INSURANCE
LEARNING OBJECTIVE
By the end of this module, the student will be able to understand the historical
background and current role of insurance in a risk management framework know
the - different classes of insurance.
CONTENTS
Risk
Law of Large Numbers
Common Loss Exposures
Types of Perils
Factors of Insurability
Types of Insurance
Life Insurance
o How Much Life Insurance Do I Need?
o How Are Premiums Set?
o Annuities
Health Insurance
Disability Insurance
Auto Insurance
Homeowners Insurance
Types Of Insurance Companies
Insurance Regulation
Reinsurance
INSURANCE
Insurance has a long history.
The first report regarding insurance dates back 4000 years ago in Babylonia,
when a man's home was destroyed, his neighbours would be required to offer
their labour free of charge, to help him rebuild his house.
Early Chinese traders, sailing the dangerous Yangtze river, devised a method of
reducing loss to a single trader instead of carrying all his cargo in his own boat,
would place a portion of his goods on other boats in his group. This way, when
one boat was lost, no one trader was wiped out. These are simple devices to
reduce the impact of a disaster upon any individual by collectively transferring the
risk to a larger group.
Insurance works on the concept of risk sharing. Insurance reduces the effect of
risk of an unaffordable magnitude by shifting the risk to an insurance carrier.
Risk
Risk is the state of uncertainty about the actual outcome of a decision or process
in which each possible outcome and its probability is known. Risk can also be
defined as chance of loss or a condition in which a possibility of loss exists.
Risks are of different types and not all risks can be insured. Generally, risks are
seen as falling into one of two classes - pure and speculative. Your companies
equipment, goods may be damaged or destroyed by fire, lightning, windstorm,
explosion, riot, theft or robbery. These risks are pure risks and they are insurable.
Speculative risks, also referred as dynamic risks, are inherent in business. The
possibility of loss arising out of business decisions is known as speculative or
dynamic risk. This type of risk is not insurable.
Faced with a risky world, most people wish to reduce the effect of that risk by
insuring. The take life insurance cover, protect against accidents with auto
insurance, take safeguards in the event falling ill with health insurance and the
like. The insurer collects a payment from the insured, which covers the cost of
risk, which is then pooled into a fund that is used by the insurer to cover the loss
when it occurs. The charge on the insured is called the premium and the loss
payout by the insurer is referred to as indemnity. The ratio of amounts of loss
covered to premium collected is called the loss ratio.
The maximum the insurance will pay as compensation is called the cover.
The insurance company uses the principle of pooling the risk of a large number
of individuals in order to provide insurance cover in a cost effective manner.