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RISK
[ Uncertainty concerning the occurance of loss ]

DEFINITIONS OF RISK :
~ Objective Risk
~ Subjective Risk

LOSS EXPOSURE
[ Any situation or circumstances in which a loss is possible regardless of whether a loss occurs ]

LAW OF LARGE NUMBER
[ The greater the number of units in a projection, the less important each unit becomes ]

CHANCE OF LOSS
[ Probability that an event will occur ]
~ Objective Probability
~ Subjective Probability

PERIL
[ Cause of loss ]

HAZARD
[ Condition that increase the frequency or severity of loss ]
~ Physical Hazard
~ Moral Hazard
~ Attitudinal Hazard
~ Legal Hazard

TYPES OF RISK :
~ Pure Risk
~ Speculative Risk
~ Diversifiable Risk
~ Non-Diversifiable Risk
~ Enterprise Risk

STRATEGIC RISK
[ Uncertainty regarding the firm's financial goals and objectives ]
~ Operational Risk
~ Financial Risk

PERSONAL RISK
[ Risk that directly affect an indivudual ]

PREMATURE DEATH
[ The death of a family head or the key person with unfilled financial obligations ]

PROPERTY RISK
[ The risk of having property damaged or lost from numerous cases ]

DIRECT LOSS
[ Financial loss that results from the physical damage, destruction or theft of the property ]

CONSEQUATION LOSS
[ A financial loss that results indirectly from the occurance of a direct physical damage or theft loss ]

AVOIDANCE
[ It ensure that an individual or business does not incur any liability relating to given activity by avoiding the activity in question ]
~ Loss Control
~ Loss Prevention
~ Loss Reduction

RETENTION
[ A firms retain part or all of the potential losses result from a given loss ]
~ Active Retention
~ Passive Retention
~ Self Insurance

NON INSURANCE TRANSFER
[ The risk is transferred to a party other than the insurance company ]

HEDGING
[ A technique for transfering the risk of unfavourable price fluctuations to a speculator ]

INSURANCE
[ Most practical method for handling major risk ]

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INSURANCE
The pooling of losses by transfer the risk from the insured to the insurer who agrees to indemnify the losses, to provide other pecuniary beneits on their occurance or to render services connected with the risk

BASIC CHARACTERISTIC OF INSURANCE

Pooling Of Losses

Payment Of Fortuitous Losses

Risk Transfer

Indemnification

Insurable Risk
[ Condition in which an applicant has met an insurance company's standards ]

CHARACTERISTIC OF AN IDEALLY INSURABLE RISK

1. Large Number Of Explosure Units        { Predict loss based on the Law Of Large Number }

2. Accidental And Unintentional Loss     { Should be Unseen And Unexpected }

3. Determinable And Measureable Loss        { Definate as to Cause, Time, Place and Amount }

4. No Catastrohic Loss      { Should not be Catastrophic }

5. Calculable Chance Of Loss                     { The insurer able to Calculate the Avarage Frequency and Average Severity Of Future Loss }

6. Economically Feasible Premium                 { The insured must be able to afford the premium }

ADVERSE SELECTION
[ Person with higher than average chance of loss seek insurance at standard rates ]

To Combat The Problem Of Adverse Selection :
Insurance company try to

Reduce their explosure to larger claims by either :

Raising Premiums

Or

Screening Out Such Applicants

Ways To Overcome :

Underwriting ( Process Of Selecting, calssifying )

Policy Provisons

COMPARISONS BETWEEN INSURANCE AND GAMBLING

Insurance

Pure Risk

Productive

Gambling

Speculative Risk

Unproductive

COMPARISON BETWEEN INSURANCE AND HEDGING

Insurance

Insurable Risk

Can reduce the Objective Risk by application of Law Of Large Number

Hedging

Uninsurable

Only involves Risk Transfer not Risk Reduction

TYPES OF INSURANCE

Government Insurance

Social Insurance

Private Insurance

Life And Health Insurance

BENEFITS OF INSURANCE

Indemnification Of Loss

[ Permit individuals and families to be restored to their former financial position after a loss occurs ]

