Introduction to risk management and insurance 7e dorfman
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Introduction to Risk Management and Insurance, 7E - Dorfman. Chapter 1: Fundamentals and Terminology. OVERVIEW OF COURSE. INSURANCE AND RISK MANAGEMENT. TERMINOLOGY. PRINCIPLES. COMPANIES (MACRO). COMPANIES OCCUPATIONS. CONSUMERS Government. CONTRACTS & PERSONAL INSURANCE.

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Introduction to Risk Management and Insurance, 7E - Dorfman

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Introduction to risk management and insurance 7e dorfman

Introduction to Risk Management and Insurance, 7E - Dorfman

Chapter 1:

Fundamentals and Terminology


Overview of course

OVERVIEW OF COURSE

INSURANCE AND

RISK MANAGEMENT

TERMINOLOGY

PRINCIPLES

COMPANIES

(MACRO)

COMPANIES

OCCUPATIONS

CONSUMERS Government

CONTRACTS & PERSONAL INSURANCE

LIFE CONTINGENCIES

COMMERCIAL INS. & ADVANCED RISK MANAGEMENT

SOCIAL PROGRAMS


Insurance benefits to society

Insurance Benefits to Society

  • Stability of families

  • Aids planning ability to businesses

  • Facilitates credit transactions

  • Anti-monopoly device

  • Reduces credit costs

  • Increases efficiency of capital


Costs to society

Costs to Society

  • The 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


The problem of arson illustration of loss costs

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?


Introduction definitions and terms

INTRODUCTIONDefinitions and terms

  • Insurance

    • Two main elements

      1) Financial intermediation

      2) Contractual relationship

  • Loss (definition of)

    • Types of losses

      • Direct Loss

      • Indirect Loss

  • Chance of Loss

    • Number expected / Total exposed = Fraction


Introduction definitions and terms1

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 proof

  • Hazard

    • Something that increases the probability of loss or increases the severity when a loss occurs

      • physical, moral, morale


Introduction definitions and terms2

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.


Introduction definitions and terms3

INTRODUCTIONDefinitions and terms

  • Risk - many definitions - the term is used in a variety of ways

    1) To describe that there is a possibility of loss

    2) To identify the probability of loss

    3) To identify the cause of loss - peril

    4) To identify conditions that increase frequency of severity of loss - hazard

    5) To identify the property or person exposed

    6) To identify the potential $ amount of loss

    7) To describe the variation in potential losses – the ability to predict


Objective risk relative variation from expected

Objective Risk - relative variation from expected

  • Degree of risk – the ability to predict

  • Not the same thing as probability of loss

  • Law of large numbers

  • Coefficient of variation = s/x = % of variation expected relative to the mean

  • OBJECTIVE RISK V. THE PROBABILITY OF LOSS


Objective risk v the probability of loss

OBJECTIVE RISK V. THE PROBABILITY OF LOSS


Objective risk v the probability of loss1

OBJECTIVE RISK V. THE PROBABILITY OF LOSS


Objective risk v the number of exposures

OBJECTIVE RISK V. THE NUMBER OF EXPOSURES


Objective risk v the number of exposures1

OBJECTIVE RISK V. THE NUMBER OF EXPOSURES


Risk types

Risk - types

  • Subjective Risk - individual’s mental attitude concerning loss

  • Pure 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)


Risk management

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.


Insurance works well when

Insurance works well when:

  • Many individuals purchase

  • Few people collect

    • Keeps rates affordable


Mathematical basis for insurance example

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


Mathematical basis for insurance example continued

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


Concepts

Concepts:

  • Cash flow underwriting

  • Loss ratio

  • Expense ratio

  • Combined ratio

  • Salvage


Insurance benefits to society1

Insurance Benefits to Society

  • Stability of families

  • Aids planning ability to businesses

  • Facilitates credit transactions

  • Anti-monopoly device

  • Reduces credit costs

  • Increases efficiency of capital


Costs to society1

Costs to Society

  • The 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


The problem of arson illustration of loss costs1

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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