1. Stock Market Analysis and Personal Finance Mr. Bernstein Risk Management, Insurance Companies and Home Insurance, pp 412-429 June 5, 2015

2. Stock Market Analysis & Personal Finance Mr. Bernstein What is a Insurance? Protection against financial loss Insurance companies share risk and charge a premium which represents their estimate of average losses plus a competitive profit The contract outlining payments between you and the insurance company is known as a policy 2

3. Stock Market Analysis & Personal Finance Mr. Bernstein How insurance rates are established Insurance companies will insure against risks which both loss amounts and frequency can be estimated Actuaries analyze data and make those estimates Deductible amounts reduce premiums 3

4. Stock Market Analysis & Personal Finance Mr. Bernstein Risk Management Planning As you accumulate wealth and assets, it is wise to plan to protect yourself financially Pure risks can be transferred to insurance companies: Life insurance Disability insurance Property loss from fire, acts of nature or crime Liability insurance against negligence (unintentional) – Auto, Property 4

5. Stock Market Analysis & Personal Finance Mr. Bernstein Risk Management Planning Must weigh costs against possible losses for each category of risk Example: Homeowner’s Insurance Estimated cost: $1,500/year Cost of rebuilding home in case of fire: $500,000 Cost of replacing contents of home: $50,000 Living expenses during rebuilding: $20,000 Partial damage is also covered, ie ice or falling trees Liability also covered up to $100,000 5

6. Stock Market Analysis & Personal Finance Mr. Bernstein Homeowner’s Insurance Cost Factors Location Type of construction Value of home Risk reduction actions (ie smoke alarms, alarm systems) Additional items (ie jewelry, furs, boats, pets) * - Most mortgage lenders will require insurance 6