Reduction Of Worry And Fear

Source Of Investment

[ Importance source of funds for investment accumulation ]

Loss Prevention

[ Reduce both direct and indirect losses ]

Enchancement Of Credit

[ A person's credit ]

COST OF INSURANCE TO SOCIETY

1. Cost Of Doing Business

2. Fraudulent Claims

3. Inflated Claim

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FUNCTIONAL OPERATIONS OF PRIVATE INSURERS

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FUNCTIONAL OPERATIONS OF PRIVATE INSURERS

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RATING AND RAKEMAKING

Pricing of insurance and the calculation of insurance premiums
~ Actuary is the person who determines rates and premiums

UNDERWRITING

The process of selecting risks for insurance and clasifying them according to their degrees of insurability so that the appropriate rates may be assigned

Statement Of Underwriting policy :

Insurer must establish an underwriting policy that is consistent with company  obejctives

The line undewriters are the persons who make daily decisions concerning the acceptance or rejection of business

Reduce adverse selection against the insurer

Basic underwriting principles

Attain An Underwriting Profit

Select Prospective Insureds According To The Companys Underwriting Standards

Provide Equity Among The Policyowners

Steps in underwriting

1. Agent as first underwriter

2. This step is known as field underwrting

3. The agent is told of what types of what applicants are acceptable, borderline or prohibited

Sources of underwriting information

Application

Agent's report

Inspection report

Physical inspection

Physical examination

Making an underwrting decison

Other underwriting consideratios :

1. Rate  adequacy and underwriting

2. Reinsurance and underwriting

3. Renewal underwriting

PRODUCTION

Refers to the sales and marketing activities of insurers

Producers are agents who sell insurance

Agency department

Professinalism in selling ( identifies potential insured, analyzed their insurance needs )

CLAIM SETTLEMENT

Objectives
~ Verification of covered loss
~ Fair and prompt payment of claims
~ Personal assistance to the insured

Types of claims adjustor

Agent ( an idependent person, representing several insurance and being pay )

Company adjustor ( can settle a claim and represent only one company )

Independent adjustor ( an organization or individual that adjust claims for a fee )

Public adjustor ( representive of an insurace claimant )

Step in settlement of a claim

1. Notice of loss ( police reprt )

2. Investigation of the claim that determine by an adjustor         ( Catastrophic )

3. Filing a proof of loss ( require a proof of loss to claim )

4. A decision by an adjustor is made concerning payment

REINSURANCE

An agreement which one insurer indemnifies another insurer for all or part of the risk of a policy originally issued and assumed by that other insurer

Reinsurer
The insurer that accepts part or all of the insurance from the ceding company

Net retention
The amount of insurance retained by the ceding company for its own account

Reasons for Reinsurance

Increase underwriting capacity

Stabilize profits

Reduce the unearned premium reserved

Provide protection against a catastrophic loss

Types insurance
Facultative reinsurance

negotiated on an individual issued-by-issued basis rather than on a treaty basis

~ Can increase the capacity of the primary insurer
~can help stabilize the financial operations of the primary insurer

Treaty reinsurance

The primary insurer has agreed to cede insurance to the reinsurer and the reinsurer has agreed to accept the business

~ It's automatic
~ No delay involved

Methods for sharing

Reinsurance

~ Can cover many insurance company
~ Insurance company can't take many reinsurance

Excess-of-loss (EOL)

~ Catastrophic loss
~ Single exposure

Surplus-share

~ Share premium and loss ( Limit )

Quota-share treaty

~ Share premium and loss
~ Share by percent / ratio

Alternatives to traditional reinsurance

Securitization of risk

Catastrophe bonds

INVESTMENTS

Life insurance investments
Property and casualty insurance investments
Financial meltdown and insurance company investments

