Assignment 5: Insurance as a Risk Management Technique Flashcards
Pooling
An arrangement that facilitates the grouping of loss exposures and the resources to pay for any losses that may occur
How Pooling Reduces Risk
The standard deviation of a pool increases as the number of members increases, but at a decreasing rate (so the standard deviation per loss decreases)
Benefits of Insurance
- Pay for losses
- Manage cash flow uncertainty
- Comply with legal requirements
- Promote risk control activity
- Efficient use of insured’s resources
- Support for insured’s credit
- Source of investment funds
- Reduce social burden
Primary Role of Insurance
Indemnify (compensate) individuals and organizations for covered losses
Six Characteristics of an Ideally Insurable Loss Exposure
- Pure risk
- Fortuitous losses (from insured’s standpoint)
- Definite and measurable
- Large number of similar exposure units
- Independent and not catastrophic
- Economically feasible premium (most important)
Fortuitous loss
A loss that is accidental and unexpected
Cross-Sectional Risk Transfer
The spreading of risk across a large number of similar exposure units within the same period (most common risk transfer function in insurance)
Intertemporal Risk Transfer
The spreading of risk through time
Ways for Risks to be Independent and Not Catastrophic
Geographic diversification, line of business diversification, reinsurance, etc.
Property Loss Exposures (When Is It Ideally Insurable?)
a. Fire: insurable (economically feasible) aside from arson-for-profit
b. Windstorm: generally insured
c. Flood: generally uninsurable by private insurers
Liability Loss Exposures (When Is It Ideally Insurable?)
a. Premises and Operations Liability: often exhibit all characteristics of ideally insurable loss exposures
b. Products Liability: not always measurable, could be catastrophic
c. (Personal) Automobile Liability: insurable
Premises and Operations Liability
An organization is liable because of injury or damage from either of two causes:
1. An accident occurring on premises owned or rented by the organization
2. An accident occurring away from such premises, but only if it arises out of the organization’s ongoing operations
Products Liability
Loss exposures arise out of injury or damage that results from defective or inherently dangerous products
Personnel Loss Exposures (When Is It Ideally Insurable?)
Generally not insured through P/C insurers, but could arise in the cases of
a. Death (of a key person)
b. Retirement (which meets all the criteria of an ideally insurable loss except it is not fortuitous)
Net Income Loss Exposures (When Is It Ideally Insurable?)
Losses caused by the business environment do not only involve pure risk (not ideally insurable), but it could be insurable when relating to property or liability losses
