Chapter 1

An Introduction to Insurance and Risk Management

Chapter 1: An Introduction to Insurance and Risk Management

What is Risk?

The chance of loss There must be a chance of loss for risk to exist.

Chapter 1: An Introduction to Insurance and Risk Management

2005 Kaplan Financial

Risk Defined

Chance/possibility of loss Uncertainty Variation of actual from expected results

Chapter 1: An Introduction to Insurance and Risk Management

2005 Kaplan Financial

Understanding Risk

Pure vs. Speculative Dynamic vs. Static Subjective vs. Objective Particular vs. Fundamental Financial vs. Nonfinancial Probability of Loss Law of Large Numbers

Chapter 1: An Introduction to Insurance and Risk Management

2005 Kaplan Financial

Responses to Pure Risk

Risk Risk Risk Risk

avoidance reduction retention or assumption transfer

Chapter 1: An Introduction to Insurance and Risk Management

2005 Kaplan Financial

Causes of Insured Losses

Perils Hazards

Physical hazard Moral hazard Morale hazard

Adverse Selection

Chapter 1: An Introduction to Insurance and Risk Management

2005 Kaplan Financial

Insurable Losses

Insurance vs. Gambling Requisites for an Insurable Risk

Large Number of Exposure Units Must Exist Insured Losses Must Be:

Accidental from Insureds Standpoint Measurable and Determinable

Losses Must Not Pose Catastrophic Risk for Insurer

2005 Kaplan Financial

Chapter 1: An Introduction to Insurance and Risk Management

Elements of a Valid Contract

Offer and Acceptance Legal Competency of all Parties Legal Consideration Lawful Purpose

Chapter 1: An Introduction to Insurance and Risk Management

2005 Kaplan Financial

Legal Principles of the Insurance Contract

The Principle of Indemnity

Subrogation Clause

The Principle of Insurable Interest The Principle of Utmost Good Faith

Warranty Representation Concealment

Chapter 1: An Introduction to Insurance and Risk Management

2005 Kaplan Financial

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Distinguishing Characteristics of Insurance Contracts

Adhesion (Take it or Leave it) Aleatory (Unequal Money Exchange) Unilateral (Only One Promise, Made By Insurer) Conditional (Conditioned on Paying the Premium)

Chapter 1: An Introduction to Insurance and Risk Management

2005 Kaplan Financial

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The Law of Agency

Agents & Brokers Agency Relationships

Express authority Implied authority Apparent authority

Chapter 1: An Introduction to Insurance and Risk Management

2005 Kaplan Financial

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Important Features of Insurance Contracts

Exclusions Riders and Endorsements Valuation of Insured Losses

Replacement Cost Actual Cash Value (ACV) Agreed-upon Value Deductibles and Copayments

Coinsurance
2005 Kaplan Financial

Chapter 1: An Introduction to Insurance and Risk Management

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Individual Loss Exposures and Insurance Coverages

Perils that Can Reduce and/or Eliminate the Ability to Earn Income

Dying too soon Living too long Disability

Perils that Can Destroy or Deplete Existing Assets

Damage to property Legal liability for injuries inflicted upon others

2005 Kaplan Financial

Chapter 1: An Introduction to Insurance and Risk Management

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Selecting an Insurance Company

Rating agencies

A. M. Bests Fitch Moodys Standard and Poors Weiss

NAIC Criteria

Chapter 1: An Introduction to Insurance and Risk Management

2005 Kaplan Financial

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Characteristics of Insurance Companies

Type of Ownership

Capital Stock Insurance Mutual Insurance

Insurance Underwriting Reinsurance Federal & State Regulation

Chapter 1: An Introduction to Insurance and Risk Management

2005 Kaplan Financial

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The Risk Management Process

Determining the objectives of the risk management program Identifying the risk exposure Evaluating identified risks as to the probability of outcome and potential loss

Chapter 1: An Introduction to Insurance and Risk Management

2005 Kaplan Financial

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The Risk Management Process

(cont.)

Determining and selecting the best risk management alternative

Risk Avoidance Loss Control Risk Retention or Assumption Risk Transfer

Implementing a risk management plan based on selected alternatives Periodically evaluating and reviewing the risk management program
2005 Kaplan Financial

Chapter 1: An Introduction to Insurance and Risk Management