Riskcommer
Uncertainty concerning the occurrence of a loss
Pure risk
When there is uncertainty as to whether loss will occur, no possibility of gain
Example of Pure Risk
Your house burning down, getting in a car accident, etc.
Speculative Risk
when there is uncertainty about whether an event can produce either a profit or a loss
Example of Speculative Risk
Gambling, investments, etc.
Subjective risk
uncertainty based on a person's mental condition or state of mind
Example of Subjective Risk
Some people think flying in an airplane is unsafe, some think its totally safe
Objective risk
relative variation of actual loss from expected loss
Difference between Subjective and Objective Risk
differs from subjective risk in the sense that it is more precisely observable and therefore measurable
Peril
Cause of loss
Hazard
condition that creates or increases the frequency or severity of loss.
Diversifiable risk
risk that affects only individuals or small groups and not the entire economy
Nondiversifiable risk
risk that affects the entire economy or large numbers of persons or groups within the economy
Risk Retention
Involves the assumption of risk, if a loss occurs, an individual or
Risk transfer
pure risk is transferred from the insured to the insurer who typically is in a stronger financial position to pay the loss than the insured
Risk Avoidance
elimination of hazards, activities and exposures that can negatively affect an organization's assets.
Active retention
individual in consciously aware of the risk and deliberately plans to retain all or part of it
Passive retention
retained passively, certain risks may be unknowingly retained because of ignorance, indifference, laziness, or failure to identify an important risk.
Law of large numbers
states that as the number of exposure units increases, the more closely the actual loss experience will approach the expected loss experience
Pooling of losses
spreading of losses incurred by the few over the entire group, so that in the process, average loss is substituted for actual loss
Indemnification
that the insured is restored to his or her approximate financial position prior to the occurrence of the loss
Characteristic of an ideally insurable risk
1. no catastrophic loss
2. allow the pooling technique to work
3. exposures to catastrophic loss can be managed by using reinsurance, dispersing overage over a large geographic area
Types of private insurances
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Life insurance
pays death benefits to beneficiaries when the insured dies
Health insurance
covers medical expenses because of sickness or injury
disability plans
pay income benefits
Property insurance
indemnifies property owners against the loss or damages of real or personal property
liability insurance
covers the insured's legal liability arising out of property damage or bodily injury to others
casualty insurance
refers to insurance that covers whatever is not covered by fire, marine, and life insurance
Personal lines
coverage that insure the real estate and personal property of individuals and families or provide protection against legal liability
Commercial lines
coverage's for business firms, nonprofit organization, and government agencies
Adverse selection
tendency of persons with a higher than average chance of loss to seek insurance at standard rates, which if not controlled by underwriting, results in higher than expected loss levels
Reinsurance
arrangement by which the primary insurer that initially writes the insurance transfer to another insurer part or all of the potential losses associated with such insurance
expense loading
amount needed to pay all expenses, including commissions, general administrative expenses, state premium taxes, acquisition expenses, and allowance for contingencies and profit
Benefits of insurance on Society
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Risk management
process that identifies loss exposures faced by an organization and selects the most appropriate techniques for treating such exposures