Personal Finance Risk Management

Risk Management

An organized strategy for controlling financial loss from pure risks and insurable risks.

Why do teenagers pay a higher premium for auto insurance?

Don't have experience driving so there is a greater potential for an accident.

Some steps that families can take to reduce the premium for teenage drivers?

Driver education, increasing deductible, teen has good grades.

Three steps in Risk Management

1.) Identify risks of loss 2.) Assess seriousness of risks 3.) Handle risks

Risk Assumption

Accepting the consequences of risk by self-insuring to absorb the loss. Ex: To help cushion your financial burden, you could establish a monetary find to cover the cost os a loss.

Property Risk

Chance of loss or harm to personal or real property. Ex: Your home, car, or other possessions could be damaged or destroyed by fired, theft, wind and rain, accident or other hazards. To protect against these risk you can buy property insurance.

Pure Risk

Chance of loss with no chance for gain. Random (can happen to anyone) and result in loss (not gain). Ex: Any accident resulting in physical injury and damage to property.

Explain how deductibles impact the cost of insurance premiums.

Lower the deductible, higher the insurance.

Risk Avoidance

Lowering your chance of loss by not doing high-risk activities. Ex: Instead of having a party at your house and risking damage, you could reserve a section of a resturant.

Indemnification

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

Risk Reduction

Taking measures to lessen the frequency of severity of losses that might occur. Ex: Installing fire alarms, using seat belts.

Deductible

The specified amount of a loss that you must pay. The higher the deductible, the lower the insurance premium.

Deductible

The specified amount of loss that you (the insured) will have to pay.

Risk Shifting

Transferring risk by buying insurance to cover potential losses. Ex: By making premium payments, you shift the risk of major financial loss to the insurance company.

Premium

Under the policy, the insurer agrees to assume an identified risk for a fee. The cost (usually monthly) of an insurance policy.

Risk Assessment

Understanding the types of risk you will face and their potential consequences.