Download Chapter 25 Introduction to Risk Management

Chapter 25
Introduction to
Risk Management
What Is Insurance?
Risk Management
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Lesson 25.1
What Is Insurance?
GOALS
 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 theft
Insurance is a method for spreading
individual risk among a large group of
people to make losses more
affordable for all.
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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.
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