Lecture 6 Week 8 Risk Management and Insurance Flashcards
Speculative risk and Pure risk
Speculative risk:
- Arises where there is a chance of a loss or a gain e.g. investment, return distributions, gambling…
Pure risk:
- Arises where there Is only a possibility of loss or no loss. Categories of pure risk (personal, property and liability) possibility of a loss.
Mitigation Strategies
- Risk avoidance
- Risk reduction / control
- Risk retention
- Risk transfer
Risk and risk management
Risk management is a systematic approach to the management of pure risk.
Process:
- The identification of risk
- Three evaluation of risk
- The control of risk
- The financing of risk
- The review of the risk management program
Pooling of risk
Insurance is based on the concept of pooling ( risk pooling is where individuals contribute resources to a fund that is used to pay for the adverse consequences suffered by some members of the pool. The contribution of the pool is referred to as premium.
Replacement value
Refers to the amount that an entity would have to pay to replace an asset at the present time. Replacement cost is the actual cost to replace an item or structure at it’s pre loss condition
Indemnity insurance
Compensates the beneficiaries of the policies for their actually economic losses, up to the limiting amount of the insurance policy e.g cash payments, repairs, replacement, reinstatement. It generally requires the insured to prove the amount of its loss before it can recover. Recovery is limited to the amount of the probable loss even if the face amount of the policy is higher
Risk and risk management
Risk management is a systematic approach to the management of pure risk.
Process:
- The identification of risk
- The evaluation of risk
- The control of risk
- The financing of risk
- The review of the risk management process
Pooling of risk
Insurance is based on the concept of pooling. Risk pooling is where individuals contribute resources to a fund that is used to pay for the adverse consequences suffered by some members of the pool. the contribution of the pool is referred to as the premium.
Replacement Value
Refers to the amount that an entity would have to pay to replace an asset at the present time. replacement cost is the actual cost to replace an item or structure at its pre-loss condition.
Indemnity insurance
contractual agreement in which one party guarantees compensation for actual or potential losses or damages sustained by another party. Indemnity insurance protects against claims arising from possible negligence or failure to perform that result in a client’s financial loss or legal entanglement. Certain professionals must carry indemnity insurance. Examples include those involved in financial and legal services, such as financial advisors, insurance agents, accountants, mortgage brokers.
Misrepresentation
A false statement of fact made by one party to another party, which has the effect of inducing that party into the contract. Maybe categorised as being either (innocent, negligent, fraudulent).
Personal risk management
- Identification (premature death, prolonged illness or injury, medical costs, business risks
- Evaluation of personal risks
a. (Lump sum costs in the event of premature death include:
- burial and associated expenses
- estate administration costs
- final medical and associated care
- debt clearing
- adjustment expenses.
b. (Provision for dependents)
c. (Disablement costs can include medical expenses, other costs associated with the disability, provision of an income to support any dependents. - Control measures: lifestyle factors such as fitness, diet, smoking and alcohol.
- Finance measures: retention- losses met from individual own resources or via insurance excess. Transfer – financial responsibility passed to another party (term life, TPD, Trauma, income protection
