Insurance and risk management Standard 11

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

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

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.

Managing Risk O Avoid O Reduce O Accept O Transfer

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.

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.

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.

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.

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

Different Types of Insurance Module 11.2

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

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

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

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

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

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

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

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

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

Using Insurance to Manage Risk 11.3

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

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

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

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