Chapter 2

1. Chapter 2 Insurance and Risk Management Chapter 2: Insurance and Risk Management

2. What is Risk? • The chance of loss • There must be a chance of loss for risk to exist. Chapter 2: Insurance and Risk Management

3. Risk Defined • Chance/possibility of loss • Uncertainty • Variation of actual from expected results Chapter 2: Insurance and Risk Management

4. Understanding Risk • Pure vs. Speculative • Dynamic vs. Static • Subjective vs. Objective • Particular vs. Fundamental • Financial vs. Nonfinancial • Probability of Loss • Law of Large Numbers Chapter 2: Insurance and Risk Management

5. Responses to Pure Risk • Risk avoidance • Risk reduction • Risk retention or assumption • Risk transfer Chapter 2: Insurance and Risk Management

6. Causes of Insured Losses • Perils • Hazards • Physical hazard • Moral hazard • Morale hazard • Adverse Selection Chapter 2: Insurance and Risk Management

7. Insurable Losses • Insurance vs. Gambling • Requisites for an Insurable Risk • Large Number of Exposure Units Must Exist • Insured Losses Must Be: • Accidental from Insured’s Standpoint • Measurable and Determinable • Losses Must Not Pose Catastrophic Risk for Insurer Chapter 2: Insurance and Risk Management

8. Elements of a Valid Contract • Offer and Acceptance • Legal Competency of all Parties • Legal Consideration • Lawful Purpose Chapter 2: Insurance and Risk Management

9. Legal Principles of the Insurance Contract • The Principle of Indemnity • Subrogation Clause • The Principle of Insurable Interest • The Principle of Utmost Good Faith • Warranty • Representation • Concealment Chapter 2: Insurance and Risk Management

10. Distinguishing Characteristics of Insurance Contracts • Adhesion (Take it or Leave it) • Aleatory (Unequal Money Exchange) • Unilateral (Only One Promise, Made By Insurer) • Conditional (Conditioned on Paying the Premium) Chapter 2: Insurance and Risk Management

11. The Law of Agency • Agents & Brokers • Agency Relationships • Express authority • Implied authority • Apparent authority Chapter 2: Insurance and Risk Management

12. Important Features of Insurance Contracts • Exclusions • Riders and Endorsements • Valuation of Insured Losses • Replacement Cost • Actual Cash Value (ACV) • Agreed-upon Value • Deductibles and Copayments • Coinsurance Chapter 2: Insurance and Risk Management

13. Individual Loss Exposures and Insurance Coverages • Perils that Can Reduce and/or Eliminate the Ability to Earn Income • Dying too soon • Living too long • Disability • Perils that Can Destroy or Deplete Existing Assets • Damage to property • Legal liability for injuries inflicted upon others Chapter 2: Insurance and Risk Management

14. Selecting an Insurance Company • Rating agencies • A. M. Best’s • Fitch • Moody’s Standard and Poor’s • Weiss • NAIC Criteria Chapter 2: Insurance and Risk Management

15. Characteristics of Insurance Companies • Type of Ownership • Capital Stock Insurance • Mutual Insurance • Insurance Underwriting • Reinsurance • Federal & State Regulation Chapter 2: Insurance and Risk Management

16. The Risk Management Process • Determining the objectives of the risk management program • Identifying the risk exposure • Evaluating identified risks as to the probability of outcome and potential loss Chapter 2: Insurance and Risk Management

17. The Risk Management Process (cont.) • Determining and selecting the best risk management alternative • Risk Avoidance • Loss Control • Risk Retention or Assumption • Risk Transfer • Implementing a risk management plan based on selected alternatives • Periodically evaluating and reviewing the risk management program Chapter 2: Insurance and Risk Management