• Pooling Of Losses
• Payment Of Fortuitous Losses
• Risk Transfer 
• Indemnification

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 }

Reduce their explosure to larger claims by either :

• Raising Premiums 

• Screening Out Such Applicants

• 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 

• Government Insurance 

• Private Insurance

• Indemnification Of Loss

• Reduction Of Worry And Fear
• Source Of Investment

• Loss Prevention 

• Enchancement Of Credit

1. Cost Of Doing Business
2. Fraudulent Claims
3. Inflated Claim

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

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

• 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

• Avoidance  
• Loss Prevention 
• Loss Reduction

Avoidance 

• The firm may not be able to avoid all losses
• It may not be feasible or practical to avoid the exposure

Loss Prevention

Loss Reduction

• Retention
• Non-Insurance Transfers
• Commercial Insurance

Retention

• No other method of treatment is available
• The worst possible loss is not serious
• Losses are fairly predictable

• Current net income
• Unfunded reserved
• Funded reserced
• Credit line

• Diffulty in obtaining insurance
• Favourable regulatory enviroment
• Lower costs 
• Easier access to a reinsurer
• Formation of a profit center

Self Insurance 

Risk Retention Groups

• Save on loss costs
• Save on expeses
• Encourage loss prevention
• Increase cash flow

• Possible higher losses
• Possible higher expenses
• Possible higher taxes

Non-Insurance Transfer

Insurance

Risk Management Matrix

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

Personal Risk Management

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

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

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

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

• 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

• 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 )

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

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

Reasons for Reinsurance

• Increase underwriting capacity
• Stabilize profits
• Reduce the unearned premium reserved
• Provide protection against a catastrophic loss

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

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

Methods for sharing

• Reinsurance 

• Excess-of-loss (EOL)

• Surplus-share

• Quota-share treaty

Alternatives to traditional reinsurance

• Securitization of risk
• Catastrophe bonds

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

Purpose 

• To prevent the insured from profiting a loss
• To reduce moral hazard

Actual cash value 

• Replacement cost less depreciation
• Fair market value
• Broad evidence rule 

Exceptions to the principle of indemify

• Value policy

• Value policy law

• Replacement cost insurance

• Life insurance

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

• Life insurance

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

Supported by legal doctrines 

• Representation 
• Concealment
• Warranty

Representation

• Material 
• False 
• Reliance

Concealment

Warranty

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 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

Estopple