HS 311 Fundamentals of Insurance
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7 Steps of Risk Management Process ✔✔1. Determining the objectives of the risk
management program
2. Identifying the risk to which the individual is exposed
3. Evaluating risks for probability and severity of loss
4. Determining and selecting the best risk managment alternatives
5. Selecting the most appropriate alternative for each risk
6. Implementing the risk management plan selected
7. Evaluating and reviewing the risk management program
Determining the objectives of the risk managment process ✔✔Can range from obtaining
cost effective protection to ensuring that income continues after a loss.
IDENTIFYING THE RISKS TO WHICH THE INDIVIDUAL IS EXPOSED ✔✔Identifying the
potential risks is primarily a function of the client's life-cycle position.
EVALUATING RISKS FOR PROBABILITY AND SEVERITY OF LOSS ✔✔Loss severity measures the dollar
magnitude, or the absolute dollar amount, of the expected financial loss were it to occur.
,Only those risks that have very severe financial consequences but occur infrequently
are appropriate to transfer or insure
DETERMINING AND SELECTING THE BEST RISK MANAGEMENT ALTERNATIVES ✔✔A
planner may use a matrix to analyze each risk.
Hig Severity and Low Severity vs. Low frequency of occurence or high frequency of occurence.
High + Low = Transfer risk using insurance. High + High = avoid risk. Low + Low = Retain risk.
Low + High = Retain/reduce risk.
IMPLEMENTING THE RISK MANAGEMENT PLAN SELECTED ✔✔The planner should work closely
with the client to ensure that appropriate risk management techniques are implemented.
EVALUATING AND REVIEWING THE RISK MANAGEMENT PROGRAM ✔✔Things change
over time, and risk exposures can change as well.
Underwriting ✔✔Underwriting is the process of classifying applicants into risk pools.
selecting insureds. assigning a premium.
Adverse Selection ✔✔The tendency of higher-than-average risks to purchase or renew
insurance policies. • Premiums depend upon a balance between favorable and unfavorable
risks in the pool. • Managed through underwriting and denying insurance on the front end or
raising premiums on the back end.
,Requisites for an Insurable Risk ✔✔• A large number of homogenous exposure units.
• Losses must be accidental.
• Losses must be measurable and determinable.
• Losses must not pose a catastrophic risk for the insurer.
CAUSES OF INSURED LOSS ✔✔PERILS - The actual cause of a loss, such as • fire, wind,
tornado, earthquake, burglary, and collision.
HAZARD - A condition that increases the likelihood of a loss occurring, e.g., • moral (filing a
false claim or stealing), morale (leaving car unlocked), and physical hazards (icy roads, poor
lighting, etc).
INSURABLE RISKS ✔✔High Severity risks with low frequency of occurence
(traditional insurance)
Low severety risk with low frequency of ocurrence (warranties)
REINSURANCE ✔✔Reinsurance is a means by which an insurance company transfers some or
all of the risk to other insurance companies.
The primary reason an insurance company may transfer risk is to reduce their exposure
to catastrophic financial risk that may result in the company becoming insolvent.
Elements of a Valid Contract ✔✔Mutual Consent
, Offer and Acceptance
Performance or Delivery
Lawful Purpose
There Must Be Legal Competency of all Parties
The Principle of Utmost Good Faith ✔✔Representation
Warranty
Concealment
Representation ✔✔Statements made by the insured to the insurer during the
application process • Must be "material" misrepresentation to void insurance contract
Warranty ✔✔• A promise made by the insured to the insurer • Breach of warranty is
grounds for avoidance
Concealment ✔✔When an insured is silent about a fact that is material to the risk
being considered
The Principle of Indemnity ✔✔The insured is only entitled to compensation to the extent of
the insured's financial loss. • The insured cannot make money from an insurance contract.
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