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UIUC FIN 230 - Introduction to Risk and Insurance

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Today’s Lecture Introduction to Risk and InsuranceDefinitionsType of Risk - ExampleDefinitions (Cont.)Risk Attitudes - ExampleSlide 6Loss Exposure ExampleSlide 8Hazards ExampleMethods of Handling Pure RiskDefinition of Insurance (Page 52 of text)Insurance Versus GamblingIdeal Requisites for InsurabilityIdeal Requisites Example 1Ideal Requisites Example 2Ideal Requisites Example 3Types of InsuranceTypes of Insurance - ExamplesToday’s LectureIntroduction to Risk and Insurance•Definitions•Methods of handling risk•Insurance vs. gambling•Ideal requisites for insurability•Types of InsuranceDefinitionsRisk - Unpredictable OutcomePure Risk Loss No LossSpeculative RiskLossNo LossGainType of Risk - ExampleWhich of the following risks represents Speculative Risk?A Your car being stolenB Your mutual fund going down in valueC Flunking a courseD Getting a speeding ticketE None of the aboveDefinitions (Cont.)Risk Neutral - Indifferent Toward RiskValue of Risky Situation is Expected LossRisk Averse - Prefer to Avoid RiskWilling to Pay More than Expected Loss to Avoid RiskRisk Seeker - Prefer RiskWould Pay More than Expected Return to Engage in Risky SituationRisk Attitudes - ExampleEngaging in a wager when the odds are in your favor is something that which of the following risk types would do?I Risk NeutralII Risk AverseIII Risk SeekerA I only B II onlyC III only D I and IIIE None of the aboveDefinitions (Cont.)Exposures - Person or Property Facing Pure RiskPersonal Loss Exposures - Affect Life, Health or Income of an IndividualProperty Loss Exposure - Damage to ItemsDirect Loss - Cost of Repair (Replacement)Consequential Loss - Additional CostsLiability Loss Exposure - Responsible for Damages to OthersLoss Exposure ExampleThe State Farm Car policy used in this class protects against which of the following exposures?I Personal Loss II Property LossIII Liability LossA I and II only B I and III onlyB II and III only C I, II and IIIE None of the aboveDefinitions (Cont.)Perils - Immediate Causes of LossHazards - Conditions Affecting PerilsPhysical Hazards - Property ConditionsIntangible Hazards - Attitudes and CultureMoral Hazard - FraudMorale Hazard - IndifferenceSocietal Hazards - Legal and CulturalHazards ExampleExaggerating the value of your property when submitting an insurance theft claim represents which of the following type of hazard?A PhysicalB Moral C MoraleD SocietalE None of the aboveMethods of Handling Pure Risk•Avoidance•Loss Control–Loss Prevention - Reduce Loss Frequency–Loss Reduction - Lower Loss Severity•Retention•Transfer–Corporations–Contractual AgreementsDefinition 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 GamblingGambling Creates RiskInsurance Transfers Existing RiskGambling is Speculative RiskInsurance Deals with Pure RiskIdeal Requisites for Insurability1 Large Number of Similar Exposure Units2 Fortuitous Losses3 Catastrophe Unlikely4 Definite Losses5 Determinable Probability Distribution6 Economic FeasibilityIdeal Requisites Example 1Which, if any, of the ideal requisites for insurability are violated by flood insurance?A Large Number of Similar Exposure UnitsB Fortuitous LossesC Catastrophe UnlikelyD Definite LossesE Determinable Probability DistributionIdeal Requisites Example 2Which, if any, of the ideal requisites for insurability are violated by divorce insurance?A Large Number of Similar Exposure UnitsB Fortuitous LossesC Catastrophe UnlikelyD Definite LossesE Determinable Probability DistributionIdeal Requisites Example 3Which, if any, of the ideal requisites for insurability are violated by mental health insurance?A Large Number of Similar Exposure UnitsB Fortuitous LossesC Catastrophe UnlikelyD Definite LossesE Determinable Probability DistributionTypes of Insurance•Personal or Commercial•Life-Health or Property-Liability•Private or Government•Voluntary or InvoluntaryTypes of Insurance - ExamplesSocial Security•Personal•Life-Health •Government•InvoluntaryMedical


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UIUC FIN 230 - Introduction to Risk and Insurance

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