Lecture Risk management and insurance - Lecture No 3: Insurance and Risk

In this chapter, the learning objectives are: Definition and basic characteristics of insurance, characteristics of an ideally insurable risk, adverse selection and insurance, insurance vs. Gambling, insurance vs. Hedging, types of insurance, benefits and costs of insurance to society.

Lecture No 3

– Expected value and standard deviation of the loss for each owner is: 

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5

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loss Expected

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loss Expected

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deviation Standard

Exhibit 2.1  Risk of Fire as an Insurable Risk

Risk

higher­than­average chance of loss to seek insurance at  standard rates

expected loss levels

– careful underwriting (selection and classification of applicants for insurance)

– policy provisions (e.g., suicide clause in life insurance)

• Gambling is not socially productive

– The winner’s gain comes at  the expense of the loser

• Hedging involves  risks that are typically uninsurable

• Hedging does not result in reduced risk

• Private insurance coverages can be grouped into  two major categories

• coverages that insure the real estate and personal property of individuals and families or provide protection against legal 

liability

• coverages for business firms, nonprofit organizations, and government agencies

Coverages

– Financed entirely or in large part by contributions from employers and/or employees

• Enhancement of Credit

End of Lecture No 3