1. 1 - 1Copyright 2008, The National Underwriter Company General Principles of Risk & Insurance  Definitions and concepts  What is insurance?  Purchase of a contract that on behalf of purchaser pledges the payment of a sum-certain amount (the “premium”) in exchange for a promise on behalf of the other party (the insurance company) to provide restitution or indemnity arising from the occurrence of a loss  A device for reducing risk by combining a sufficient number of exposure units to make individual losses collectively predictable  The losses of the few are shared among the many Chapter 1 Risk Management For Financial Planners

2. 1 - 2Copyright 2008, The National Underwriter Company  Definitions and concepts (cont'd)  The law of large numbers  Primary underpinning to the insurance mechanism  The more exposure units in the mix, the easier it become to predict the groups losses  Fortuitousness  Non-fortuitous loss (those losses that are certain to occur may not be insurable) Chapter 1 Risk Management For Financial Planners General Principles of Risk & Insurance

3. 1 - 3Copyright 2008, The National Underwriter Company  Peril, Hazard and Risk  Although terms may be used synonymously by practitioners, they do have differing technical meaning  Risk  Refers to the uncertainty as to the the outcome of am event  Possible outcomes are Loss or No-Loss  Peril  The cause of a possible loss  Fire, water damage, mold, etc.  Peril may be a covered peril (included under the coverage) or a peril that is specifically excluded under the policy Chapter 1 Risk Management For Financial Planners General Principles of Risk & Insurance

4. 1 - 4Copyright 2008, The National Underwriter Company  Peril, Hazard and Risk (cont'd)  Hazard  A specific situation that increases the probability of the occurrence of a loss arising from a peril or that may influence the extent of a loss  Concept of Indemnity  Indemnity means to make whole again  Insurance puts the person back in the same position he or she was in prior to the loss – no better, no worse Chapter 1 Risk Management For Financial Planners General Principles of Risk & Insurance

5. 1 - 5Copyright 2008, The National Underwriter Company  Insurance Versus Gambling  Insurance is not wagering  Three outcomes with gambling  Loss  No loss  Gain  Two possible outcomes with insurance  Loss  No loss Chapter 1 Risk Management For Financial Planners General Principles of Risk & Insurance

6. 1 - 6Copyright 2008, The National Underwriter Company  Other Non-insurance Responses To Risk  Retention  One assumes the risk on his or her own  Example – Not to purchase collision on an older car  Requires careful consideration of the possible losses  Corporations use large retention as a financial risk management strategy  Avoidance  Either not doing something or getting rid of the risk  Example – Use of public transportation avoids the risks of physical damage and liability of car ownership Chapter 1 Risk Management For Financial Planners General Principles of Risk & Insurance

7. 1 - 7Copyright 2008, The National Underwriter Company  Other Non-insurance Responses To Risk  Control  Minimizing hazards  Example – Installing a burglar alarm  Non-insurance transfer  Transfer of risk to someone other than an insurer  Rental agreement for tools where the customer agrees to bring them back in the same condition.  Failure to do so could result in customers being charged for the price of those tools Chapter 1 Risk Management For Financial Planners General Principles of Risk & Insurance

8. 1 - 8Copyright 2008, The National Underwriter Company  Voluntary and Social Insurance  Social Insurance  Government agencies that provide social insurance, against loss from  Unemployment, injuries, sickness, old age, premature death  Major types of social insurance  Old Age, Survivors, and Disability (Social Security)  Workers Compensation  Unemployment Compensation  Participation is mandatory  Premiums collected via payroll deduction  Employees and Employers pay into the social security fund  Employers must purchase both workers compensation insurance and unemployment compensation insurance Chapter 1 Risk Management For Financial Planners General Principles of Risk & Insurance