insurance Flashcards
advantages of insurance in handling risk
greater predictability of actual losses
transfer of risk
specialized approach to analyzing, assessing, and handling risk
two basic premises of insurance
- business should have coverage if premium is less than risk adjusted present value of the expected loss
- businesses should consider whether or not the asset for which insurance coverage is sought is redundant
definition of insurance
the pooling of fortuitous losses by transfer of such risks to third parties who agree to indemnify the transferee for such losses and to provide certain services related to the risk
four basic characteristics of insurance
pooling of losses
payment of fortuitous losses
risk transfer
indemnification
pooling of losses
law of large numbers applies
payment of fortuitous losses
must be unforeseen and accidental
cannot be intentional
risk transfer
actual transfer of risk needs to occur to the insurance company
has to have an unknown trasnferred
indemnificiation
trying to restore the injured party back to the pre-loss condition had the accident not occured
not always possible
indemnification limit for cars
$30,000
requirements of an insurable risk
large number of exposure units accidental and unintentional loss determinable and measurable loss no catastrophic loss calculable chance of loss economically feasible premium
four things to know about loss
cause
time
place
amount
adverse selection and insurance
adverse selection: sellers have info that the buyers do not have
nature of adverse selection
people who worry about losses will buy insurance
underwriting
sign and accept liability under (an insurance policy), this guaranteeing payment in case of loss or damage occurs
meaning of underwriting: insurance companies will do all the research on the factors and people, then individuals will read the info, process it, and sign
consequences of adverse selection
higher losses
types of insurable risk
personal, property, liability
generally uninsurable risks
stock market
finances
production (will not insure actual action, but will insure losses due to production issues)
political
types of insurance
private and governement
private insurace
life and health
property and liability
government insurance
social (unemployment)
crop
flood
social benefits of insurance
indemnification less worry and fear source of investment funds loss prevention enhancement of credit
cost of insurance to society
cost of doing business
fraudulent claims
inflated claims
cost of doing business
administrative load (rent, wages)
expense load
cost of running the insurance company
risk premium
pure loss + expense load
types of inflated claims
overstatement of loss
misrepresenting facts
misrepresenting the nature of loss of the payment
misrepresenting the situation to pay a lower premium
underwriting cycle
fluctuations in the insurance business over a period of time
hard market
high prices, low availability
soft market
low prices, high availiabilty
three ways to forecast loss
probability analysis
regression analysis
forecasting with loss distributions
capital budgeting; current expected loss
(cost of building * % of total loss) + (cost of other building * % of total loss)…. for however many buildings there are
capital budgeting; future benefit
(cost of building * difference in % of total loss) + (cost of building * difference in % of total loss)…. for total amount of buildings
capital budgeting; net present value
future benefit / 1 + discount rate
