RI 1 case studies
An automobile club charged more for first year memberships than for renewal memberships. When asked about this pricing policy, a club official said, "It costs something to put the new members' names on the books, and more importantly, utilization of club services tends to be much higher for first year club members, we we must adjust our rates accordingly." Is a similar phenomenon observed in private insurance markets? Explain.
Auto clubs like private insurers are susceptible to adverse selection problems. Individuals are likely to seek out health insurance if they are sick, drivers are more likely to enroll in auto club if they anticipate the need for its resources. Through underwriting private insurers try to prevent high risks from passing off as average risks leading to higher than anticipated losses. The auto club loads new members.
For many years SJ was a successful independent insurance agent. Recently, she was recruited by two insurance companies. W/ the first she'd be an exclusive agent. W/ the second she'd be a direct writer. What changes would SJ observe if she switched?
Currently SJ is an independent businessperson repping more than one insurer. She owns the expiration rights to the coverage she sells and her renewal commissions = commission earned on new business. Exclusive agent- still be independent businessperson but only rep one company who would own the expiration rights and no higher commission on renewal Direct writer- employee rather than agent, paid a salary, rep one insurer
Casinos and lotteries have increased in popularity in recent years. What type of risk (pure or speculative) is created when someone gambles as a casino or plays the lottery? The method of wagering at casinos is interesting. Most games of chance are designed to have repeated small bets rather than a single large bet. Why are the games designed in this way?
Gambling is a speculative risk. Possibilities of loss, no loss, and gain. Repetitions reduce objective risk for the casino. If a casino game is played 4 times for high stakes the casino could lose a lot but if it's played 400 times at low stakes then the result will be closer to expected outcome. Both casinos and insurers apply the same mathematical principle (law of large numbers) to reduce objective risk.
Individuals who are in charge of handling loss exposures for corporations, municipalities, universities, etc, are called "risk managers." Why are the ID of hazards and the prep for perils important in risk management? What types of physical hazards confront the risk manager of your college or uni?
Identifying hazards before loss occurs allows the risk manager to better prepare for and reduce the likelihood that the hazard will result in loss. Uni hazards: crowded buildings w/ limited exits, ice on campus roads, unruly crowds at campus events, hazardous substances in chem labs, unattended vehicles in lot, etc.
Why did the agent wait so long to tell SC about the premium increase? Is SC also to blame for being surprised by the premium increase? As SC's risk management consultant what would you do?
It's likely the agent was afraid of losing the account if SC officials were aware of the price increase. SC should have known and prepared for these problems in advance You should first ask the agent to extend converage at a pro rate premium for a short period of time
How might compensation and rewards be restructured to obtain better underwriting results?
Only being compensated on straight commission leads to an incentive to sell as much as possible and can lead to bad risks. Also consider the quality of applicants solicited by agents. Award for quantity and quality.
John's risk manager for UM, the personnel dpmtmt is responsible for eemployee benefits and the risk mgmt dpmt is concerned with property and liability exposures only. Late last year, UM added employee benefit of off site day care for employees with children. No one told John about this new benefit or its location. Why was John furious when he learend about the existence of this off site day care?
Since John did not know about the location it could nnot have been listed under insurance coverages. UM may not be covered for legal liability arising from the day care center. If the day care was an insured location the companys liability insurance might exclude liability for such an operation. This case shows the importance of communication and cooperation between departments.
The Feelings Mutual Insurance co is considering insuring two risks the company has not previously insured: windstorm and war. Considering the recs of privately insurable risks, will TFMIC be able to write insurance for windstorm and war? Explain.
Windstorm yes: lrg # exposure units, losses accidental/unintentional, losses determinable/measurable, diversification or reinsurance avoids catastrophe, premium economically feasible, chance of loss calculatable based on historical data War no: lrg # exposure units, losses not accidental/unintentional, losses difficult to determine, losses could be catostrophic, not calculatbale, unlikely affordable premium