1. Seminar: Timely Topics for Today’s Business World Mr. Bernstein Risk Management and Insurance Companies January 21, 2015

2. What is a Insurance? Protection against financial loss Insurance companies share risk and charge a premium which represents their estimate of average losses plus a competitive profit The contract outlining payments between you and the insurance company is known as a policy 2 Seminar: Timely Topics for Today’s Business World Mr. Bernstein

3. Insurance is similar to a put option The seller charges a premium to accept transfer of a risk of a specific type of financial loss The contract has a maturity date The deductible is equivalent to a strike price But because personal insurance policies generally cannot be bought or sold to third parties, (i.e. you cannot buy and sell contracts that would pay off if your neighbor’s house burned down) volatility is not a factor 3 Seminar: Timely Topics for Today’s Business World Mr. Bernstein

4. How insurance rates are established Insurance companies will insure against risks which both loss amounts and frequency can be estimated Actuaries analyze data and make those estimates Deductible amounts reduce premiums 4 Seminar: Timely Topics for Today’s Business World Mr. Bernstein

5. Personal Risk Management Planning As you accumulate wealth and assets, it is wise to plan to protect yourself financially Pure risks can be transferred to insurance companies: Life insurance Disability insurance Property loss from fire, acts of nature or crime Liability insurance against negligence (unintentional) – Auto, Property 5 Seminar: Timely Topics for Today’s Business World Mr. Bernstein

6. Risk Management Planning Must weigh costs against possible losses for each category of risk Example: Homeowner’s Insurance Estimated cost: $1,500/year Cost of rebuilding home in case of fire: $500,000 Cost of replacing contents of home: $50,000 Living expenses during rebuilding: $20,000 Partial damage is also covered, ie ice or falling trees Liability also covered up to $100,000 6 Seminar: Timely Topics for Today’s Business World Mr. Bernstein

7. Homeowner’s Insurance Cost Factors Much like put option pricing considers risk by incorporating estimated volatility, the insurance company adjusts for estimated risk by taking into consideration factors which are correlated to payout patterns: Location Type of construction Value of home Risk reduction actions (ie smoke alarms, alarm systems) Additional items (ie jewelry, furs, boats, pets) Most mortgage lenders reduce their risk by requiring insurance 7 Seminar: Timely Topics for Today’s Business World Mr. Bernstein