Other insurance company function

Loss control services

Information system

Legal function

Accounting

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RISK MANAGEMENT
A process that identifies the loss exposures faced by an organization and selects the most appropriate techniques for treating such explosures

OBJECTIVES

PRE-LOSS

The firms should prepare for potential losess in the most economical way

Reduction Of Anxiety

Meet Any Legal Obligations

POST-LOSS

Survival Of The Firm

Continue Operating

Stability Or Earnings

Continued Growth Of Firm

Minimize The Effect that A Loss will have on Other Persons or Society

STEP IN THE RISK MANAGEMENT PROCESS

1. Identify The Loss Exposures

2. Measure And Analyse The Loss Exposure

3. Select The Appropiate Combination Of Techniques For Treating The Loss Exposures

4. Implement And Monitor The Risk Management Program

IDENTIFY LOSS EXPOSURES

Identify all MAJOR and MINOR loss exposures

Property

Liability

Business Income

Human Resources

Crime Explosures

Employee Benefit

Foreign

Intangible Property

Failure To Comply With Governments Laws And Regulation

SOURCE OF INFORMATION TO IDENTIFY THE LOSS EXPLOSURES

Risk Analysis Questionnaires And Checklists

Physical Inspection

Flowcharts

Financial Statements

Historical Loss Data

MEASURE AND ANALYZE THE LOSS EXPOSURES

1. Estimate the frequency and severity of loss

2. Loss frequency refers to the probable number of losses that may occur during some given time period

3. Loss severity refers to the proable size of the losses that may occur

4. Once the risk manager estimate each type of loss exposure, it can be ranked according to their relative importance

5. Loss Severity is More Important because a single catastrophic loss could wipe out the firm

6. The Maximum Possible Loss is the Worst Loss during lifetime

7. The Proable Maximum Loss is the Worst Loss that is likely to happen

SELECT THE APPROPIATE COMBINATION OF TECHNIQUES FOR TREATING THE LOSS EXPOSURES
Risk Control Techniques
( Reduce the frequency and severity of lose )

Avoidance

Loss Prevention

Loss Reduction

Avoidance

A certain loss exposure is never acquired or an existing loss exposure is abandoned
ADVANTANGE
Chance of loss is reduce to zero if the loss exposure is never acquired
DISADVANTANGES

The firm may not be able to avoid all losses

It may not be feasible or practical to avoid the exposure

Loss Prevention

Measures that reduce the frequency of a particular loss

Loss Reduction

Measures that reduce the severity of a loss after it occurs
Risk Financing
( Utilization of soucers of funds to pay for losses  )

Retention

Non-Insurance Transfers

Commercial Insurance

Retention

The firms retains part or all of the losses that can result from a given loss
Condition to used :

No other method of treatment is available

The worst possible loss is not serious

Losses are fairly predictable

Method for paying losses :

Current net income

Unfunded reserved

Funded reserced

Credit line

Captive Insurer
insurer owned by a parent firm for the purpose of insuring the parent firm's loss exposures
Single parent captive
insurer owned by only one parent such as corporation
Association or group captive
insurer owned by several parents
Captive Insurer are formed :

Diffulty in obtaining insurance

Favourable regulatory enviroment

Lower costs

Easier access to a reinsurer

Formation of a profit center

Self Insurance

Protecting against loss by setting aside one's own money

Risk Retention Groups

A group captive that can write any type of liability coverage except employers liability, workers compensation and personal lines
ADVANTANGE

Save on loss costs

Save on expeses

Encourage loss prevention

Increase cash flow

DISADVANTANGES

Possible higher losses

Possible higher expenses

Possible higher taxes

Non-Insurance Transfer

Methods other than insurance by which a pure risk and its potential financial consequences are transfered to another party

Insurance

Appropriate for loss exposures that have a low probability of loss but the severity  of loss is high

Risk Management Matrix

TYPE OF LOSS | LOSS FREQUENCY | LOSS SEVERITY | APPROPRIATE RISK MANAGEMENT TECHNIQUE
1 | Low | Low | Retention
2 | High | Low | Loss prevention and retention
3 | Low | High | Insurance
4 | High | High | Avoidance

