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uncertainty or possibility
2 Kinds of Risk
Speculative Risk: possibility of gain or loss. ie gambling and NOT insurable.
Pure Risk: no possibility of gain
Elements of an Insurable Risk
risks are the subject of insurance, but not all pure risks are insurable
exist for risk to be insurable
- Ascertainable in case, time and amount
- Economically feasible premium
- Insurance must exclude catastrophic loss exposure such as war or nuclear
- Predict the chance of loss using the "Law of Large Numbers"
NOT PREDICTABLE = NOT INSURABLE
Law of Large Numbers
Statistically predict future losses
Law of Large numbers does not predict individual losses
Process of Identifying exposure to risk and deciding how to handle the risk
4 Management Techniques
1. Reduce - Lowering the hazard
2. Retain - Assume financial risk self-insure, deductible or co-pay
3. Avoid - Eliminate the financial risk
4. Transfer - Purchase insurance
Life and Health Insurance Concepts
Insurance Policy- a legally binding contact between the two parties
Insurer: Insurance Company
Insured: The person whose life, health is insured by the insurance policy
The likelihood of dying during a given year.
Morality tables assume everyone is statistically dead at age 100
The price (cost) of life insurance quoted in thousands
i.e. cost per unit of exposure
Prospective Loss Cost (aka Loss Ratio)
Portion of the rate which is projected to be paid out in insurance benefits
Age at the time of application
Actuary: Mathematician who develops the rates for the insurer.
Underwriter (aka Home Office Underwriter)- employee of the insurer selects risk for insurer to avoid adverse selection.
Producer (Agent) (aka Field Underwriter)(aka Agent Underwriter)- licensed to solicit, negotiate, or sell insurance