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IRM Sessional Test Notes - Introduction To Risk and Insurance

Insurance is used to cover risks and involves transferring risk from an individual to a group. Insurance works by those who do not suffer losses paying those who do, thereby spreading the risk. There are several types of insurance including life, health, and property & liability insurance. Property & liability insurance covers losses from damage to property or legal liability and includes types like property, marine, automobile, workers compensation, and title insurance. Insurance policies are written contracts that provide coverage in exchange for premium payments.

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Rupesh Sharma
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153 views

IRM Sessional Test Notes - Introduction To Risk and Insurance

Insurance is used to cover risks and involves transferring risk from an individual to a group. Insurance works by those who do not suffer losses paying those who do, thereby spreading the risk. There are several types of insurance including life, health, and property & liability insurance. Property & liability insurance covers losses from damage to property or legal liability and includes types like property, marine, automobile, workers compensation, and title insurance. Insurance policies are written contracts that provide coverage in exchange for premium payments.

Uploaded by

Rupesh Sharma
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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Lecture Notes

INSURANCE AND RISK MANAGEMENT

By Rupesh Sharma

#INSURANCE is used to cover a type or kind of #RISK


RISK:

A pervasive condition of human existence


A simple enough notion
Uncertainty Possibility exists that the outcome can be unfavourable
Each group treats a different body of subject matter, each requires a different concept of risk
Two common elements in different definitions:
1. INDETERMINACY
2. LOSS

INDETERMINACY:

Indeterminate outcome
If there is a risk, there must be atleast two outcomes
If we are certain that a loss would occur, there is said to be NO RISK
Investment in a Capital Asset, certainly involves loss in value due to depreciation. Hence, its
not a loss.

LOSS:
One of the outcomes that is undesirable
Something that the individual possess and loses OR gains smaller than the gain that was
possible
The investor faced with the choice between two stocks may be said to lose if he or she
chooses the one that increases in value less than the alternative.
Definition by Emmett J. Vaughan and Therese M. Vaughan:

Risk is a condition in which there is a possibility of an adverse deviation


from a desired outcome that is expected or hoped for.

There is no requirement of measurability of the POSSIBILITY


Thus, for an insurer, actuaries work to predict the amount of loss and then a premium is
charged based on this expectation.
For the insurer, the risk is the possibility that losses will deviate adversely from what is
expected.
Page 1 of 2

Lecture Notes

INSURANCE AND RISK MANAGEMENT

By Rupesh Sharma

RISK MANAGEMENT:

The process of identification, analysis and either acceptance or mitigation of uncertainty in


investment decision-making.
Essentially, risk management occurs anytime an investor or fund manager analyzes and
attempts to quantify the potential for losses in an investment and then takes the appropriate
action (or inaction) given their investment objectives and risk tolerance.
Simply put, risk management is a two-step process - determining what risks exist in an
investment and then handling those risks in a way best-suited to your investment objectives.
Risk management occurs everywhere in the financial world. It occurs when an investor buys
low-risk government bonds over more risky corporate debt, when a fund manager hedges their
currency exposure with currency derivatives and when a bank performs a credit check on an
individual before issuing them a personal line of credit.
Inadequate risk management can result in severe consequences for companies as well as
individuals. For example, the recession that began in 2008 was largely caused by the loose
credit risk management of financial firms.

Page 2 of 2

Lecture 2 Notes

INSURANCE AND RISK MANAGEMENT

By Rupesh Sharma

INSURANCE:
Insurance is a means of guaranteeing you financial protection against various risks. In exchange for a
relatively small payment, you gain protection against a potentially large loss.
INSURANCE POLICY:
PREMIUM:

FACTORS AFFECTING
INSURANCE
PREMIUMS:

This is a written contract detailing what an insurance company will cover,


how much it will pay, and how much you will pay.
The amount of money that you pay for an insurance policy.
Can be paid monthly, quarterly, semi-annually, or annually.
It is based on the type and amount of coverage you choose and varies from
one insurance company to another.
Your age
Marital status
Whether you live in an urban or rural area
Your credit history
Also, each special type of insurance is going to consider other factors.

