HS 311: Fundamentals of Insurance Planning –
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Terms in this set (263)
Types of Insurance Life, Health, Disability, Property, Long-Term care,
Personal liability
Categories of Risk Pure
Speculative
Subjective
Objective
Fundamental
Particular
Nonfinancial
Financial
Pure Risk There is a chance of loss or no loss.
Examples: death, auto accident, house fire.
,Speculative Risk There is a chance of profit, loss, or no loss.
Generally voluntary (not insurable) and undertaken by
investors/entrepreneurs.
Subjective Risk Based on an indiviual's perception of risk.
Objective Risk Does not depend on individual perception. Measures
the difference between actual loss and the expected
loss.
Fundamental Risk Impact many individuals at once (Earthquake, Flood).
Difficult to insure because the risk can lead to severe
financial consequence for the insurance company.
Particular Risk Impacts a particular individual (Death or inability to
work because of sickness or accident).
Nonfinancial Risk Would result in a loss other than a monetary loss
(emotional distress when a loved one passes).
Financial Risk Loss of financial value, such as premature death of a
family's primary wage earner. Life insurance can help
with this.
Probability of Loss Measure the long-run frequence of an event.
Quantifies expected cost of claims.
Insurer then applie a premium to the probability of
loss. The more measurable the loss, the more efficient
the premiums.
Law of Large Numbers The more frequently an event occurs, the more likely
that the true probability will reveal itself. Helps reduce
objective risk.
,7 Steps of Risk Management Process 1. Determining the objectives of the risk management
program
2. Identifying the risk to which the individual is
exposed
3. Evaluating risks for probability and severity of loss
4. Determining and selecting the best risk managment
alternatives
5. Selecting the most appropriate alternative for each
risk
6. Implementing the risk management plan selected
7. Evaluating and reviewing the risk management
program
Determining the objectives of the risk Can range from obtaining cost effective protection to
managment process ensuring that income continues after a loss.
IDENTIFYING THE RISKS TO WHICH Identifying the potential risks is primarily a function of
THE INDIVIDUAL IS EXPOSED the client's life-cycle position.
EVALUATING RISKS FOR Loss severity measures the dollar magnitude, or the
PROBABILITY AND SEVERITY OF LOSS absolute dollar amount, of the expected financial loss
were it to occur.
Only those risks that have very severe financial
consequences but occur infrequently are appropriate
to transfer or insure
DETERMINING AND SELECTING THE A planner may use a matrix to analyze each risk.
BEST RISK MANAGEMENT Hig Severity and Low Severity vs. Low frequency of
ALTERNATIVES occurence or high frequency of occurence. High +
Low = Transfer risk using insurance. High + High = avoid
risk. Low + Low = Retain risk. Low + High =
Retain/reduce risk.
, IMPLEMENTING THE RISK The planner should work closely with the client to
MANAGEMENT PLAN SELECTED ensure that appropriate risk management techniques
are implemented.
EVALUATING AND REVIEWING THE Things change over time, and risk exposures can
RISK MANAGEMENT PROGRAM change as well.
Underwriting Underwriting is the process of classifying applicants
into risk pools. selecting insureds. assigning a
premium.
Adverse Selection The tendency of higher-than-average risks to
purchase or renew insurance policies. • Premiums
depend upon a balance between favorable and
unfavorable risks in the pool. • Managed through
underwriting and denying insurance on the front end
or raising premiums on the back end.
Requisites for an Insurable Risk • A large number of homogenous exposure units.
• Losses must be accidental.
• Losses must be measurable and determinable.
• Losses must not pose a catastrophic risk for the
insurer.
CAUSES OF INSURED LOSS PERILS - The actual cause of a loss, such as • fire, wind,
tornado, earthquake, burglary, and collision.
HAZARD - A condition that increases the likelihood of
a loss occurring, e.g., • moral (filing a false claim or
stealing), morale (leaving car unlocked), and physical
hazards (icy roads, poor lighting, etc).
