Bảo hiểm - Chapter 2: Insurance and Risk

Chapter 2Insurance and RiskAgendaDefinition and Basic Characteristics of InsuranceCharacteristics of An Ideally Insurable RiskAdverse Selection and InsuranceInsurance vs. Gambling Insurance vs. HedgingTypes of InsuranceBenefits and Costs of Insurance to SocietyDefinition of InsuranceInsurance is the pooling of fortuitous losses by transfer of such risks to insurers, who agree to indemnify insureds for such losses, to provide other pecuniary benefits on their occurrence, or to render services connected with the riskBasic Characteristics of InsurancePooling of lossesSpreading losses incurred by the few over the entire groupRisk reduction based on the Law of Large NumbersExample:Two business owners own identical buildings valued at $50,000There is a 10 percent chance each building will be destroyed by a peril in any year; loss to either building is an independent eventExpected value and standard deviation of the loss for each owner is: Basic Characteristics of InsuranceExample, continued:If the owners instead pool (combine) their loss exposures, and each agrees to pay an equal share of any loss that might occur:As additional individuals are added to the pooling arrangement, the standard deviation continues to decline while the expected value of the loss remains unchangedBasic Characteristics of InsurancePayment of fortuitous lossesInsurance pays for losses that are unforeseen, unexpected, and occur as a result of chanceRisk transferA pure risk is transferred from the insured to the insurer, who typically is in a stronger financial position IndemnificationThe insured is restored to his or her approximate financial position prior to the occurrence of the lossCharacteristics of an Ideally Insurable RiskLarge number of exposure unitsto predict average lossAccidental and unintentional lossto control moral hazardto assure randomnessDeterminable and measurable lossto facilitate loss adjustmentinsurer must be able to determine if the loss is covered and if so, how much should be paid.Requirements of an Insurable RiskNo catastrophic lossto allow the pooling technique to workexposures to catastrophic loss can be managed by:dispersing coverage over a large geographic areausing reinsurancecatastrophe bondsCalculable chance of lossto establish an adequate premium Requirements of an Insurable RiskEconomically feasible premiumso people can afford to buyPremium must be substantially less than the face value of the policyBased on these requirements:Most personal, property and liability risks can be insuredMarket risks, financial risks, production risks and political risks are difficult to insureExhibit 2.1 Risk of Fire as an Insurable RiskExhibit 2.2 Risk of Unemployment as an Insurable RiskAdverse Selection and InsuranceAdverse selection is the tendency of persons with a higher-than-average chance of loss to seek insurance at standard ratesIf not controlled, adverse selection result in higher-than-expected loss levelsAdverse selection can be controlled by:careful underwriting (selection and classification of applicants for insurance)policy provisions (e.g., suicide clause in life insurance)Insurance vs. GamblingInsuranceInsurance is a technique for handing an already existing pure riskInsurance is socially productive:both parties have a common interest in the prevention of a lossGamblingGambling creates a new speculative riskGambling is not socially productiveThe winner’s gain comes at the expense of the loserInsurance vs. HedgingInsuranceRisk is transferred by a contractInsurance involves the transfer of insurable risksInsurance can reduce the objective risk of an insurer through the Law of Large NumbersHedgingRisk is transferred by a contractHedging involves risks that are typically uninsurableHedging does not result in reduced riskTypes of InsurancePrivate InsuranceLife and HealthProperty and LiabilityGovernment InsuranceSocial InsuranceOther Government InsurancePrivate InsuranceLife and HealthLife insurance pays death benefits to beneficiaries when the insured diesHealth insurance covers medical expenses because of sickness or injuryDisability plans pay income benefitsProperty and LiabilityProperty insurance indemnifies property owners against the loss or damage of real or personal propertyLiability insurance covers the insured’s legal liability arising out of property damage or bodily injury to othersCasualty insurance refers to insurance that covers whatever is not covered by fire, marine, and life insurancePrivate InsurancePrivate insurance coverages can be grouped into two major categoriesPersonal linescoverages that insure the real estate and personal property of individuals and families or provide protection against legal liabilityCommercial linescoverages for business firms, nonprofit organizations, and government agenciesExhibit 2.3 Property and Casualty Insurance CoveragesGovernment InsuranceSocial Insurance ProgramsFinanced entirely or in large part by contributions from employers and/or employeesBenefits are heavily weighted in favor of low-income groupsEligibility and benefits are prescribed by statuteExamples: Social Security, Unemployment, Workers CompOther Government Insurance ProgramsFound at both the federal and state levelExamples:Federal flood insurance, state health insurance poolsSocial Benefits of InsuranceIndemnification for LossContributes to family and business stabilityReduction of Worry and FearInsureds are less worried about lossesSource of Investment FundsPremiums may be invested, promoting economic growthLoss PreventionInsurers support loss-prevention activities that reduce direct and indirect losses Enhancement of CreditInsured individuals are better credit risks than individuals without insuranceSocial Costs of InsuranceCost of Doing BusinessInsurers consume resources in providing insurance to societyAn expense loading is the amount needed to pay all expenses, including commissions, general administrative expenses, state premium taxes, acquisition expenses, and an allowance for contingencies and profitCost of Fraudulent and Inflated ClaimsPayment of fraudulent or inflated claims results in higher premiums to all insureds, thus reducing disposable income and consumption of other goods and services