1. Insurance and Risk

2. Meaning of Insurance Requirements of an Insurable Risk Description of Insurable and Uninsurable Risks Insurance Distinguished from Other Transactions Types of Insurance Social Benefits and Costs of Insurance

3. Meaning of Insurance

4. Insurance is a technique for handling an already existing pure risk.

5. Basic Characteristics of Insurance

6. 1-Pooling of losses

7. Losses incurred by the few are spread over the entire group, so that in the process, average loss is substituted for actual loss.

8. Pooling is essential for two reasons: -losses of the few are spread over the entire group, so that average loss is substituted for actual loss. Thus, the financial burden of the loss is shared by the entire group. -pooling involves the grouping of a large number of exposure units so that the law of large numbers can operate to provide a substantially accurate prediction of future losses.

9. 2-Payment of fortuitous losses

10. Insurance plans provide for the pooling of fortuitous losses. A fortuitous loss is one that is unforeseen and unexpected and occurs as a result of chance.

11. 3-Risk transfer

12. In private insurance, a pure risk is transferred from the insured to the insurer, which typically is in a better financial position to pay the loss than the insured.

13. 4-Indemnification

14. Compensation is given to the victim of a loss, in whole or in part, by payment, repair, or replacement.

15. Requirements of an Insurable Risk

16. General Requirements

17. 1-Large number of exposure units

18. 2-Accidental and unintentional loss

19. 3-Determinable and measurable loss

20. 4-No catastrophic loss

21. 5- Calculable chance of loss

22. 6-Economically feasible premium

23. Application of the Requirements

24. How the risk of fire to a private dwelling satisfies the requirements

25. How the risk of unemployment fails to meet the requirements

26. Adverse Selection and Insurance

27. 1.Nature of adverse selection

28. 2. Consequences of adverse selection

29. Description of Insurable and Uninsurable Risks

30. Insurable Risks

31. 1. Personal

32. 2. Property

33. 3. Liability

34. Generally Uninsurable Risks

35. 1.Market

36. 2.Financial

37. 3.Production

38. 4.Political

39. These risks are generally uninsurable for several reasons: - many of these risks are speculative risks, which are difficult to insure privately. - the potential for a catastrophic loss is great; this is particularly true for political risks, such as the risk of war. - calculation of the proper premium may be difficult because the chance of loss cannot be accurately estimated.

40. Insurance Distinguished from Other Transactions

41. How Insurance Differs from Gambling

42. 1. Insurance eliminates a pure risk, while gambling creates a new speculative risk.

43. 2. Insurance is socially productive, since both the insured and insurer win if the loss does not occur; while gambling is socially unproductive, since the winner's gain comes at the expense of the loser.

44. How Insurance Differs from Hedging

45. Hedging is a technique for handling risks that are typically uninsurable, such as protection against a substantial decline in the price of commodities.

46. 1. Insurance transfers a pure risk, while hedging involves the transfer of a speculative risk.

47. 2. Insurance reduces objective risk, because of application of the law of large numbers; while hedging does not. Hedging typically involves only risk transfer, not risk reduction.

48. Types of Insurance

49. Private Insurance

50. Life and health insurance

51. Property and liability insurance

52. Government Insurance

53. Social insurance

54. Other government insurance programs

55. Social Benefits and Costs of Insurance

56. Benefits of Insurance to Society

57. 1. Indemnification for loss

58. 2. Less worry and fear

59. 3. Source of investment funds

60. 4. Loss prevention

61. 5. Enhancement of credit

62. Costs of Insurance to Society

63. 1. Cost of doing business

64. 2. Fraudulent claims

65. 3. Inflated claims