Module 7 Risk Managment and Insurance Flashcards
Risk
The possibility of loosing something of value
Speculative Risk
Involves the possibility of lose or gain and is undertaken as a concious choise
Pure Risk
Involves the possibility of loss only and is not choosen
5 Steps of Risk managment
1) Identifying Risk
2) Evaluating the Risk
3) Controling the Risk
4) Financing the Risk
5) Monitoring the risk profile
Identifying risk: What are the 3 types of risk?
1) Personal, life and health
2) Property ( loss or damage to personal possession)
3) 3rd Party
Evaluating the Risks
Consider size, impact and proba of occurance of potential loss + assess which loss would be insuportable
Controling Risk: What are the 3 ways to control risk
- Avoidance
- Separation or Diversification
- Prevention or reduction of frequency
Financing Risk
Finding someont to share risk with through insurance
Law of Large Number
Principle on which insurance is based on. If the occurance of some particular event are independent of each other, then, in a large pop, the proba of their occuring can be represented by the average of their frequency
Moral Hazard
Risk brought on by choice
Self insurance
Mythical idea based on the decision not to insure/ finance risk
Acturial tables
Show the proba of occurance for every combination of age sex and occupation
Life Insurance
Finance premature and untimely death of a family member by compensating the dependance for the loss of income
Insured
The person upon whose death the face value of the insurance will be paid
Beneficiary
Person who receive the death benefit upon the death of the insured
Premium
$ amount that must be paid to the insurance company
Owner of an insurance policy
The person who pays the premiums, can be the insured, his employer, the beneficiary or a third party
Term insurance policy
Period during which the insurance is in force
Rate (life insurance)
Cost of each unit of insurance
Insurability (life insurance)
Qualification for the insured to be insurable.
Guarenteed insurability
A provision that allows the insured to buy additional life insurance at certain specified future dates without proof of insurability
How to claculate the amount of life insurance needed (3 approaches)
1) Income Approach
2) Expense Approach
3) The human capital approach
The income approach (life insurance)
It is based on the present value of expected future earnings of the insured. It is calculated with real rate of interest and a 0 growth in real earnings
Why are their adjustment to the income approach of life insurance
- Higher discount rate
- Increase in salary
- the beneficiary does not pay tax on the principal
The 6 steps of the expense approach to calculating the amount of life insurance needed
1) project a balance sheet on death until retirement + identify the assets that can be invested to generate income
2) Estimate income that can be generated from asset
3) include other sources of income arising from death
4) estimate expenses of the dependants
5) determine expenses -income
6) determin the face value
The human capital approach to calculating the amount of life insurance needed
starts with the income approach but adjust it for the unpaid income aspect of stared household duties and the expenses that wouldn’t be incured once a person dies.
What are the principal types of life insurance
1) Term life insurance
2) Life insurance with saving/investment
Term life insurance
Pays the face value to the beneficiary only if the insured dies during the term of the policy
Pure Premium
The portion of the policy premium that covers the pure risk. Calculated based on the proba of dying x face value of the policy
Adverse Selection (life insurance)
Group insurance is priced to reflect the average quality
Convertible Insurance
Life insurance provided by an employer can be converted into non group insurance upon leaving that employer
Participating term policy
the insurance company pays back dividend
Cash Surender value (life insurance)
Extra cash accumulated by the life insurance during the early years of the policy
Whole life insurance
Policy that pays out the face value to the beneficiary when the insured dies. It has leveled premiums and cash surender value when the policy is cancelled
Endowment Life policy
Pays the face value to the beneficiary when the insured dies OR pays the face amount (the endowment) if the beneficiary reach a certain age
Universal life insurance
A combinetion of life insurance and side investment fund
Waver of premium (life insurance)
If the insured becomes totaly disabled, premium will not have to be paid although the policy will stay in force
Guarenteed insurability
No need to provied evidence of insurability
The premium in a disability insurance is called
Waiting period of elimination period
non participating term policy
the policy pays no dividend back to the insured
Net premium (life insurance)
Premium minus insurance. It is the true cost of a life insurance
level term insurance
The face value of the policy stays the same through out the term of the insurance contract
Decreasing term insurance
The face value of the insurance declines at the insurance approaches expiry
