Chapter 25 Introduction to Risk Management MYPF CHAPTER 25 13-SEPT-2001 Chapter 25 Introduction to Risk Management What Is Insurance? Risk Management © South-Western Educational Publishing

Lesson 25.1 What Is Insurance? Explain the concept of insurance. Define basic insurance terminology and types of risk. © South-Western Educational Publishing

Spreading the Risk Risk is the chance of financial loss from perils to people or property Perils to people include declining health, injury, or death Perils to property include fire damage, vandalism, car accidents, and theft Insurance is a method for spreading individual risk among a large group of people to make losses more affordable for all. © South-Western Educational Publishing

Spreading the Risk Insurer is a business that agrees to pay the cost of potential future losses in exchange for regular fee payments. When people buy insurance, the join a risk-sharing group by purchasing an insurance contract. Under the contract, the insurer agrees to assume an identified risk for a premium. © South-Western Educational Publishing

Spreading the Risk The insurer collects premium from policyholders under the assumption that only a few policy holders will have financial losses at any given time. To make a profit, the insurer must collect more money in premiums than it pays out for losses. © South-Western Educational Publishing

Spreading the Risk Indemnification – putting an insurance policyholder back in the same financial condition as before a loss occurred Probability – the chance that a loss may occur Insurers set premiums based on statistical probability, they estimate the likelihood of potential losses. © South-Western Educational Publishing

Insurance Terminology Actuarial Table – A table of premiums rates based on ages and life expectancies Actuary – A specialist in insurance calculations and statistics Beneficiary – A person named on an insurance policy to receive benefits from the policy Benefits – Sums of money to be paid for specific types of losses under the terms of an insurance policy © South-Western Educational Publishing

Insurance Terminology Cash Value – The amount of money payable to a policyholder upon discontinuation of a life insurance policy Claim – A policyholders request for reimbursement for a loss under the terms of an insurance policy Coverage – Protection provided by the terms of an insurance policy Deductible – The specified losses that the insurance policy does not cover © South-Western Educational Publishing

Insurance Terminology Exclusions specified losses that the insurance policy does not cover Face amount – The amount stated in a life insurance policy to be paid upon death. Insurance Agent – A professional insurance salesperson who acts for the insurer in negotiating, servicing, or writing an insurance policy. Insured – The person or company protected against loss © South-Western Educational Publishing

Insurance Terminology Loss – An unexpected reduction in value of the insured property caused by a covered peril; basis of a valid claim for reimbursement under terms of the insurance policy Proof of Loss – Written verification of the amount of a loss that must be provided by the insured to the insurer before a claim can be settled Standard Policy – Contract form that has been adopted by many insurers, approved by state insurance divisions or prescribed by law © South-Western Educational Publishing

Insurable Risks Personal risks - Possible losses involving income or standard of living. Protect against personal risk by buying life, health, and disability insurance. Property risks - The chances of loss or harm to personal or real property Protect against property risk by buying home and automobile insurance. Liability risks - The possibilities of loss due to error or negligence. Protect against liability risk by buying liability insurance. © South-Western Educational Publishing