RMI 3011 Notes Chapter 2 McChristian lmcchristian my fsu edu Insurance the pooling of fortuitous losses by transfer of such risks to insurers who agree to indemnify insureds for such losses to provide other pecuniary benefits on their occurrence or to render services connected with the risk Pooling of losses o Spreads losses over the entire group o Risk reduction is based on the Law of Large Numbers Payment of fortuitous claims Risk transfer Indemnification Adverse Selection the tendency of persons with a higher than average chance of loss to seek insurance at standard rates o If not controlled by underwriting adverse selection results in higher than expected loss levels o Can also be controlled by policy provisions Insurance vs Hedging vs Gambling Insurance o Technique for handling an already existing pure risk o Always socially productive society benefits from something broken being made whole again o Both parties have a common interest in the prevention of a loss o Risk is transferred by a contract o Involves the transfer of pure insurable risks o Can reduce the objective risk of an insurer Hedging Gambling o Risk is transferred by contract o Hedging involves risks that are typically uninsurable o Does not result in reduced risk o Creates new speculative risk o Not socially productive o Winner s gain comes at the expense of the loser Types of Private Insurance long term care plans o Property and Liability o Life and Health Includes individual and group health plans disability income plans Personal Lines for individuals and families Commercial Lines for businesses nonprofit organizations government agencies Types of Government Insurance o Social Insurance Programs Financed entirely or in large part by contributions from employers and or employees Benefits are heavily weighted in favor of low income groups Eligibility and benefits are prescribed by statute Examples Social Security Unemployment Workers Comp o Other Governmental Insurance Programs Found at both the federal and state level Examples Federal flood insurance state health insurance pools Social Benefits of Insurance o Indemnification for Loss o Reduction of Worry and Fear o Source of Investment Funds safe investments o Loss Prevention o Enhancement of Credit credit rating is better because your property is insured and your credit company knows those costs can be paid off Social Costs of Insurance o Cost of doing business An expense loading is the amount needed to pay all expenses including commissions general administrative expenses state premium taxes acquisition expenses and an allowance for contingencies and profit o Fraudulent Claims Lots of staged accidents most common claims are for Personal Injury Protection vehicle Application and worker s compensation When cases are suspect they are sent to an investigation unit and if found to be false claims the people are arrested o Inflated Claims o Higher premiums to cover additional losses reduce disposable income and consumption of other goods and services Mergers and Acquisitions huge way for insurance companies and businesses in general to grow their business and make more money
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