Introduction to Insurance

TABLE OF CONTENTS

!The Nature of Risk !Forms of Risk !Analysing Risk Insurance A Risk Transfer Mechanism !Insurable Risk !Risk Management !The Market Place !Case Study !Additional Notes : - Heinrich Triangle - Classes of Insurance - Goverment Supervision

CHAPTER 1

The Nature of Risks

The Uncertainty Of Loss
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a. b. c. d. e.
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f. g. h. i. j.

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type of uncertainty

2. Desired Outcome

1. Rejected Outcome - Example : a. Risk of losing job b. Risk of fire

- Example : a. Chance of winning bet b. Chance of raining

CHAPTER 2

Form of Risk
A. Pure Risk vs Speculative Risk

- Pure Risk : Loss or Break Even

- Speculative Risk : Loss, Break Even or Profit

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B. Fundamental Risk vs Particular Risk Fundamental Risk : - Impersonal, both in origin & consequence - Not normally caused by 1 individual - Impact wide range of people

- Ex : war, inflation, changing customs, typhoon, waves Particular Risk : - Individual events - Impact Locally

- Ex : Theft of property, accidental damage to personal effects, explosion of a boiler, etc. C. Physical Hazard vs Moral Hazard Physical Hazard : - Physical/Tangible aspects influence occurrence and/or severity of loss - Ex : a. Life Insurance : Old age b.Health Insurance : Smoke Moral Hazard : - Attitudes and conduct of people - Ex : a. low salary strike

b. Sports car vs saloon family car

Bad Ones
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Good Ones
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CHAPTER 3

Analysing Risk

1. Frequency & Severity

High Frequency ~ Low Severity

- Ex : Health insurance Low Frequency ! ~ High Severity - Ex :

sickness

High Frequency ~ High Severity

- Ex :
!! ! !
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2. Statistical Risk Analysis

Descriptive Statistic ! Data collection, presentation & description

Inferential Statistic ! Estimation / Forecast

!! !! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! !

3. Probability Theory : Scale from 0 to 1 4. Physchological Aspects :

CHAPTER 4

INSURANCE A RISK TRANSFER MECHANISM

1. Primary Function of Insurance

- Risk Transfer : by paying small premium - Common Pool : premium collected from client's payments
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- Equitable Premiums : fair premium based on the risk degree 2. Subsidiary Functions - Stimulus to business enterprise * Security - Social Benefits : create jobs - Savings : life assurance 3. Associated Functions
-! Investment of Funds : Premium ! Investment !!

- Invisible Earnings : * Insurance premium from A country ! Reinsurance in other countries

CHAPTER 5

INSURABLE RISKS

1. Financial Value 2. Homogeneous Exposures 3. Pure Risk only 4. Particular & Fundamental Risks 5. Fortuitous ! sudden & unpredictable 6. Insurable Interest 7. Not Against Public Policy 8. Reasonable Premium

CHAPTER 6

RISK MANAGEMENT

The __________, ________ and Economic _____ of risks which could threaten the assets or earning capabilities of an organisation

Insurance * Insurable Risk

Risk Management * Insurable Risk * Uninsurable Risk

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Risk Management Process

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John Glenn Says: The greatest antidote to worry, whether you are getting ready for a space flight or facing a problem in life, is _________.
(Obat terbaik terhadap kecemasan, baik menerbangkan pesawat atau menghadapi masalah hidup adalah ____________)

The more you try to envisage what might happen and what your best response and options are, the more you are able to allay your fears for the future.
(Semakin kamu membayangkan apa yang akan terjadi dan apa tanggapan dan pilihan baik yang ada, semakin kamu mampu menghilangkan ketakutan akan masa depan.)

An effective summary of the risk management process.

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Risk identification * Identify risk(s) that may cause Financial Loss * Insured risk(s) & Uninsured risk(s)

Risk Identification techniques :

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- Organisational Charts

- Flow Chart - Check List

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- Others : Fault Trees, Hazard Analysis, HAZOP

Risk Evaluation * Evaluate the impact of risk to the company * How : - Qualitative : past records - Quantitative : statistic

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Risk Control Final step which Risk Manager use all informations he has to make best decisions for his company to control the risk Financial: * Retention : Self Insurance * Transfer : - Insurance - Futures - Options - Contracts Physical: * Elimination * Minimisation : - Pre Loss Minimisatio - Post Loss Minimisation

Self Insurance
Advantages : * Cheaper * Get Interest * Fix Premium * Direct Control * No disputes in claims * Prot to the insured Disadvantages : * Lack of claim fund : - Catastrophe - High frequencies * Low investment return * Lack of risk prevention skills * Low claim statistics * Temptation to borrow claim fund * No tax relief

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CHAPTER 7

THE MARKET PLACE

General Structure : Insurance Buyers Intermediaries / Middlemen : - Insurance broker - Agent - Insurance consultant

Purpose of Risk Management

Remove All Risks ?

Reduce the probability and/or severity of risk incidents down to _________ level

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CHAPTER 8

STUDY CASE

CASE STUDY 1
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* Salary : Rp. 3,000,000.- / month * Savings : Rp. 50,000,000.* Living cost : Rp. 2,500,000. - / month * Debt : Rp. 7,500,000.How to anticipate : Death Temporarily Disability Permanent Disability Sick Fired

FIGURE 1

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CASE STUDY 2
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* Car Value : Rp. 100,000,000.-

* Savings : Rp. 25,000,000.How to anticipate : Fire Lost Scratches Fines FIGURE 2

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CHAPTER 9

ADDITIONAL NOTES

Heinrich Triangel
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* Relationship between frequency and severity to industrial accidents * Every 1 major injury, there are 30 minor injuries and 300 non-injury accidents * Result of studying several thousand incidents

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Classes of Insurance

Combined & Comprehensive Policies - Combined Insurance Policy !! !! Ex : Flexas + RSMD 41ACC Advantages : a. Cheaper 1 administration fee b. Premium & 1 Renewal Date c. Easier to Market - Comprehensive * 1 step on from issuing Combined policy * Package, ie : Simas Rumah, Simas Ruko

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Goverment SuPervision

To Protect the Public : Solvency margin

Compulsory Insurance - Provision of funds - Eases the state's burden - Response to National Concern - Protection

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