Chapter 1

Risk and Insurance

Risk

What are some examples of Risk?

Uncertainty An event might
happen & if so, it might not be
favourable.
- Doubt about the future
- Lack of knowledge
Chance Outcome could be
favourable

Risk
3 Components of Risk:
1) Uncertainty
2) Different levels of risk not all risks are
equally likely to occur. See example on pg 4.
- Frequency and Severity
3)
- Cause of loss 2 aspects peril and
hazard
Peril event that gives rise to a loss.
Hazard factor that may influence the
outcome of a loss.

Classifications of Risk

Speculative risk chance of loss or

profit.
- what are some examples?
- not insurable

Pure risk only chance of a loss

- lets look at examples
- pure risk is insurable

Risk to individuals &

family

We are constantly exposed to risk

Personal risk based on loss of life or loss
of income from premature death, physical
disability, old age or unemployment can
we support our dependents, pay our bills,
etc.
Property Take a second to think of all
your belongings. Cost to replace?
Mortgage to repay? What are some things
that could happen to damage your
belongings.

Risk to individuals and

families

1.
2.
3.
4.

Owning an automobile injuring ourselves,

others, property damage, fire, stolen vehicle
Perils can damage not only our home, but
also the contents inside
Liability responsibility & obligation to
others
Injury to others or damage to their property
Keeping our premises safe
Children causing injury or damage to others
Our pets causing injury or damage to others

Risks to Businesses

Personal What will happen to the

business if you are unable to work? Can
one partner carry on business? What if one
partner dies?
Property All businesses have some form
of property.
- Some Perils that can destroy
property are fire, theft, hail, lightning.
Anything else?
- Business interruption/Indirect loss

Liability Lets discuss the liability

risks that business owners are
exposed to. Examples?
- Premises
- Products
- Environmental
- Employers Liability
- Libel and slander

Dealing with Risk

A growing phenomenon called Risk
Management
- Risk management is the minimization
of the detrimental effects of risk by
identifying the risk, measuring the risk
and controlling the risk
Risk managers are used in several
different business, manufacturing
plants, insurance companies, lottery,
law offices, drilling companies

Identifying the Risk

Direct damage to property could be caused by

fire, flood, earthquake, vandalism and other
perils
Business interruption the amount of time it
takes to get the business back up and running
new premises or repair old premises
Liability injuries on premises, injury caused by
product
Employers Liability employees injured on the
job
Fidelity Employees stealing from you

Measuring the Risk

Loss frequency What is the

likelihood of each peril occurring?
Loss severity How severe will the
loss be?

Controlling the Risk

Reduce risks by preventive effort

Assume or retain risk
Transfer risk

Reduce risk by
prevention

Its important to eliminate as much

risk as possible replace wire to
prevent fire, clear snow and ice, build
with fire resistive materials.
Impossible to eliminate all risk, but
we can reduce the damages. Repair
roof so the damage wont be as bad
during a hurricane. Burglar alarms
will reduce damage during a break in.

Assume or Retain Risk

1.
2.

Two ways to assume or retain risk is

to:
Ignore it and hope for the best
Self insure set up a fund in which
money is periodically paid in order to
pay for losses. Why is this not a
good idea? Another way to self
insure is through a captive insurance
company.

Transfer the Risk

What is a good way to transfer risk?

INSURANCE!!!

Insurance

Definition Insurance is the method

of sharing the losses of the few
individuals in a group who suffer them
among the many members of that
group who do not.
What do you think this means?
Indemnify means to put back in the
same financial position as just prior to
the loss.

Insurance

Why do we buy insurance?

Insurance
Insurance provides:
Security we can buy a house with
the security of insurance.
Peace of mind
See formal definition of insurance on
page 16

Insurance A large pot

The payment of losses suffered by those

who have a claim
Reserves for those losses that have
occurred but have not been reported yet
(outstanding losses)
Reserves for returns of partial premiums
to those who cancel a policy part way
through its term (unearned premiums)
The cost of managing the pot

Reserves

Insurance companies are highly

regulated
Required by law to have money set
aside for outstanding losses and
unearned premiums

Unearned Premiums

If a person has paid $1200 up front

for an insurance policy, but cancels
it after 6 months, the insurance
company has only earned 6 months
worth of premium and needs to
reimburse the insured for the extra
6 months of coverage that they paid
for.

Insurance

Keep in mind that the main basis of

insurance is to spread the losses.