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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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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
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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