TWO FUNDAMENTAL CHARACTERISTICS:

Transferring or shifting risk from one individual to a group


Sharing losses, on some equitable basis, by all members of the group

HOW INSURANCE WORKS:


Those who suffer losses are indemnified by those who do not. Those who escape loss are willing to pay
those who do not because by doing so they help eliminate the possibility that they themselves might
suffer a loss.
TYPES OF INSURANCE
1. LIFE INSURANCE:
a. Designed to provide protection against two distinct risks:
i. Premature Death
ii. Superannuation (Living Too Long)
b. A person can, and sometimes does, die before adequate preparation has been made for
the future financial requirements of dependents.
c. In the same way, a person can, and often does, outlive income earning ability.
d. Life insurance, endowments, and annuities protect the individual and his or her
dependents against the undesirable financial consequences of premature death and
superannuation.

Page 1 of 3

Lecture 2 Notes

INSURANCE AND RISK MANAGEMENT

By Rupesh Sharma

2. HEALTH INSURANCE
a. Defined as insurance against loss by sickness or accidental bodily injury.
b. The loss may be the loss of wages caused by the sickness or accident or it may be
expenses for doctor bills, hospital bills, medicine, or the expenses of long-term care.
c. Also includes forms of insurance that provide lump-sum or periodic payments in the
event of loss occasioned by sickness or accident, such as disability income insurance and
accidental death and dismemberment insurance.
3. PROPERTY AND LIABILITY INSURANCE:
a. Consists of those forms of insurance designed to protect against losses resulting from
damage to or loss of property and losses arising from legal liability. Includes the
following types of insurance:
i. PROPERTY INSURANCE, also sometimes referred to as fire insurance, is designed
to indemnify the insured for loss of, or damage to, buildings, furniture, fixtures,
or other personal property as a result of fire, lightning, windstorm, hail,
explosion, and a long list of other perils.
ii. MARINE INSURANCE, like fire insurance, is designed to protect against financial
loss resulting from damage to owned property, except that here the perils are
primarily those associated with transportation.
Ocean marine insurance
Inland marine insurance
iii. AUTOMOBILE INSURANCE provides protection against several types of losses.
First, it protects against loss resulting from legal liability arising out of the
ownership or use of an automobile. In addition, the medical payments section of
the automobile policy consists of a special form of health and accident insurance
that provides for the payment of medical expenses incurred as a result of
automobile accidents.
iv. LIABILITY INSURANCE a type of insurance policy that protects an individual or
business from the risk that they may be sued and held legally liable for
something such as malpractice, injury or negligence. Liability insurance policies
cover both legal costs and any legal payouts for which the insured would be
responsible if found legally liable. Intentional damage and contractual liabilities
are typically not covered in these types of policies.
v. WORKERS COMPENSATION INSURANCE a form of insurance providing wage
replacement and medical benefits to employees injured in the course of
employment in exchange for mandatory relinquishment of the employee's right
to sue his or her employer for the tort of negligence.
vi. EQUIPMENT BREAKDOWN INSURANCE (Boiler and Machinery insurance)
Page 2 of 3

Lecture 2 Notes

INSURANCE AND RISK MANAGEMENT

By Rupesh Sharma

vii. BURGLARY, ROBBERY, AND THEFT INSURANCE - protects the property of the
insured against loss resulting from criminal acts of others
viii. CREDIT OR TRADE CREDIT INSURANCE a type of life insurance policy
purchased by a borrower that pays off one or more existing debts in the event of
a death, disability, or in rare cases, unemployment. Credit insurance is marketed
most often as a credit card feature, with the monthly cost charging a low
percentage of the card's unpaid balance.
ix. TITLE INSURANCE Insurance that covers the loss of an interest in a property
due to legal defects and that is required if the property is under mortgage. Most
title insurance is lender's title insurance, which is paid for by the borrower but
protects only the lender.

Page 3 of 3

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