Methods of handling risk

Common types of insurance

-life and health insurance -annuities -property and casualty insurance -credit insurance -variable insurance

Credit insurance

Protects against the risk that a person in debt, termed DEBTOR, cannot repay the debt to the creditor because of accident, sickness, disability or death -credit life and health insurance cover these risks

Reduction

Accomplished by actively finding ways to minimize the loss exposure to a risk -two methods.... 1)LOSS PREVENTION (annual wellness exams) 2)LOSS CONTROL (flu shots and smoke-free premises)

Variable insurance

Comprised of variable life and variable annuities -products invest premium dollars in securities, which carry more risk due to price fluctuations

Coinsurance

Cost sharing mechanism between the insurer and the insured, and applies only to medical insurance -for a certain range of coverage, the insurer agrees to pay a large percentage of the expenses, and the insured is responsible for paying the remainder -typically 80/20

Annuities

Protect against the risk of living longer than expected -provide guaranteed life income to protect against the risk of depleting retirement funds

Property insurance

Protects against the rick of damage and destruction to all types of property

Casualty insurance

Protects against the risk of legal liability for injury, death, disability, damage and destruction to property

Sharing

When an insured and insurance company shares the cost of risk -for example, health insurance policies with deductibles require the insured to pay a portion of the loss before the insurer pays

Indemnity

An issuance that compensates the beneficiaries of the policies for their actual economic losses, up to limiting amount of the insurance policy -"TO MAKE WHOLE" -For health insurance, the policy agrees to indemnify the insured for the financial loss caused by accident, illness, or disability -insurers require PROOF OF LOSS to avoid overpaying an insured for a loss

Reinsurance

One way insurers deal with catastrophic loss is through REINSURANCE -spreading risk from one insurer to one or more other insurers -a way insurers cooperate to prevent bankruptcy -the insurer that accepts the additional risk is termed the REINSURER -the insurer that gives the risk to the reinsurer is termed the CEDING COMPANY or PRIMARY INSURER

Claim

The insured's notification to the insurer that a payment is requested for a covered loss -applies to ALL lines of insurance

Adverse selection

The tendency for poorer than average risks to seek out insurance -insurers must seek to minimize adverse selection -if an insurer cannot compensate the poor risks associated with smokers with better than average risks, then its loss experience will increase and its ability to pay claims may be compromised

Limit of liability

The total amount the insurer will pay for an insured risk -more often used in property and casualty lines, but the concept is transferrable to health insurance as the lifetime maximum benefit -policies may also contain sub limits termed INSIDE LIMITS which restrict the dollar amount of certain coverages within a policy, such as room and board limit of $200 per day

Retention

When a person chooses not to take proactive steps to transfer, avoid or reduce the risk -instead, a person deals with the risk when it happens -FAIRLY COMMON WAY -not financially practical to handle these risks other than through risk retention -one type of risk retention= SELF INSURANCE *when a person is aware of the risk and chooses to be financially responsible for any losses that may occur (most often used for smaller losses)

Avoidance

Deliberately steering clear of exposure to a risk -not always the most practical way of handling risk

Life insurance

Designed to protect against the risk of premature death

Health

Designed to protect against the severity of financial loss due to illness, disease, short or long-term disability, wages lost while ill or disabled, and medical expenses

Transfer

Essence of insurance -risk is transferred from one party to another -the party assuming the risk (the insurer) charges a small premium in exchange for providing benefits to the partly relieved of the risk (the insured) in the event of a covered loss

Ways to handle risk

Five ways.... 1)avoidance 2)retention 3)sharing 4)reduction 5)transfer