1. Insurance and risk management Standard 11

2. What is risk? O the likelihood of loss or profit O from an investment O from some threat to your well-being ability to tolerate risk varies from person to person

3. Risk O Based on uncertainty O Part of every day life O It involves a loss, a catastrophe, or some other undesirable or negative outcome Sometimes it is possible to control risk Other times it is not

4. Potential Sources of Risk O If you drink and drive, you’re responsible. O You’re in the car with a friend who runs a red light, you are subject to risk. O Your house gets damaged by an earthquake, your loss is a result of circumstances beyond your control.

5. Managing Risk O Avoid O Reduce O Accept O Transfer

6. Avoiding Risk O You choose not to act on a behavior you know is risky O Example: You’ve never owned a business and know nothing about running one, you can avoid the risk but not starting one.

7. Reducing Risk O lowers the severity of loss or likelihood of loss occurring O Example: Installing smoke detectors in your home reduces the risk of fire damage.

8. Accepting Risk O A viable strategy for small risks where the cost of insuring against the risk would be greater than the total loss O Example: If your friend’s car manual recommends changing the oil every 5,000 miles, she waits to have the oil changed at 5,200 miles it is a small risk that will most likely not cause severe loss.

9. Transferring Risk (to a third party) O achieved by buying insurance O The insurance policy you purchase that protects you from catastrophic loss and the insurance company is covers it. O Example: You are required by law to purchase insurance on your car.

10. A Risky BehaviorRunning a red light when driving A way to avoid the riskStop at the light A way to reduce the riskLook both ways before you run it A way to accept the riskRun it anyway A way to transfer the riskHave car insurance in case you do get into an accident

11. Different Types of Insurance Module 11.2

12. Terminology O PREMIUMS O the fees paid to cover potential losses O insurance companies takes premiums and pools them together O Funds are available to pay for losses suffered by member of pool O CLAIM O Written request to insurance to cover a loss

13. Terminology Continued O DEDUCTIBLE O Amount you’re willing to pay before insurance picks up the rest O Represents RETAINED risk O Example : Car insurance may have a $500 deductible

14. Types of Insurance HEALTH/MEDICAL O protects family from expected/unexpected health care-related problems O You pay monthly premiums based on different factors O Having insurance through employer is cheaper than buying your own

15. Health Insurance… O Copayment – amount you’ll have to pay each time you go to the doctor ($25-$35) O Coinsurance – percentage of your medical costs you will need to pay after meeting you deductible (Traditionally insurance = 80%, you = 20%) O Cap – The most YOU pay out of pocket before insurances covers ALL

16. Types of Insurance O MEDICARE –program provided by the government for people 65+ with certain health problems O MEDICAID – like medicare but pays for low- income citizens of all ages O LONG-TERM CARE – covers costs associated with nursing homes

17. Types of Insurance O LIFE INSURANCE – insures against loss of income due to death or retirement planning O You pay, others benefit. O It provides for others in case you die. O Term Life – provides coverage for a defined time period (5, 10, or 20 years) O Whole Life – covers for entire life O Universal Life – whole life with more flexibility; allows policy holder to make changes

18. Types of Insurance O LIABILITY INSURANCE – protects you when others claim to be hurt or injured as a result of something you did/didn’t do. O HOMEOWNERS INSURANCE – protects against, fires, tornadoes, busted pipes, robbery, etc. (very few cover flood) O Rule of thumb: cover for 80% of replacement value, the other 20% is the value of land which doesn’t need to be replaced

19. Types of Insurance O RENTERS – protects renters from theft or damage of personal items (furniture, TV, computer, clothing, etc.) O AUTOMOBILE – it’s the LAW to have car insurance O Collision for you if you get into an accident O Auto liability insurance pays for someone else’s property or injuries O Comprehensive insurance covers vehicle if damaged by act of nature or stolen

20. Types of Insurance O DISABILITY - provides benefits if you become injured or ill O You may need extra time to recover before returning to work

21. Using Insurance to Manage Risk 11.3

22. Example John had an accident on his skateboard. His hospital bill is $40,250. Based on his insurance policy information below, how much will John have to pay? Deductible: $250 Coinsurance: 80/20 Cap on coinsurance: $2,000

23. Deductible: $250 Coinsurance: 80/20 Cap on coinsurance: $2,000 $40, 250 – 250 (deductible) = $40,000 $40,000 x 20% = $8,000 $8,000 > John’s $2,000 cap $2,000 cap + $250 deductible = $2,250 total

24. Principal of Probability (represents CHANCE) O Insurance companies measure the probability you’ll need to make a claim O They decide how much they will charge you for the policy based on that O The more likely a company thinks you’ll file a claim, the higher your premium will be O Why people will health problems pay higher for health insurance and teens pay higher for car insurance

25. Risk Factors Considered O Driving record – the worse the record, the higher the premium and vice versa O Type of car – sticker price, repair costs, and safety records affects rate O Theft – frequently stolen cars are higher O Age – younger drivers pay more b/c of stats O Where – large cities with heavy traffic are higher O Credit report score – good score = good premiums