1-D Hazards and Risk Flashcards
Risk means
-Potential for financial loss, being exposed, or open to damage.
-An insured item
Speculative Risk
-Undertaken with no certainty of either gain or loss.
-Main knowingly, by conscious choice
-Cannot be insured
Pure Risk
-Risk with no chance of gain
-Can only result in either loss or no loss
-can be insured
What does exposure mean?
Openness to loss or damage..
Gulf Coast- High exposure hurricanes
California- High exposure liberalism and earthquakes
High crime area- High exposure to theft
Evaluating exposure
-expressed in dollars or units
-a determining factor in issuing a policy and setting a premium.
Hazard
Condition increasing the likelihood or severity of a loss.
Increases the likelihood of a loss.
ex. -Storing dangerous materials in a building
-Record of drunk driving
-Smoking
Hazard VS Exposure
-Exposure is the possibility of a loss
-Hazards are things that increase that possibility
More hazards = Higher exposure
What’s Peril?
anything that can actually cause loss or damage
ex. Lightning, Fire, Flood, vandalism
Insurance policies can be:
Named peril- lists each peril that is covered.
All Peril (Open Peril)- Covers all perils except those specifically insured.
LOSS?
- Value of insured item reduced due to peril
- Financial loss due to an occurrence or accident
- For insurers: The amount paid out in a claim settlement
Insurable Risk
Risk: Item, person, or organization that has been insured.
-Not everything is insurable.
-Six qualifications determine what can be insured
SIX QUALIFICATIONS OF INSURABLE RISK: ADEQUATE PREMIUMS
Insurer must be able to cover claims with premium income
-Potential losses cannot be too much for the insurer to pay.
-Insurer must be able to cover claims and expenses
-If premiums must be set too high, the risk isn’t insurable
SIX Q OF INSURABLE RISK- Definable risk
- Insurer can define the exact conditions under which the item is covered by the policy.
EX. Jewelry is covered up to a specified limit if stolen. - The item itself is defineable (it can precisely described)
EX. A house, car , or diamond necklace can be defined. An entire riverbed cannot. - The item has precise value.
EX. A house of car does. A family photo does not.
SIX Q OF INSURABLE RISK- Unexpected Losses
The loss must be
-Unforeseeable
-Unexpected
-Reasonably preventable
-Completely random in nature
ex. Flood insurance is not available in many areas because flooding has become expected.
SIX Q OF INSURABLE RISK- Substantial Loss
EX. If your shirt is ruined while throwing chicken down on the BBQ, This is not a substantial loss.
If a guest accidentally backs his car into your porch, you can’t easily afford a new porch. This is a substantial loss.
SIX Q OF INSURABLE RISK- Exclusions
The insurer MUST exclude coverage for large scale disasters
-Insurers have to charge adequate premiums
-Some losses would require such large premiums that. it is impossible to insure them.
EX. Wars, Terrorism
Nuclear and Missile attacks
Earthquakes
Floods
SIX Q OF INSURABLE RISK- LAW OF LARGE #’S
A large # of similar risks must be insured because
-Spreads the risk across more policies
-Helps the insurer predict losses more accurately
-Similar Risks can mean: cars, houses, persons lives, similar businesses, etc
LAW OF LARGE #’S
A large # of insured units reduces the possibility of variation from the expected number of claims.
If there are more units involved, there will be much less variation from stats, which means the rate of claims will be more predictable
Adverse Selection:
When someone decides to buy insurance because he knows he will probably have to file a claim, typically because of information about the risk that the insurer is unaware of or unable to discriminate against.
EX. Smokers may be more motivated to purchase health insurance than non
Healthy young people usually buy minimal health insurance with low premiums while high risk ppl choose more extensive coverage
Problem with Adverse Selection:
-Insufficent Premiums for level of risk exposure
-Leads to higher premiums which might cause people to cancel policies
One solution: Charging Higher risk individuals higher premiums.
