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