RISK MANAGEMENT

Ch. 10 RISK MANAGEMENT
10.1 Nature of Risk
10.2 Methods of Handling Risk
• Reduce the risk (instillation a burglar alarm and etc)
• Avoid the risk
• Assume the risk (self-insurance)
• Spread the risk
• Shift the risk (insurance)

. BASIC PRINCIPLES OF INSURANCE
10.3 The Law of a Large Numbers (the law of averages)
Many types of losses are predicable over a period of time. The degree of predictability of lass varies directly with the size of the number of cases used (for ex. 5 from 1000 houses will be damaged from fire this years).

10.4 Insurable Risk
In order to qualify for insurance, a risk must possess following characteristics:
• The loss must be measurable and predictable
• The risk must be numerous
• The risk must be spread out
• The loss must be purely accidental
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10.5 Insurable Interest

10.6 The Indemnity Principle
It states that one may not collect for more than the actual loss should an insured-against event occur. Make profit from a loss. At the time of loss, and assuming adequate coverage, an insurance company will be pay the exact amount of the loss or actual cash value. As a general rule, it will pay what it would cost to replace the property less depreciation. It is thus uneconomical to carry too much insurance. The indemnity principle does not apply to life or health insurance because no upper limit can be placed on the value or either one.

10.7 The Coinsurance Principle
2 purposes:
• Prevents policyholders from underinsuring their property
• It make the insured bear a certain percentage of the loss

The typical insurance contract includes coinsurance clause, which states that the company is liable in the event of loss only in the proportion that the amount of insurance carried bears to the amount required.



10.8 Pro Rata Liability
If you insure with more than one company, each is liable for only its pro rata share of the loss.

10.9 Insurance Companies
Stock Companies – a state-chartered corporation owned by its stockholders and operated for profit. Policyholders are not assessed if losses are greater than expected.
Mutual Companies – nonprofit corporations owned by their policyholders. Any excess income is returned to policyholders in the form of a dividend or premium reduction. Policyholders can also be assessed should losses prove greater than anticipated.

10.10 Types of Insurance
• Fire insurance
• Automobile Insurance (Collision insurance, fire and theft, liability)
• Life insurance (straight-life, limited-payment life, endowment, and term)
• Accident and Health Insurance
• Liability Insurance
• Insurance Against Dishonesty (Fidelity Bonds)
• Insurance Against Nonperformance (Surety Bonds)
• Marine Insurance (Ocean Marine, Inland Marine)
• Public Insurance (Workman’s Compensation, Social Security Program FICA, Federal Deposit Insurance Corporation FDIC and Federal Savings and Loan Insurance Corporation FSLIC, Federal Housing Administration FHA, Federal Flood Insurance, Federal Crime Insurance).

Business Terms
Coinsurance principle – states that the insurance company is liable for no more than the amount that the insurance carried bears to the value of the property at the time of loss.
Collision insurance protects the owners against damages caused to his or her vehicle due to collision with other automobiles or any other objects, whether moving or stationary.
Comprehensive coverage endorsement extends fire and theft coverage to include losses resulting from windstorm, flood, riot, or practically any other cause except collision or upset.
Consequential losses – losses not directly connected with the insured-against event. Smoke and water damage are examples.
Deductible – limited losses which must be borne by the insurance coverage begins.
Endowment – insurance premiums are paid for only limited number of years, at which time the insured receives the full value of the policy. If he or she dies before then, the full value is paid to the beneficiary. Provides the greatest savings feature.
Hedging – a basic method of handling risk. Involves trading futures on common exchanges in order to gain protection against loss from price-level fluctuation.
Indemnity principle states that one may not collect more that the actual loss should an insured-against event occur. Makes it impossible to make a profit from a loss through insurance.
Inland Marine insurance that covers the shipment of goods by rail, truck, airplane, and coastal or inland waterway, financial loss would be suffered should the insured-against event occur.
Insurable interest-in order to collect from an insurance claim, the insured must be able to demonstrate that some financial loss would be suffered should the insured-against event occur.
Insurable risk states that in order to be insurable, a risk must possess certain characteristics, the loss must be measurable and predictable, the risks must be numerous, the risk must be spread out, the loss must be purely accidental.
Liability insurance covers injury to others or damage to the property of others on the part of the insured through some negligent act.
Limited payment life – insurance premiums are paid for a specified numbers of years only.
Mutual company – nonprofit corporations owned by their policyholders. Any excess income is returned to policyholders in the form of a dividend or premium reduction. Policyholders can also be assessed should losses prove greater than anticipated.
No-fault insurance – in states with no-fault laws, each automobile owner is required to carry a specified amount of liability insurance for the owners and any passengers. Any injuries suffered are paid by the policyholder’s own company, regardless of who is at fault.
Risk also called peril or hazard – undesirable event.
Standard fire policy (SFP) provides for uniformity in the writing of fire insurance contracts.
Stock company – a state-chartered corporation owned by its stockholders and operated for profit. Policyholders are not assessed if losses are greater than expected.
Straight-life requires that an equal premium be paid from a fate of purchase until death, when the full amount of the policy is paid to the beneficiary. Includes a savings feature which may be barrowed against or received in a lump sum it the policy is terminated.
Term – a basic type of life insurance protection. Provides the greatest amount of protection at the lowest premium cost for a stated number of years. Includes no savings feature and becomes increasingly expensive with age.