Introduction to Risk Management & Insurance Personal Finance Mr. Lamberti

Risk Management A plan to recognize risks, identify the consequences of those risks, and the creation of a plan to handle the risks. NOT just insurance! Challenge: Identifying the short-term and the long-term consequences.

Risk Management A plan to protect yourself, your family or your property against a financial loss, including a business. Characteristics: 1. Dynamic - Plans change over time as you age, have children, retire, etc. 2. Insurance is just one piece of the plan

Types of Risk Peril Anything that might cause a loss Hazard Anything that increases the likelihood of a loss Negligence The failure to take reasonable, ordinary measures to prevent a loss

Risk Management Strategies 1. Avoidance – Simply don’t participate in an activity to avoid the peril. 2. Risk Reduction – Taking precautions to reduce the likelihood of harm. 3. Risk Assumption – Taking responsibility for the negative results of a risk or decision. 4. Risk Shifting – Transferring or sharing the loss with an insurance company.

Insurance Protection against a financial loss. You can’t predict the future, so you must prepare for a worst case scenario. Insurance will not help for a long term physical or emotional loss.

Automobile

Fire / Natural Disaster

Death

Terminology 1. Insurer A business that agrees to pay for a loss 2. Policy A contract to share the risk of a loss 3. Policyholder Purchaser of the policy 4. Premium Fee paid by policyholder to insurer 5. Insured All parties covered by a policy 6. CoverageThe terms and specifics of the protection provided 7. Deductible See next slide!

Deductible A set amount you must pay per loss as a combination of risk shifting and risk assumption. Example – You have a $500 deductible on your car. You get in an accident an do $2,000 damage. You pay $500, the insurer pays $1,500.