1. Chapter 25 Introduction to Risk Management
MYPF CHAPTER 25
13-SEPT-2001
Chapter 25 Introduction to Risk Management
What Is Insurance?
Risk Management
© South-Western Educational Publishing

2. Lesson 25.1 What Is Insurance?
Explain the concept of insurance.
Define basic insurance terminology and types of risk.
© South-Western Educational Publishing

3. Spreading the Risk
Risk is the chance of financial loss from perils to people or property
Perils to people include declining health, injury, or death
Perils to property include fire damage, vandalism, car accidents, and theft
Insurance is a method for spreading individual risk among a large group of people to make losses more affordable for all.
© South-Western Educational Publishing

4. Spreading the Risk
Insurer is a business that agrees to pay the cost of potential future losses in exchange for regular fee payments.
When people buy insurance, the join a risk-sharing group by purchasing an insurance contract. Under the contract, the insurer agrees to assume an identified risk for a premium.
© South-Western Educational Publishing

5. Spreading the Risk
The insurer collects premium from policyholders under the assumption that only a few policy holders will have financial losses at any given time.
To make a profit, the insurer must collect more money in premiums than it pays out for losses.
© South-Western Educational Publishing

6. Spreading the Risk
Indemnification – putting an insurance policyholder back in the same financial condition as before a loss occurred
Probability – the chance that a loss may occur
Insurers set premiums based on statistical probability, they estimate the likelihood of potential losses.
© South-Western Educational Publishing

7. Insurance Terminology
Actuarial Table – A table of premiums rates based on ages and life expectancies
Actuary – A specialist in insurance calculations and statistics
Beneficiary – A person named on an insurance policy to receive benefits from the policy
Benefits – Sums of money to be paid for specific types of losses under the terms of an insurance policy
© South-Western Educational Publishing

8. Insurance Terminology
Cash Value – The amount of money payable to a policyholder upon discontinuation of a life insurance policy
Claim – A policyholders request for reimbursement for a loss under the terms of an insurance policy
Coverage – Protection provided by the terms of an insurance policy
Deductible – The specified losses that the insurance policy does not cover
© South-Western Educational Publishing

9. Insurance Terminology
Exclusions specified losses that the insurance policy does not cover
Face amount – The amount stated in a life insurance policy to be paid upon death.
Insurance Agent – A professional insurance salesperson who acts for the insurer in negotiating, servicing, or writing an insurance policy.
Insured – The person or company protected against loss
© South-Western Educational Publishing

10. Insurance Terminology
Loss – An unexpected reduction in value of the insured property caused by a covered peril; basis of a valid claim for reimbursement under terms of the insurance policy
Proof of Loss – Written verification of the amount of a loss that must be provided by the insured to the insurer before a claim can be settled
Standard Policy – Contract form that has been adopted by many insurers, approved by state insurance divisions or prescribed by law
© South-Western Educational Publishing

11. Insurable Risks
Personal risks - Possible losses involving income or standard of living.
Protect against personal risk by buying life, health, and disability insurance.
Property risks - The chances of loss or harm to personal or real property
Protect against property risk by buying home and automobile insurance.
Liability risks - The possibilities of loss due to error or negligence.
Protect against liability risk by buying liability insurance.
© South-Western Educational Publishing