Insurance Ch. 1
What are the costs of pure risks
1. Actual losses that occur 2. Worry and fear about possible losses 3. Less-than-optimal use of resources 4. Costs of managing the risks
What are the 5 classifications of risks?
1. Financial vs. Non-financial risks 2. Particular vs. Fundamental Risks 3. Static vs. Dynamic Risks 4. Pure vs. Speculative Risks 5. Insurable vs. Uninsurable Risks
What are the three types of Pure Risks?
1. Personal Risks 2. Property Risks 3. Liability Risks
Insurer's Premium
An amount to be paid for an insurance policy
Personal Risks (Pure Risks)
Concerned with death, injury illness, old age, and unemployment
Insurable vs. Uninsurable Risks
Insurable Risk = usually financial, particular, static and pure risks that meets five requirements [MUST be from Insurance from Privately owned insurance companies] 1. The amount of the loss must be important 2. The loss must be of an accidental nature 3. Future losses must be calculable 4. The loss must be definite 5. The loss cannot be excessively catastrophic
Particular vs. Fundamental Risks
Particular Risk = loss possibilities that affect only individuals or small groups of individuals at the same time, rather than a large segment of society. DEALT by individuals or insurance programs] Fundamental Risks = loss possibilities that affect large segments of a society at the same time. DEALT by society as a whole through government action]
What are the three types of hazards?
Physical hazards Moral hazards Attitudinal hazards
Pure vs. Speculative Risks
Pure Risk = either loss or no loss (Do not mix both profits and losses = Prospect of loss only is the cause of concern (Can be INSURED because its predictable) Speculative Risk = loss, no loss/no gain, or gain NOT insurable because not predictable
Static vs. Dynamic Risks
Static Risk = NOT involved changes in society or the economy (risks = death or fire damage to a client's home). TEND to be predictable and therefore treatable by insurance Dynamic Risk = involved in changes in society or in the economy. Including change in consumer tastes, preference in technology. TEND or be unpredictable and can potentially be untreatable
What methods do we use to measure risk?
The Deductive or the Inductive Method
Gambling
a speculative risk by betting on an uncertain outcome (people need to have a loss equal to the cost of insurance) Insurance does not create risk; it transfers and reduces a risk that already exists
Hazard
act or condition that increases the likelihood of the occurrence of a loss and/or increase the severity of a loss if a peril does occur
Perils
cause of loss: unemployment
Risk-tolerance Level
measures each person's reaction to risk (attached to or averse to the possibility of loss) - differs between person to person, situation to situation and risk to risk - important for a financial planner to understand a client's risk tolerance
Physical Hazard
physical condition relating to location, structure, occupancy, exposure
Property Risks (Pure Risks)
Destruction or loss of Property - may contain direct and indirect losses
Moral Hazard
Dishonest tendency likely to increase loss frequency and/or severity (Subprime Mortgage Crisis)
Financial vs. Non-financial risks
Financial risk = Loss of money (lost earnings or expensive medical bill) = More likely Non-financial Risk = Non-monetary losses (Compensation is provided by insurers if there is evidence of a policy owner's negligence)
Liability Risk (Pure Risks)
Individuals may become legally liable for injury to another person or damage to another party's property - also known as THIRT-PARTY Risk [injured person will be paid for injuries for which an insured is legally liable - can be financial or physical risk