Chapter 37 The Fundamentals of Risk. Risk Risk - can be thought of as the possibility of incurring a loss. There are 4 main types of Risk -  Economic.

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Presentation transcript:

Chapter 37 The Fundamentals of Risk

Risk Risk - can be thought of as the possibility of incurring a loss. There are 4 main types of Risk -  Economic Risk  Personal Risk  Property Risk  Liability Risk

Types of Risk Economic Risk - can be related to property liability and one’s own personal well being. Personal Risk - are risks associated with illness, disability, loss of income, unemployment, old age, and premature death. Property Risk - risk of damage to or loss of property due to theft, wind, fire, flood, or other hazard. Liability Risk - are potential losses to others that occur as a result of injury or damage that you may have caused

Sharing Economic Risk Golf Club Insurance Association -  10 members  Average set of clubs = $  Cost to replace a set of clubs to a nonmember = $  Cost to replace a set of clubs for a member = $30.00 per member.

Insurance Insurance is the planned protection provided by sharing economic losses. Insurance provides peace of mind in knowing that you are protected from economic loss. Many bad things could happen that would normally give you some economic difficulties, yet with Insurance, you should not have any difficulties.

Insurance Insurance Companies - business that provide planned protection against economic loss. Insured or Policyholder - the person for whom the risk is assumed. Policy - the contract issued by the insurance company for coverage for the policyholder.

More Insurance Vocabulary Premium - the amount of money that the policyholder must pay for insurance coverage.  The premium is normally paid in payments once a month, once every six months, or once a year.  The premiums from all of the policies for a company, make up the funds for which the company pays its claims. Claim - is a policyholder’s request for payment for a loss that is covered by the insurance company. Deductible - The amount you must pay before the insurance company pays a claim.

Things to be insured At the extremes…  Violinist can insure his/her fingers  Professional Athletes can get insurance against injury  Writers can insure their manuscripts  Businesses are able to insure against the loss of rent from property damaged by fire, injury to consumers caused by a faulty product, or theft by employees. For the normal people…  Insurance for automobiles and homes, life insurance, health insurance, and insurance for income security.

Self Insurance Self Insurance - means that the individual, family, or business assumes the total risk of economic loss.  A family might regularly place money in a savings account to cover possible financial losses.  This is obviously difficult to do, since it would be very difficult to prepare for a catastrophe like replacing a house lost to a fire.

Coinsurance Coinsurance is the sharing of expenses by the policyholder and the insurance company.  The policyholder normally pays the deductible and then shares the remaining balance with the insurance company.  For example, the insurance company may pay 80% of the amount remaining after the deductible is paid, leaving that 20% to be paid by the policyholder.

Cost of Insurance The premium of a policy is determined partly by the past experiences of insurance companies in paying for the kinds of losses that are covered in the policy.  For example - 20-year-old drivers are greater risks than 40-year-old drivers, and due to this, the 20-year-old pays more of a premium.

Cost of Insurance The item being insured determines how much the premium is as well.  If you want to in sure a luxury car, the premium will be higher than if it was a low end car. Then the number and size of claims that the insurance company has to deal with also helps in determining premium.  By locking doors and driving defensively, losses associated with thefts and automobile accidents can be reduced. Practicing good health habits will reduce life and health insurance costs.

Purchasing Insurance Insurance from your employer…  Employers may pay part of life and or health insurance premiums for their employees. Otherwise, an Insurance Agent will sell you insurance.  Large Insurance Company Agent - sells policies written by the company which they are employed by.  Independent Agent - sells many different policies from many different companies.

Insurance for Economic Security Insurance is important to everyone because it provides economic security. Insurance also helps our economy. Insurance makes it possible for many people to do things they otherwise could not do.  Buying a house…in order to get a loan, the house better be insured.  Buying a car…in order to get a loan, the car has to be insured as well.