IMPLEMENT AND MONITOR THE RISK MANAGEMENT PROGRAM

1. Begins with a policy statement

2. Several department that need to ccoperate in the risk management process :

Accounting

Finance

Marketing

Production

Human Resources

Benefits Of Risk Management

The cost of risk is reduced, which may increase the company's profit
Enables a firm to attain its pre-loss and post-loss objectives more easily

Personal Risk Management

Identification of pure risks faced by an individual or family, and to the selection of the most appropriate technique for treating such risk
4 STEP

1. Identify loss exposure

2. Measure and analyze the loss exposures

3. Select appropriate techniques techniques for treating the loss exposures

4. Implement and review program periodcally

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PRINCIPLE OF INDEMNITY
Insurer agrees to pay no more than the actual amount of the loss, and differently the insured should not profit from a loss

Purpose

To prevent the insured from profiting a loss

To reduce moral hazard

Actual cash value

Cost of replacing damaged or destroyed property with comparable new property, minus depreciation and obsolescene

Replacement cost less depreciation

Fair market value

Broad evidence rule

Exceptions to the principle of indemify

Value policy

( Policy that pays a specified sum not related in any way to the extent of the loss )

Value policy law

( Requires payment of the face amount of insurance if a total loss to real property occurs )

Replacement cost insurance

( No deduction for physical depreciation in determning  the amount paid for a loss )

Life insurance

( Not a contract of indemnity but is a value policy that pays a stated sum to the beneficiary upon the insured's death )

PRINCIPLE OF INSURANCE INTEREST
The insured must be in a position to lose financially if a covered loss occurs

Purpose

To prevent gambling

To reduce moral hazard

To mesure the amount of the insured's loss in oroperty insurance

When must an insurable interest exist ?

Property insurance

( Time of loss )

Life insurance

( Inception of the policy )

PRINVIPLE OF SUBROGATION
Substitution of one creditor for another in settlement of a claim or obligation, or transfer of ownership, as when a mortgage is sold in the scondary market

Purpose

Prevent the insured from collecting twice for the same

To hold the negligent person responsible for the loss

Helps ho hold down insurance rates

Importance of subrogation

By exercising its subrogation

After a loss, the insured cannot impair or interfere

Subrogation does not apply to life insurance

Insurer Can't subrogate its own insured

PRINCIPLE OF UTMOST GOODFAITH
Higher degree of honesty is imposed on both parties to an insurance contract than is imposed on parties to other contracts

Supported by legal doctrines

Representation

Concealment

Warranty

Representation

Statements by made the applicant for insurance

Material

False

Reliance

Concealment

Intentional failure made by applicant for insurance content

Warranty

Statement that because part of insurance contract and its guaranteed by maker true in all expects

Character of insurance content

Offer and acceptance / Mutual asset

Consideration   ~Contractual capacity     ( Minor / Lack mental capacity )

Competent parties

Legal purpose

Legal characteristic of insurance

Aleatory contract         ( values exchanged may not be equal but depend on an uncertain event

Unilateral contract        ( only  one party makes a legally enforceable promise )

Conditional contract      ( insurer's obligation to pay a claim depends on whether the insured or the beneficiary has complied with all policy condition )

Personal contract         ( the contract is between the insured and the insurer )

Contract of adhesion      ( The insured must accept the entire contract )

LAW OF THE INSURANCE AGENT

Law of agency

No presumption of an agency relationship

Authority to represent the principal          ~ Expresss authority    ~ Implied Authority    ~ Apparent Authority

Principle responsible for acts of agents

Limitations on the power of agents

Waiver and Estoppels

Waiver

To waive the collection of premiums while keeping the policy in force if the policyholder becomes unable to work because of an accident or injury

Estopple

a represntation of fact mede by one person to another person is reasonable relied on by that person to such an extent that it would be inequitable to allow the first person to deny the truth of the represntation