1-E Risk Management

Give an example of Risk Avoidance.

An insurer may refuse to insure a vacant building for the peril of vandalism--the probability of loss is just too high. Other reasons an insurer might practice Risk Avoidance include an applicant's record. For example, imagine a potential client applying for insurance on a house in a good neighborhood. Normally, an insurer would have no qualms about issuing the policy, until a background check discloses the applicant's record of insurance fraud convictions. Risk Avoidance would be a sensible method in this case.

What is Risk Avoidance?

As the name suggests, by practicing Risk Avoidance the insurer elects not to write a policy for an applicant, usually because it has verified the likelihood that premiums will not cover claims costs. Risk Avoidance might be practiced simply because of high exposure to loss.

Review: What is Risk Retention?

Assuming and acceptance of risk.

What are four key concepts of Risk Management Techniques?

Avoidance, Reduction, Transference, and Retention

Review: What does Risk Avoidance do?

Eliminates risk.

Explain risk management from the insurers perceptive.

If it insures too many high risks (high probabilities of losses), claims payments could be more than premium collections. If losses are more than gains, the insurer would not make enough to pay claims and business expenses. There would be no more insurance, and everyone would lose.

Explain how Risk Transference works.

Sometimes an insurer is willing to accept a certain risk only if it can share, or transfer, some of it. The risk-sharer is called a re-insurer, essentially a provider of insurance for an insurer. When an insurer purchases insurance in order to transfer some of its risk of loss, it is practicing risk transference. Often used to protect an insurer from catastrophic losses caused by such large-scale disasters as hurricanes or floods, re-insurance typically pays either a percentage of total losses or for any losses over a predetermined amount. The insurer's obligations to its policyholders are in no way altered when it transfers risk by means of reinsurance.

Explain how an insurer practices Risk Reduction and give examples.

In three main ways: it can insure a risk but charge higher than usual premiums, or it can require the policyholder to perform some action to reduce risk, or it can provide less coverage than the applicant wants. Another method to mitigate certain risks is practiced when an insurer provides less coverage than an applicant might want. For example, a yacht owner might apply for a $250,000 policy, but his insurer might only agree to $50,000 because the boat is not stored under shelter. For example, drivers with poor driving records commonly pay much higher premiums than safe drivers because the insurer, by collecting more in premiums, reduces its risk of paying more for a claim than it collects in premiums. As another example, consider an applicant for Workers' Compensation insurance. An insurer might practice Risk Reduction by writing a policy including a condition that the insured must install a sprinkler system and post signs marking dangerous areas.

What is Risk Retention?

Retention = Acceptance. Insurer accepts the risk and issues a policy. When an insurer determines that it will be likely to take in more money in premiums than it pays out in claims, it practices Risk Retention.

What are the two questions insurers ask to measure risk?

1. What is the chance of loss on an item? 2. How can the insurer reduce the risk o loss when insuring a particular item or person

When does risk management begin?

Before a policy is purchased.

Review: What does Risk Reduction do?

Reduces or mitigates risk.

Give an example explaining Risk Retention.

When Sean applied for insurance after he bought a home, his insurer examined his record and the value of the home and wrote Sean a policy. Maria applied for a policy for her new car, and because of her good driving record, her insurer issued the policy. Both of these are examples of Risk Retention. You have an auto policy because your insurer has practiced Risk Retention.

Review: What is Risk Transference?

Re-insurance, risk sharing.

What is Risk Transference?

Risk Transfer = Re-Insurance. Re-insurance is insurance protection for insurers. Insurer still has the same obligation to its policyholder.