INSURABLE RISKS High Severity risks with low frequency of occurence
(traditional insurance)
Low severety risk with low frequency of ocurrence
(warranties)
Questions With Correct Solutions
Add to calendar
Play your way to mastery with fun games
Match Blocks Charms NEW
Terms in this set (263)
Types of Insurance Life, Health, Disability, Property, Long-Term care,
Personal liability
Categories of Risk Pure
Speculative
Subjective
Objective
Fundamental
Particular
Nonfinancial
Financial
Pure Risk There is a chance of loss or no loss.
Examples: death, auto accident, house fire.
,Speculative Risk There is a chance of profit, loss, or no loss.
Generally voluntary (not insurable) and undertaken by
investors/entrepreneurs.
Subjective Risk Based on an indiviual's perception of risk.
Objective Risk Does not depend on individual perception. Measures
the difference between actual loss and the expected
loss.
Fundamental Risk Impact many individuals at once (Earthquake, Flood).
Difficult to insure because the risk can lead to severe
financial consequence for the insurance company.
Particular Risk Impacts a particular individual (Death or inability to
work because of sickness or accident).
Nonfinancial Risk Would result in a loss other than a monetary loss
(emotional distress when a loved one passes).
Financial Risk Loss of financial value, such as premature death of a
family's primary wage earner. Life insurance can help
with this.
Probability of Loss Measure the long-run frequence of an event.
Quantifies expected cost of claims.
Insurer then applie a premium to the probability of
loss. The more measurable the loss, the more efficient
the premiums.
Law of Large Numbers The more frequently an event occurs, the more likely
that the true probability will reveal itself. Helps reduce
objective risk.
,7 Steps of Risk Management Process 1. Determining the objectives of the risk management
program
2. Identifying the risk to which the individual is
exposed
3. Evaluating risks for probability and severity of loss
4. Determining and selecting the best risk managment
alternatives
5. Selecting the most appropriate alternative for each
risk
6. Implementing the risk management plan selected
7. Evaluating and reviewing the risk management
program
Determining the objectives of the risk Can range from obtaining cost effective protection to
managment process ensuring that income continues after a loss.
IDENTIFYING THE RISKS TO WHICH Identifying the potential risks is primarily a function of
THE INDIVIDUAL IS EXPOSED the client's life-cycle position.
EVALUATING RISKS FOR Loss severity measures the dollar magnitude, or the
PROBABILITY AND SEVERITY OF LOSS absolute dollar amount, of the expected financial loss
were it to occur.
Only those risks that have very severe financial
consequences but occur infrequently are appropriate
to transfer or insure
DETERMINING AND SELECTING THE A planner may use a matrix to analyze each risk.
BEST RISK MANAGEMENT Hig Severity and Low Severity vs. Low frequency of
ALTERNATIVES occurence or high frequency of occurence. High +
Low = Transfer risk using insurance. High + High = avoid
risk. Low + Low = Retain risk. Low + High =
Retain/reduce risk.
, IMPLEMENTING THE RISK The planner should work closely with the client to
MANAGEMENT PLAN SELECTED ensure that appropriate risk management techniques
are implemented.
EVALUATING AND REVIEWING THE Things change over time, and risk exposures can
RISK MANAGEMENT PROGRAM change as well.
Underwriting Underwriting is the process of classifying applicants
into risk pools. selecting insureds. assigning a
premium.
Adverse Selection The tendency of higher-than-average risks to
purchase or renew insurance policies. • Premiums
depend upon a balance between favorable and
unfavorable risks in the pool. • Managed through
underwriting and denying insurance on the front end
or raising premiums on the back end.
Requisites for an Insurable Risk • A large number of homogenous exposure units.
• Losses must be accidental.
• Losses must be measurable and determinable.
• Losses must not pose a catastrophic risk for the
insurer.
CAUSES OF INSURED LOSS PERILS - The actual cause of a loss, such as • fire, wind,
tornado, earthquake, burglary, and collision.
HAZARD - A condition that increases the likelihood of
a loss occurring, e.g., • moral (filing a false claim or
stealing), morale (leaving car unlocked), and physical
hazards (icy roads, poor lighting, etc).
INSURABLE RISKS High Severity risks with low frequency of occurence
(traditional insurance)
Low severety risk with low frequency of ocurrence
(warranties)
