chapter 25- introduction to risk management

what is an example of a liability risk?

- accidentally causing injury or damage to others or their property by your conduct while driving a car - person could fall because of your home's crumbling front steps and break an arm.

what are some examples of pure risks?

- accidents resulting in physical injury and damage to property - illnesses that people get throughout life, as a part of aging - acts of nature, resulting in damage to persons and property

what are some examples of a speculative risk?

- gambling - investing in real estate (you never know when property will sell)

what are some ways to reduce insurance costs?

- increase deductibles - look for discounts, comparison shop - buying more than one type of insurance from the same company usually results in lower costs

what are some techniques for handling risks?

- risk shifting/risk transfer - risk avoidance - risk reduction - risk assumption

what is the three-step process to risk assessment?

1. identify risks of loss 2. assess seriousness of risks 3. handle risks

pure risk

a chance of loss with no chance for gain - random and results in loss

insurance

a method for spreading individual risk among a large group of people to make losses more affordable for all

insurable risk

a pure risk that is faced by a large number of people and for which the amount of the loss can be predicted

policy

a written insurance contract

what must you have to purchase insurance?

an insurable interest

risk management

an organized strategy for controlling financial loss from pure risks and insurable risks - you can't eliminate risk, but you can manage it to avoid major loss

insurable interest

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

how do you spread risk?

buy insurance

insurance is not meant to enrich...

it's only to compensate for actual losses incurred

risk avoidance

lowers the chance for loss by not doing the activity that could result in the loss

risk reduction

lowers the chance of loss by taking measures to lessen the frequency or severity of losses that may occur

speculative risk

may result in either gain or loss - not "accidental" or random - cannot purchase insurance to protect yourself from speculative risk

economic risk

may result in gain or loss because of changing economic conditions - recovery or growth-- financial gains - recession (decline)-- financial losses, layoffs

risk shifting (risk transfer)

occurs when you buy insurance to cover financial losses caused by damaging events, such as fire, theft, injury, or death - by making premium payments, you shift the risk of major financial loss to the insurance company

what are the three major insurable risks?

personal, property, and liability

risk management is a...

process

indemnification

putting the policyholder back in the same financial condition he or she was in before the loss occurred

personal risk

the chance of loss involving your income and standard of living

property risk

the chance of loss or harm to personal or real property

liability risk

the chance of loss that may occur when your errors or actions result in injuries to others or damages to their property

risk assumption

the process of accepting the consequences of risk - not recommend for a serious risk

deductible

the specified amount of a loss that you must pay

risk assessment

understanding the types of risk you will face and their potential consequences

premium

when an insurance company agrees to assume an identified risk for a fee - usually paid at regular intervals by the policyholder (monthly)

what is an example of risk reduction?

you put studded snow tires on your car, install fire alarms or sprinklers in your home, or use seat belts

what is an example of a property risk?

your home, car, or other possessions could be damaged or destroyed by fire, theft, wind, rain, accident, and other hazards