Intro to Business Chapter 34 Dealing with Risk Intro to Business Chapter 34

Learning Objectives Explain how insurance can help people protect themselves against possible financial loss. Describe the process of purchasing insurance, and identify the more common types of insurance. Identify the factors that affect the cost of insurance. Explain important steps to follow to interpret a statistical table.

Questions to Ask Yourself What can minimize the risk of financial loss? Where can you buy insurance? What are the differences among the many kinds of insurance available? What factors affect the cost of insurance? How can you interpret a statistical table?

Managing Risk Sharing risk through insurance Insurance-A protection plan that divides possible losses among large numbers of people pay money in the hope that if they suffer a loss, the insurance coverage they purchased with their premiums will cover their financial loss.

Insurance Process Pay fee for protection Principle of large numbers Financial risks are handled most effectively when large numbers of people share the risk. Large number of people that pay the fee makes enough money available to cover the loss for the few people who have an emergency or disaster.

Risk Management Services Provided by the insurance companies for a fee Estimate the probability rate at which an emergency or disaster will occur Cliff jumping (risky, higher premiums) Area with many house fires (risky, higher premiums)

Purchasing Insurance Insurable Interest-a financial interest in property or another person’s life that permits a person to buy insurance to protect against loss customer must be able to prove that the loss of the person or item insured would cause a financial loss to the customer.

Purchasing Insurance Agents offer info, help, and guidance to customers to find best program for their needs. agent prepares an application for the customer after the plan is complete. A policy is made after application is accepted. Policy-formal written agreement between the purchaser and the company

Purchasing Insurance A policy identifies: the insurer- the insurance company the insured- the customer or policyholder details of the protection, costs, rights, and responsibilities of the insured conditions under which the insurer will or will not honor claims- requests for payment to cover financial losses.

Purchasing Insurance A policy is a legal contract between the insured and the insurer. Once policy is signed, the policyholder must pay a fee for the risk management service provided from the insurance company

Purchasing Insurance Premiums-$ amount charged by insurance company for protection during a certain period of time (money charged by insurer) Premiums pay for services received and paying claims. (cost of services/claims) Some of the premiums are held in reserves for large disasters. (held in reserves) Premiums also create profit for the company. (profit)

Purchasing Insurance Deductible-amount the policyholder must pay first, before the insurance company pays anything Higher deductibles generally mean lower premiums and vice versa

Regulating Insurance Regulated by the states Insurance companies must be licensed within the state it operates Important regulation is in premiums Premiums may need to be approved by insurance commissioner

Automobile Insurance Types of Auto Insurance Bodily Injury- covers injury or death to person(s) not in policyholder’s car Property Damage Liability- covers damage to another person’s property during an accident Medical Payments- covers medical expenses resulting from injury to the driver or others in policyholder’s car

Automobile Insurance Types cont Collision- covers damage during an accident to the policyholder’s car Comprehensive- covers storms, floods, falling objects, fire, vandalism, and theft Uninsured Motorist- covers accidents caused by people who have no liability insurance and no money to pay for the damages they cause

Automobile Insurance Costs As the risk of accident and potential cost of damage for a driver increases, so does the premium. Factors that affect auto insurance premiums Cost of automobile Miles traveled per year Driving record Age Where you live Marital status

Real and Personal Property Insurance Houses, buildings ,and other real property Furniture, jewelry, and electronic equipment Renter’s Insurance Landlord/owner should have insurance on building The insurance the landlord/owner has will not cover loss of or damage to personal property of renters.

Real and Personal Property Insurance Homeowner’s Insurance Homeowner’s insurance is a combination policy Protects against most types of losses and liabilities related to home ownership Fire, lightning, windstorm, hail, explosion, riots, aircraft crashes, smoke, motor vehicles, malicious mischief, vandalism, and burglary Also covers liabilities for injuries to others while on the insured property.

Real and Personal Property Insurance Homeowner’s Insurance (cont) Many different policy options Cost and options depend on the protection you want

Real and Personal Property Insurance Property Insurance Costs Factors: Payment terms Construction materials Deductible Replacement value of the home Preventive measures

Life, Health, and Income Insurance Life Insurance Designed to protect the standard of living of the policyholder’s survivors At policyholder’s death, the survivors are paid the face value of the insurance policy. Proceeds- the money paid to the survivors

Life, Health, and Income Insurance Life Insurance (cont) Beneficiary- person who receives part of the proceeds Beneficiaries are specified in the policy Types of life insurance Term insurance- covers a person for a specific period of time Whole life insurance- provides death benefits and savings Variable life insurance- covers until insured dies and accumulates value

Life, Health, and Income Insurance Life insurance costs Type of life insurance Age of insured Insured’s health Sex Face amount of policy Company selected

Life, Health, and Income Insurance Health Insurance Hospitalization insurance Surgical and medical insurance Major-medical insurance Dental and vision Mental health Most health insurance policies have a deductible that the insured must pay first.

Interpreting Statistics Stats are numbers until you learn how to use them Help understand trends and patterns, surveys, and make informed decisions. Insurance industry uses statistics to assess potential risks and determine premiums. Statistics gain meaning when they are compared to others. After comparing stats, you can make inferences.