INTRODUCTION TO RISK AND INSURANCE

 INTRODUCTION TO RISK AND INSURANCE (CHAPTER 3)

(PRINCIPLES OF INSURANCE : LIFE, HEALTH AND ANNUITIES)
HARRIETT E. JONES - DANI L. LONG (LOMA)

All insurance provides protection against some of the economics consequences of loss. Thus, insurance meets part of individuals' and businesses' need for economic security. The insurance products to meet various aspects of this need.  Despite these product changed, the underlying purpose of insurance products remains the same: to provide protection against the risk of financial loss. In order to understand insurance and how it work, you need to understand the concept of risk and which types of risks  are insurable.

The Concept of Risk

Risk exist when there is uncertainty about the future.

Two kinds of the risk :

1. Speculative Risk involves three possible outcomes ; (loss , gain or no change)
2. Pure Risk involves no possibility of gain, either a loss occurs or no loss occurs

Risk Management 

Risk Management involves identifying and assessing the financial risks we face. In order to eliminate or reduce our exposure to a specific financial risk, we can choose any of at least four options:

1. Avoiding Risk 
2. Controlling Risk
3. Accepting Risk
4. Transferring Risk

Avoiding Risk 

The first, and perhaps most obvious, method of managing risk is simply to avoid risk altogether.

Controlling Risk

We can try to control risk by taking steps to prevent or reduce losses.

Accepting Risk

A third method of managing risk is to accept, or retain, risk. Simply stated, to accept is to assume all financial responsibility for that risk.

Individuals and businesses sometimes decide to accept total responsibility for a given financial risk rather than purchasing insurance to cover the risk. In this situation, the person or business is said to self insurance against the risk. Self Insurance is a risk-management technique by which a person or business accept financial responsibility for losses associated with specific risks.

Transferring Risk

Transferring risk is a fourth method of risk management. When you transfer risk to another party, you are shifting the financial responsibility for that risk to the other party, generally in exchange for a fee. The common way for individuals, families, and businesses to transfer risk is to purchase insurance coverage.

When an insurance company agrees to provide a person or a business with insurance coverage, the insurer issues an insurance policy.

The policy is a written document that contains the terms of the agreement between the insurance company and the owner of the policy.

Managing Personal Risks Through Insurance                                    

Insurers use a concept known as risk pooling. With risk pooling, individuals who face the uncertainty of a particular economic loss - for example, the loss of income because of a disability - transfer this risks to an insurance company. 

Insurance company know that not everyone who is issued a policy to cover the risk of economic loss caused by disability will suffer a disability. In reality, only a small percentage of the individuals who purchase this type of insurance will actually become disabled at some time during the period of insurance coverage. 

By collecting premiums from all individuals and businesses that wish to transfer the financial risk of disability, insurers spread the cost of the few losses that are expected to occur among all the insured persons. 

Insurance, then , provides protection against the risk of economic loss by applying a simple principle :

"If the economic losses that actually result from a given peril, such as disability, can be shared by large numbers of people who are all subject to the risk of such losses and the probability of loss is relatively small for each other, then the cost to each person will be relatively small."

Characteristic of Insurable Risks

Insurance products are designed in accordance with some basic principles that define which risks are insurable. In order for risk - a potential loss - to be considered insurable, it must have certain characteristic:

1. The Loss Must Occur by Chance. In order for a potential loss to be insurable, the element of change must be present. The loss should be caused either by an unexpected event or by an event that is not intentionally caused by the person covered by the insurance. 
2. The Loss Must Be Definite. For most types of insurance, an insurable loss must be definite in terms of time and amount. In other words, the insurer must be able to determine when to pay policy benefits and how much those benefits should be . Depending on the way in which a policy states the amount of the policy benefit, every insurance policy can be classified as being a contract indemnity (base on the actual amount of financial loss, as determined at the time of loss) or a valued contract (specifies the amount of the amount of the benefit that will be payable when a covered loss occurs, regardless of the actual amount of the loss that was incurred)
3. The Loss Must Be Significant . some losses would cause financial hardship to most people and are considered to be insurable.
4. The Loss Rate Must Be Predictable. In order to provide a specific type of insurance coverage, an insurer must be able to predict the probable rate of loss - the loss rate - that the people insured by the coverage will experience. These predictions of future losses are based on the concept that, even though individual events, such as the death of a particular person - occur randomly, we can use observations of past events to determine the likelihood - or probability - that a given event will occur in the future.  "The law of the large numbers states that, typically, the more times we observe a particular event, the more likely it is that our observed results will approximate the true probability that the event will occur. "
5. The Loss Must Not Be Catastrophic to The Insurer

Please Answer the question according to the serial number of absences.  (Answer with Indonesian Language)

1. Define the risk  and its example
2. Define the Speculative Risk and its example
3. Define the Pure Risk and  its example
4. Define the Risk Management
5. Four options to eliminate or reduce financial risk
6. Define Avoiding Risk and its example
7. Define Controlling Risk and its example
8. Define Accepting Risk and its example
9. Define Transferring Risk and its example
10. What is an insurance policy?
11. What is the policy benefit?
12. What is the Premium
13. Give an example of the insurance policy can be purchased by individual or businesses
14. Define :The Risk Pooling
15. Characteristics of Insurance Risks
16. Define the Loss Must Occurs by Chance and its example
17. Define the Loss Must Be Definite
18. Define A Contract of Indemnity
19. Define A Value Contract
20. Define The Loss Must Be Significant and its example
21. Define The Loss Rate Must Be Predictable and its example
22. Define The Law of The Large Number and its example
23. Define The Mortality (rate and table) 
24. Define The Morbidity (rate and table)
25. Define The Loss Must Not Be Catastrophic to the Insurer
26. What is Reinsurance
27. What is Ceding Company
28. What is Retention Limit
29.