Concept of Insurance Flashcards
What are the 2 main aspects of insurance
Risk transfer and risk transformation
Risk transfer
Passes on the loss distribution of a loss
Risk transformation
Happens through the pooling of risks
Who does insurance require input from
The insured and the insurer
What must the insured give for risk transfer
The risk, Information and premium
What does the insurer give the insured?
Indemnity, information/guarantee
When does a risk transfer occur (utility insured)
When the insured regards the utility from the risk transfer to be higher than the premium.
When does a risk transfer occur (utility insurer)
When the insurer regards the utility from the risk transfer higher than the added risk to the risk pool
What is the loss in insurance and what is the benefit to this
The loss is the premium, it is fixed and known
What from can risk take when transferred to the insurer
Totaly and partially
Partial risk transfer
There is a deductible that means the insured retains some of the risk
Coinsurance
Coinsurance is when the risk is retained by the policyholder, but there is no actual insurance because there is no pooling of risks
How can the insurer transfer risk to the insured
Fixed or variable premium
Variable premium
Changes based on individual losses
What is the ideal situation in terms of partial/full cover and variable/fixed premiums for the insured
Fixed full cover - insured has no risk
What are the 5 components of an insurance premium?
- Net risk premium
- Safety loading
- Admin loading
- Pofit loading
- Tax
Net risk premium should be what
The expectancy-value
Ex-ante
Looking to the future
Ex post
Looking at the past
What is the goal of risk transformation
The sum of all negatives equal the positives
Do risk in a portfolio need to be equal in terms of sort and expectancy-value (size
No, however, it can be better
How can portfolios be classified?
Homogeneity, heterogeneity
Homogeneity
Risks are similar
Heterogeneity
Risks are different
What is typically seen in portfolios in insurance in terms of size?
A few large risks and a number of small risks
What happens to standard deviation when more risks are added
More risks increase the spread but not at a proportional rate so that each risk added adds a smaller amount of standard deviation
Problems with risk balancing
- Portfolio does not remain constant
- Individual risks forming the -portfolio might not remain constant
- Damage or loss my last for more than one period
Self-insurance
Risk balancing by the entity
Define insurance
Insurance is the covering of a need individually uncertain, but in total estimated on the basis of risk balancing in the portfolio and of risk balancing over time.
Pure risk
Only has negitive outcomes
Speculative risks
Have a favourable or unfavourable outcome
Business risk
Loss of profits, hard to insure
