5a Risk Management

Insurable Risk

• large # of homogeneous (similar) exposure units must exist to help develop statistics for forecasting losses

• insured losses must be accidental

• insured losses must be measurable & determinable

• no catostrophic risk for the insurer

Pure risk

probability of loss, no gain

Personal risk

cause of loss of income

Property risk

cause the loss of property

Liability risk

cause financial loss

Avoidance

avoid traveling in a car

Reduction

wear a seat belt

Retention

deductibles and co-pays

Transfer

buy insurance, transfer loss to entity

Rating Agencies

asses financial health and condition of insurance companies

• A.M. Best (A++)

• Fitch (AAA)

• Moody’s (Aaa)

• Standard & Poor’s (AAA)

NAIC (National Association of Insurance Commissioners)

set common standards, best practices and regulatory support for the insurance profession

Peril

cause of loss (eg. flood, death, disability)

Named Peril

only covers if certain name is stated

Open Peril

covers everything except exclusions

Hazards

increase the liklihood of a loss occurring

Physical hazard

poor lighting, icy road

Moral Hazard

dishonesty, character flaw (theft)

Morale Hazard

driving reckless, not setting home alarm

Perils can reduce/eliminate the ability to earn income by..

• dying too soon

• living too long

• disability

Perils can destroy/deplete existing assets

• long-term care expenses

• damage to property

• legal liabilities for injuries inflicted upon others

• NOT having enough insurance

Loss Frequency

expected # of losses that will occur in a given time period

Loss severity

refers to the potential size or financial damage of loss