fuck this class

beast

Risk avoidance

avoiding risk altogether

Risk Reduction

reducing the chance that a loss will occur or reducing the magnitude of a loss if it does occur

Risk Transfer

Means transferring the financial consequences of any loss to some other party.

Remember the matrix for probability and cost of loss

Risk avoidance- high high

risk reduction- high prob, low cost of loss

risk retention- low low

risk transfer- low prob, high cost of loss

Risk Management THeory

No grouping of assets can fully eliminate risk in your portfolio

Prisk managmenet process

Develop obj

establish exposures

identify available risk management tools

match appropriate risk magement tools to exposure

match appropriate risk management tools to exposure

implement

review

Develop objectives

Ovjectives determine RM scope

Establish Exposures

each area of household assets has it own risk

Identify avaiable risk management tools

avoid, reduce, retain, diversify, transfer etc.

match appropriate RM tools to the exposures

different exposures call for separate risk managemnt tools

Human related assets

longevity, premature death

Health/Disability risk

illness, loss of future wages due to disability

Macro and MIcroeconomic risk

type of exposure general economy or industry

Real assets

tangible assets the household owns

liabilities

monies owed to others

Intangible liabilities

less quantifiable (liabilities to third parties)

Implement

taking action step toward RM

Review

Risk management exposures can change

Insurance is transferring risk

risk shifted to the insurance for a premium

Insurance pools

reduce risk by apply law of large numbers

insurance company estimates its exposure to loss then charges enough premium to make a profit

Potential advantages of insurance

forced savings

safe and profitalble investment

encourages thrift

minimizes worry

provides assured inome

helps preserve an estate

If insurance products were fully efficient

amount paid for insurance would equal the cost of the loss (everyone would buy if so)

insurance is not fully efficient due to

overhead cost

incomplete information

search cost

behavioral factors

insurable loss

unplanned and unpredicted loss of economic value direct or indirect

Peril

Defined as cause of the loss

Hazard

Conditions that increase probability of loss from a peril

physical hazard

construction, frayed wires, no stair railings,

Moral Hazard

dishonest intention (exaggerating loses, intentionally committing fraud)

Morale Hazard

INcrease in losses knowing insurance coverage will pay for losses (leaving car unlocked)

Legal hazard

Increase losses due to legislation (ADA req)

Proximate Cause

what initially caused the loss?

Pure risk

possibility of loss only (only type of risk insurance will deal with)

Speculative risk

possibility of gain or loss ( investments, stock etc)

Law of large numbers

The greater the number of observations of an event based on chance, the more likely the actual result will approximate the expected result

Adverse Selection

When one party to a transaction has more relevant information or more control of outcomes than another party, the party with superior information or control can take advantage of the situation

personal life insurance

provides monies to others at the death of the insured

Personal disability insurance

makes payments to replace income once the person is incapacitated

personal long term care insurance

payment provided generally to the elderly, which assists those unable to care for themselves due to physical or mental conditions

personal health

reimburses health related expenditures

property and casualty insurance

pays for losses to home possessions and coverage for exposures to third party losses

personal liability insurance

extends coverage for liabilities of many types of a personal nature

Government unemployment insurance

supplies income for a specified period upon job termination

Government social security insurance

Provides income, disability, and medical reimbursement after retirement, and in the event of premature death will provide payment to spouse, children, and parents

Government insurance providers

widespread societal exposures

Private group polices

employer sponsored

associated with low marketing costs, mass volume efficiency, and reduced screening and admini cost

Private indivual policies

flexible and portable

why can insurance be an asset

insurance reduces risk in one area, it enables greater risk taking in other areas

What is the primary goal of life insurance

to compensates for the death of a household wage earner

Mortality charge

calculates the cost of a policy due to the probability of death for a group of insurance holders

Parts of life insurance policy

1.mortality charge

2. investment return

3. overhead expense

Multiple of income method

amount of insurance benfit needed to cover the loss of income

pv of lost lifetime income

life insurance needs

considerations are future living cost, future education costs for children and paying off the mortgage

Partial replacement

provide enough cash to partially replace a deceased wage earner or educate spouse to earn more

