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Chapter 25Introduction to Risk Management

What Is Insurance?Risk Management

GOALSGOALS

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Lesson 25.1

What Is Insurance?

Explain the concept of insurance. Define basic insurance terminology

and types of risk.

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Spreading the Risk

Risk is the chance of financial loss from perils to people or property Perils to people include declining health,

injury, or death Perils to property include fire damage,

vandalism, car accidents, and theftInsurance is a method for spreading

individual risk among a large group of people to make losses more affordable for all.

Spreading the Risk

Insurer is a business that agrees to pay the cost of potential future losses in exchange for regular fee payments.

When people buy insurance, the join a risk-sharing group by purchasing an insurance contract. Under the contract, the insurer agrees to assume an identified risk for a premium.

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Spreading the Risk

The insurer collects premium from policyholders under the assumption that only a few policy holders will have financial losses at any given time.

To make a profit, the insurer must collect more money in premiums than it pays out for losses.

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Spreading the Risk

Indemnification – putting an insurance policyholder back in the same financial condition as before a loss occurred

Probability – the chance that a loss may occur

Insurers set premiums based on statistical probability, they estimate the likelihood of potential losses.

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Insurance Terminology

Actuarial Table – A table of premiums rates based on ages and life expectancies

Actuary – A specialist in insurance calculations and statistics

Beneficiary – A person named on an insurance policy to receive benefits from the policy

Benefits – Sums of money to be paid for specific types of losses under the terms of an insurance policy

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Insurance Terminology

Cash Value – The amount of money payable to a policyholder upon discontinuation of a life insurance policy

Claim – A policyholders request for reimbursement for a loss under the terms of an insurance policy

Coverage – Protection provided by the terms of an insurance policy

Deductible – The specified losses that the insurance policy does not cover

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Insurance Terminology

Exclusions specified losses that the insurance policy does not cover

Face amount – The amount stated in a life insurance policy to be paid upon death.

Insurance Agent – A professional insurance salesperson who acts for the insurer in negotiating, servicing, or writing an insurance policy.

Insured – The person or company protected against loss

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Insurance Terminology

Loss – An unexpected reduction in value of the insured property caused by a covered peril; basis of a valid claim for reimbursement under terms of the insurance policy

Proof of Loss – Written verification of the amount of a loss that must be provided by the insured to the insurer before a claim can be settled

Standard Policy – Contract form that has been adopted by many insurers, approved by state insurance divisions or prescribed by law

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Insurable Risks

Personal risks - Possible losses involving income or standard of living. Protect against personal risk by buying life,

health, and disability insurance. Property risks - The chances of loss or harm to

personal or real property Protect against property risk by buying home and

automobile insurance. Liability risks - The possibilities of loss due to error

or negligence. Protect against liability risk by buying liability

insurance.