INSURANCE AND RISK MANAGMENT UNIT THREE – CHAPTER 13 – LESSON ONE

WHAT IS INSURANCE? INSURANCE is protection against possible financial loss Insurance allows you to be prepared for unexpected property loss, illness, and injury Insurance can grant you peace of mind and protection (financially speaking) An INSURANCE COMPANY is a risk-sharing business that agrees to pay for losses that may happen to someone it insures

WHAT IS INSURANCE? o A person joins the risk-sharing group by purchasing an INSURANCE POLICY o That person becomes a policy holder o Under the policy, the policyholder agrees to pay a PREMIUM (fee) and the company agrees to take on the risk o The protection provided by the policy is known as COVERAGE

TYPES OF RISKS RISK is the chance of loss or injury Insurance companies takes a risk every time they issue a policy PERIL is anything that may possibly cause loss HAZARD is anything that increase the likelihood of loss through peril NEGLIGENCE is the failure to take ordinary or reasonable care to prevent accidents from happening

RISK MANAGEMENT METHODS RISK AVOIDANCE Most risk avoidance is practical – do not engage in risky behavior (driving in the snow, drinking, etc.) RISK REDUCTION When unavoidable, risk can be reduced by simply taking precautions (wearing a seatbelt, not smoking, etc)

RISK MANAGEMENT METHODS RISK ASSUMPTION Taking on responsibility for the negative results of a risk is known as Risk Assumption When insurance coverage for a particular item is expensive, it may not be worth insuring (old items) RISK SHIFTING The most common way to deal with risk is to transfer it to the insurance company (in exchange for a fee) DEDUCTIBLE is the set amount that the policy holder must pay per loss on an insurance policy

LESSON REVIEW WHAT ARE THE THREE MAIN TYPES OF INSURABLE RISKS? HOW CAN PURCHASING AN INSURANCE POLICY HELP YOU “SHIFT RISK”? WHY WOULD A BANK ISSUING A CAR LOAN REQUIRE THE BORROWER TO OWN CAR INSURANCE?