Strengths and weaknesses of term life insurance

pure life insurance, unlimited flex, highly competitive pricing, easy to compare

Premium rates increasingly rise over time

Strength and weakness of whole life insurance

premiums remain level over time, cash value account is tax shelterd

Costs for full coverage more expensive than term, policies difficult for the average person to compare

insurable interest

can only insure against loss that you yourself would suffer a loss on

Indemnity

your maximum reimbursement is the value of the item

Screening and segregation of applicants

separating people based on their risk categories (smokers, ages)

Deductibles

insurance company reimburses individuals claims only for the amount above an established minimum

Coinsurance

Policyholder pays a stated % of the outlay along with the insurance compnay 80/20

Coinsurance exclusion

eliminating certain condition from insurance payout

Coinsurance waiting periods

amount of time before reimburesements are allowed

Coinsurance prespecified limits

establishes the amount the insurance company is willing to pay contractually

Coinsurance experience based alteration in policy costs

charges rates to policy holders based on their loss experience as clients

Coinsurance use of group policies

motivates employers to help monitor for moral and morale hazards

(A) homeowner coverages

attached, dwelling, insures dwelling+ any structures attached to dwelling (

(B) homeowners coverages

Backyard, other structures, insures structures set aprat from dwelling (pool, fence etc)

(C) homeowners coverages

Contents, personal property, provides coverage anywhere in the world

(D) homeowner coverages

damage, loss of use, insures additional living expenses due to damage of insured property

(E) homeowner coverage

Enemies, personal liability, insures when an isured legally liable for bodily injury or propert damage

(F) homeowners coverages

first aid, medical payments, provides limited amount for necessary medical expenses involving persons other than the insured while on insured property

Basic form of perils (Wharves/FLT)

Windstorm, hail, aircraft, riot, vandalism, explosion, smoke, fire , lightinging, theft

Broad form of perils (Basic form+RAF)

Rupture of system, artifical electricty, falling objects

Open Perils form » pays claims on all damages causes except for OPEN WiF

ordiance of law

power failure

earthquake

neglect/nuclear

war

intentional loss

Flood

ACV (Actual cash value

default coverage, equals RCV-Depreciation

RCV (Replacement Cash Value)

Must opt into RCV, cost 20% more than ACV, depreciation not considered

underinsured formula

amount of insurance/amount of insurance required* amount of loss - deductible

personal auto policy (PAP)

cover liability, medical payments, and damage

owner of the vehicle not the driver is the insured

Liability insurance

protects you personally against having to pay for losses to others

Umbrella liability insurance

provides excess liability coverage on home and auto

does not pay til basic liability insurance policy pays first

Health Maintenance Organizations (HMO)

provides full range of medical services for a flat fee

primary care physicians used as gatekeppers

ok and cheap

Preferred Provider Organization (PPO)

Unlike HMO, primary care physicians not used as gatekeepers

Good, more $$ but doesn’t coord specialty visits

Point of Service Systems (POS)

Patients can choose either POS or non-POS health care providers

very good more complex

Blue Cross Blue SHield

traditional provider given nonprofit status by individual states

excellent most expensive among group insurance options

INdividual non group health insurance policies

independently choose hospitalization, surgeries, ongoing medical expenditures

best but most expensive

Basic medical expense

nonsurgical costs

major medical policies

used for expensive care

Maximum out of pocket (MOOP)

= deductible + insured’s portion of the coinsurance (capped)

stop loss limit

max amount of expenses after deductible paid by insured

MOOP deductible/ insured Coinsurance %

COBRA (Consolidated omnibus budget Reconciliation act of 1986)

Requires employees to be allowed to contiune health insurance

Disability insurance

benefits when unable to work due to accident or illness

short term disability

up to two years

long term disability

covers longer periods up to age 65

own occupation disability

unable to work current job (best definition)

ANy Occupation disability

Unable to work any job (broader worst)

Residual Benefit

partial payment when you have returned to your job but with a shorter work week

Preexisting condition

will no pay out benefits for illnesses or injury that occured before the policy was activated

rehabilitation benefit

reimbursement for rehabilitaition helps a person get bak into workforce

what is the disability limited %

60 to encourage you to get back to work

Long term care insurance

reimburses expenses incurred when unable to perform at least two activietes of daily living (bathing eating dressing etc)