insuranceoutline.doc

Insurance Outline Chapter 1: Introduction Concept of Risk: The possibility that the actual result is different from the anticipated result 2 kinds of risk Upside: Possibility things will turn out better than expected Downside: Possibility things will turn out worse than expected -Risk is a probability-the risk of occurrence can be fro 0-100% -Greatest concern is when risk = 50% -4 things to do about risk: Accept it and do nothing Try to minimize w/ security safety devices Avoid the risk Transfer risk to somebody else (insurance) -Insurance = “risk transfer agreement” -Other arrangements: lease, set up a corporation, try to pass the risk to somebody else (special warranty) -Risk has subjective ramifications -Some people pursue risk for shits giggles -Most people are risk averse and prefer to reduce as much as possible -Risk transfer: why is it that somebody else is willing to take it? They love risk (not likely) Lease from a fleet (large volume/lower prices) Insurance: law of large numbers -The larger the population, the more likely the actual experience = anticipated experience - 1 coin flip is not a scientific predictor, but 1 million flips will yield roughly 50/50 heads tails -Much less risk in 1 million flips than 1 flip Mortality Tables -Expected death at age 29 = 1.03 -This means for every 1000 people age 29 on 1/1/98, 1.03 died by the end of the year -For any individual age 29 on 1/1/98, the chances of dying are virtually unknown, but out of 1000, someone will die. -Economic consequences can be addressed (loss of income), but the non-economic cannot be (emotional suffering) -For parents leading families, risk addressed by pooling; for each 1000, 1 will die, each can put in $100 and the family of the one who dies gets $100K -BUT insurers have costs-goal is for losses to equal 60% of premium -The other 40% covers admin expenses/profits -For 29 yr olds, each would have to pay $172 for $100K of insurance -Gov’t statistics are the basis for calculation -Can