loss Prevention - Reduce Loss Frequency

◦Loss Reduction - Lower Loss SeverityTransfer

◦Corporations◦Contractual Agreements

Assumption – retention

Risk Management ProcessRisk Management Process

Risk Management PlanRisk Management PlanYoung, Single AdultYoung, Single Adult

RiskSeriousness of

Financial ImpactMethod for Handling

Auto Accidents High

*Collision and Liability Insurance*Driver Education

Class*Safer Driving

Practices

Theft or damage to property in apartments

Medium*Renter’s Insurance

*Take security measures

Theft or damage to property at work or

in my carMedium

*Renter’s Insurance*Floater policy *Take security

measures

Injury to apartment visitors

Medium*Renter’s Insurance

*Keep apartment safe

Personal Illness and sports Injuries

High

*Health Insurance*Avoid Risk – stop

skydiving, stop smoking

*Wear a bike helmet

*Get specialized training

Risk Management PlanRisk Management PlanYoung, Single Adult Young, Single Adult Continued…Continued…

Risk Seriousness of

Financial ImpactMethod for Handling

Vision & Dental Needs

Low

*Dental Insurance*Assume Risk – Pay

out of pocket for any expenses

Income Protection Low/Medium*Life Insurance

*Disability Insurance

Definitions (Cont.)Definitions (Cont.)Exposures - Person or Property Facing

Pure RiskPersonal Loss Exposures - Affect Life,

Health or Income of an IndividualProperty Loss Exposure - Damage to

ItemsDirect Loss - Cost of Repair (Replacement)Consequential Loss - Additional Costs

Liability Loss Exposure - Responsible for Damages to Others

Definitions (Cont.)Definitions (Cont.)Perils - Immediate Causes of LossHazards - Conditions Affecting Perils

* Physical Hazards - Property Conditions* Intangible Hazards - Attitudes and Culture* Moral Hazard - Fraud

What is the Purpose of What is the Purpose of Insurance?Insurance?

Insurance is a social device in which a group of individuals (insured) transfer risk to another party (insurer) in order to combine loss experience, which permits statistical prediction of losses and provides for payment of losses from funds contributed (premiums) by all members who transferred risk. ** Basically it is a method for spreading individual risk among a large group of people to make losses more affordable for all.

Who can take out an Who can take out an insurance policy?insurance policy?

An insurable interest is any financial interest in life or property such that, if the life or property were lost or harmed, the insured would suffer financially.

Insurance is not a get rich quick scheme.◦Insurance is meant to only compensate

for actual losses. This is called indemnification. It means putting the policyholder back in the same financial condition he/she was in before the loss occurred.

What Can Be Insured?What Can Be Insured?Ideal Requisites for Ideal Requisites for

InsurabilityInsurability1Large Number of Similar

Exposure Units2Fortuitous Losses3Catastrophe Unlikely4Definite Losses5Determinable Probability

Distribution6Economic Feasibility

Ideal Requisites Example Ideal Requisites Example 11

Which, if any, of the ideal requisites for insurability are violated by flood insurance?A Large Number of Similar Exposure UnitsB Fortuitous LossesC Catastrophe UnlikelyD Definite LossesE Determinable Probability Distribution

Ideal Requisites Example Ideal Requisites Example 22

Which, if any, of the ideal requisites for insurability are violated by mental health insurance?A Large Number of Similar Exposure UnitsB Fortuitous LossesC Catastrophe UnlikelyD Definite LossesE Determinable Probability Distribution

Types of Insurance - Types of Insurance - ExamplesExamples

Personal◦ Homeowner’s◦ Renter’s

LifeHealth Commercial Property-LiabilityProfessional

Liability Medical Malpractice

Disability