seminar: timely topics for today’s business world mr. bernstein risk management and insurance...

Seminar: Timely Topics for Today’s Business World

Mr. Bernstein

Risk Management and Insurance Companies

January 21, 2015

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What is a Insurance?Protection against financial lossInsurance companies share risk and charge a premium which represents their estimate of average losses plus a competitive profitThe contract outlining payments between you and

the insurance company is known as a policy

Seminar: Timely Topics for Today’s Business World

Mr. Bernstein

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Insurance is similar to a put optionThe seller charges a premium to accept transfer of a risk of a specific type of financial loss

The contract has a maturity date

The deductible is equivalent toa strike price

But because personal insurance policies generally cannot be bought or sold to third parties, (i.e. you cannot buy and sell contracts that would pay off if your neighbor’s house burned down) volatility is not a factor

Seminar: Timely Topics for Today’s Business World

Mr. Bernstein

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How insurance rates are establishedInsurance companies will insure against risks which

both loss amounts and frequency can be estimatedActuaries analyze data and make those estimatesDeductible amounts reduce premiums

Seminar: Timely Topics for Today’s Business World

Mr. Bernstein

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Personal Risk Management PlanningAs you accumulate wealth and assets, it is wise to

plan to protect yourself financiallyPure risks can be transferred to insurance companies:

Life insuranceDisability insuranceProperty loss from fire, acts of nature or crimeLiability insurance against negligence (unintentional) – Auto, Property

Seminar: Timely Topics for Today’s Business World

Mr. Bernstein

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Risk Management PlanningMust weigh costs against possible losses for each category

of risk Example: Homeowner’s Insurance

Estimated cost: $1,500/yearCost of rebuilding home in case of fire: $500,000Cost of replacing contents of home: $50,000Living expenses during rebuilding: $20,000Partial damage is also covered, ie ice or falling treesLiability also covered up to $100,000

Seminar: Timely Topics for Today’s Business World

Mr. Bernstein

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Homeowner’s Insurance Cost FactorsMuch like put option pricing considers risk by incorporating

estimated volatility, the insurance company adjusts for estimated risk by taking into consideration factors which are correlated to payout patterns:LocationType of constructionValue of homeRisk reduction actions (ie smoke alarms, alarm systems)Additional items (ie jewelry, furs, boats, pets)

Most mortgage lenders reduce their risk by requiring insurance

Seminar: Timely Topics for Today’s Business World

Mr. Bernstein