Fin: Insurance and Risk Management

• Premium: an amount to be paid for a contract of insurance
• premium income: sales made from insurance
• 3 classifications of insurance include: life insurance, health insurance, property and liability insurance
• insurance density: premiums per capita = total premium / population
• Insurance Penetration: Premiums as % of GDP = Total Premium/GDP
• Claim Adjuster - A person who investigates and settles claims for insurance companies
• Insurance Underwriters - they are the ones who decide whether or not to insure a person or a company
• Insurance Sales Agent - Sells insurance policies to individuals and businesses
• Risk Managers are responsible for identifying, assessing, and controlling risks to the organization
• Risk is uncertainty concerning the occurrence of a loss
• law of large number states that as the number of exposure units increases, the more closely the actual loss
• In insurance risk identifies property or life being considered for insurance
• Risk vs uncertainty: Risk is the probability of loss, uncertainty is the magnitude of loss can’t be estimated
• loss exposure situation where loss is possible regardless of whether loss actually occurs
• Manufacturing plants that may be damaged by an earthquake or flood is an example of loss exposure
• Objective risk (degree of risk)relative variation of actual loss from expected loss
• Subjective risk is uncertainty based on persons mental conditions or state of mind, difficult to measure, results in prudent behavior
• Drunk driving is an example of subjective risk
• Objective Probability in the long run relative frequency of an event based on assumption of infinitive number of observations and no change in the underlying conditions
• chance of loss vs objective risk: chance of loss is the probability that an event that causes a loss will occur; and objective risk is relative variation of actual loss from expected loss
• peril is the cause of loss
• hazard creates or increases frequency or severity of loss
• Four types of hazard: Physical, Moral, Attitudinal, and Legal
• Physical: physical condition increases frequency/severity of loss such as an icy road
• Moral is dishonesty or character defect that increase frequency or severity of loss
• Attitudinal is carelessness or indifference to a loss
• Legal is the characteristic of legal system
• Pure risk is a situation which there are only possibilities of loss or no loss
• Speculative risk situation in which either profit or loss is possible
• Diversifiable risk is a risk that affect only individuals or small groups and not the entire economy
• Non diversifiable risk is risk that affects the entire economy or large number of persons or groups within the economy
• Enterprise risk includes all risks faced by business firm such as pure risk, speculative risk, operational, and financial risk
• Strategic risk refers to uncertainty relating to firms financial goals/objectives
• operational risk is firms business operation
• financial risk is the uncertainty of loss because of adverse changes in commodity prices, interest rates, foreign and the value of money
• Enterprise risk management combines into a single unified treatment program all major risk faced by the firm
• systematic risk is the risk that collapses an entire system or entire market due to failure of single entity or group of entities that result in break down of entire financial system
• personal risk are risk that directly affect an individual or family this includes premature death, retirement risk, poor health, or unemployment
• property risk is anyone who owns property is at risk of having property damage or destroyed
• direct loss is financial loss resulting from physical damage or destruction