Today s Lecture Introduction to Risk and Insurance Definitions Methods of handling risk Insurance vs gambling Ideal requisites for insurability Types of Insurance Definitions Risk Unpredictable Outcome Pure Risk Loss No Loss Speculative Risk Loss No Loss Gain Type of Risk Example Which of the following risks represents Speculative Risk A Your car being stolen B Your mutual fund going down in value C Flunking a course D Getting a speeding ticket E None of the above Definitions Cont Risk Neutral Indifferent Toward Risk Value of Risky Situation is Expected Loss Risk Averse Prefer to Avoid Risk Willing to Pay More than Expected Loss to Avoid Risk Risk Seeker Prefer Risk Would Pay More than Expected Return to Engage in Risky Situation Risk Attitudes Example Engaging in a wager when the odds are in your favor is something that which of the following risk types would do I Risk Neutral II Risk Averse III Risk Seeker A I only B II only C III only D I and III E None of the above Definitions Cont Exposures Person or Property Facing Pure Risk Personal Loss Exposures Affect Life Health or Income of an Individual Property Loss Exposure Damage to Items Direct Loss Cost of Repair Replacement Consequential Loss Additional Costs Liability Loss Exposure Responsible for Damages to Others Loss Exposure Example The State Farm Car policy used in this class protects against which of the following exposures I Personal Loss II Property Loss III Liability Loss A I and II only B I and III only B II and III only C I II and III E None of the above Definitions Cont Perils Immediate Causes of Loss Hazards Conditions Affecting Perils Physical Hazards Property Conditions Intangible Hazards Attitudes and Culture Moral Hazard Fraud Morale Hazard Indifference Societal Hazards Legal and Cultural Hazards Example Exaggerating the value of your property when submitting an insurance theft claim represents which of the following type of hazard A Physical B Moral C Morale D Societal E None of the above Methods of Handling Pure Risk Avoidance Loss Control Loss Prevention Reduce Loss Frequency Loss Reduction Lower Loss Severity Retention Transfer Corporations Contractual Agreements Definition of Insurance Page 52 of text Insurance is a social device in which a group of individuals insureds transfer risk to another party insurer in order to combine loss experience which permits statistical prediction of losses and provides for payment of losses from funds contributed premiums by all members who transferred risk Insurance Versus Gambling Gambling Creates Risk Insurance Transfers Existing Risk Gambling is Speculative Risk Insurance Deals with Pure Risk Ideal Requisites for Insurability 1 2 3 4 5 6 Large Number of Similar Exposure Units Fortuitous Losses Catastrophe Unlikely Definite Losses Determinable Probability Distribution Economic Feasibility Ideal Requisites Example 1 Which if any of the ideal requisites for insurability are violated by flood insurance A Large Number of Similar Exposure Units B Fortuitous Losses C Catastrophe Unlikely D Definite Losses E Determinable Probability Distribution Ideal Requisites Example 2 Which if any of the ideal requisites for insurability are violated by divorce insurance A Large Number of Similar Exposure Units B Fortuitous Losses C Catastrophe Unlikely D Definite Losses E Determinable Probability Distribution Ideal Requisites Example 3 Which if any of the ideal requisites for insurability are violated by mental health insurance A Large Number of Similar Exposure Units B Fortuitous Losses C Catastrophe Unlikely D Definite Losses E Determinable Probability Distribution Types of Insurance Personal or Commercial Life Health or Property Liability Private or Government Voluntary or Involuntary Types of Insurance Examples Social Security Personal Life Health Government Involuntary Medical Malpractice Commercial Property Liability Private Voluntary
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