Chapter 7: Risk Financing Insurance

Basic concept and principle Insurance contract Insurance industry Classification of insurer Selection of insurer Underwriting cycle Demand for insurance
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Learning Objective
Understand the basic concepts of insurance Identify the main components of an insurance contract Describe the different types of insurance company ownership Describe the factors that affect the selection of insurer Summarize the evidence and explanations for the insurance underwriting cycle Understand the demand for insurance for a corporation
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Risk Financing

Risk Retention
Risk Transfer
Via insurance Via contract
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Definition of Insurance
Insurance is pooling of fortuitous loss by transferring of such risk to insurers, who agree to :a) indemnify the policy holders such losses; b) provide other pecuniary benefits on the occurrence; c) render services connected with the risk

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Pool

indemnification

Basic Concepts

fortuitous

transfer
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Basic Principles of Insurance

1 2 3 4

Indemnity Insurable interest Subrogation Contribution Utmost good faith

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5.

Basic Parts of Insurance Contracts

Declaration
Definition Insuring agreement Condition

Exclusion
Miscellaneous provisions
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Insurance Companies
Type Ownership
Marketing system
Life General Composite Capital Stock Mutual Agency Branch office Direct General Agent Broker

Agency

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Others
Insurer capital Insurance premium Underwriting cycle

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Selection of insurers

Financial stability Product availability

Service quality
Ethical behavior
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Insurer capital Insolvency Risk

Inadequate premium collection Underwriting> capital TO AVOID:
Diversification reinsurance

High investment risk

Management Fraud

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Why transfer the risk to insurer?

Services
Claims processing Advise

External funds
Avoid

Financial distress
Avoid

Tax
Deductible

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Insurance Premium

Gross premium
Pure premium Loadings Investment income Loss adjustment expenses

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