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Chapter 37

Chapter 37. The Fundamentals of Risk. Risk. Risk - can be thought of as the possibility of incurring a loss. There are 4 main types of Risk - Economic Risk Personal Risk Property Risk Liability Risk. Types of Risk.

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Chapter 37

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  1. Chapter 37 The Fundamentals of Risk

  2. Risk • Risk - can be thought of as the possibility of incurring a loss. • There are 4 main types of Risk - • Economic Risk • Personal Risk • Property Risk • Liability Risk

  3. Types of Risk • Economic Risk - can be related to property liability and one’s own personal well being. • Personal Risk - are risks associated with illness, disability, loss of income, unemployment, old age, and premature death. • Property Risk - risk of damage to or loss of property due to theft, wind, fire, flood, or other hazard. • Liability Risk - are potential losses to others that occur as a result of injury or damage that you may have caused

  4. Sharing Economic Risk • Golf Club Insurance Association - • 10 members • Average set of clubs = $300.00 • Cost to replace a set of clubs to a nonmember = $300.00 • Cost to replace a set of clubs for a member = $30.00 per member.

  5. Insurance • Insurance is the planned protection provided by sharing economic losses. • Insurance provides peace of mind in knowing that you are protected from economic loss. • Many bad things could happen that would normally give you some economic difficulties, yet with Insurance, you should not have any difficulties.

  6. Insurance • Insurance Companies - business that provide planned protection against economic loss. • Insured or Policyholder - the person for whom the risk is assumed. • Policy - the contract issued by the insurance company for coverage for the policyholder.

  7. More Insurance Vocabulary • Premium - the amount of money that the policyholder must pay for insurance coverage. • The premium is normally paid in payments once a month, once every six months, or once a year. • The premiums from all of the policies for a company, make up the funds for which the company pays its claims. • Claim - is a policyholder’s request for payment for a loss that is covered by the insurance company. • Deductible - The amount you must pay before the insurance company pays a claim.

  8. Things to be insured • At the extremes… • Violinist can insure his/her fingers • Professional Athletes can get insurance against injury • Writers can insure their manuscripts • Businesses are able to insure against the loss of rent from property damaged by fire, injury to consumers caused by a faulty product, or theft by employees. • For the normal people… • Insurance for automobiles and homes, life insurance, health insurance, and insurance for income security.

  9. Self Insurance • Self Insurance - means that the individual, family, or business assumes the total risk of economic loss. • A family might regularly place money in a savings account to cover possible financial losses. • This is obviously difficult to do, since it would be very difficult to prepare for a catastrophe like replacing a house lost to a fire.

  10. Coinsurance • Coinsurance is the sharing of expenses by the policyholder and the insurance company. • The policyholder normally pays the deductible and then shares the remaining balance with the insurance company. • For example, the insurance company may pay 80% of the amount remaining after the deductible is paid, leaving that 20% to be paid by the policyholder.

  11. Cost of Insurance • The premium of a policy is determined partly by the past experiences of insurance companies in paying for the kinds of losses that are covered in the policy. • For example - 20-year-old drivers are greater risks than 40-year-old drivers, and due to this, the 20-year-old pays more of a premium.

  12. Cost of Insurance • The item being insured determines how much the premium is as well. • If you want to in sure a luxury car, the premium will be higher than if it was a low end car. • Then the number and size of claims that the insurance company has to deal with also helps in determining premium. • By locking doors and driving defensively, losses associated with thefts and automobile accidents can be reduced. Practicing good health habits will reduce life and health insurance costs.

  13. Purchasing Insurance • Insurance from your employer… • Employers may pay part of life and or health insurance premiums for their employees. • Otherwise, an Insurance Agent will sell you insurance. • Large Insurance Company Agent - sells policies written by the company which they are employed by. • Independent Agent - sells many different policies from many different companies.

  14. Insurance for Economic Security • Insurance is important to everyone because it provides economic security. • Insurance also helps our economy. Insurance makes it possible for many people to do things they otherwise could not do. • Buying a house…in order to get a loan, the house better be insured. • Buying a car…in order to get a loan, the car has to be insured as well.

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