Insurance

Insurance is a contractual arrangement whereby one party agrees to compensate another party for losses. We call the party agreeing to pay for the losses the insurer, we call the party whose loss cause the insurer to make a claims payment the insured. We call the payment the insurer receives a premium. We call the insurance contract a policy, we calls the insured possibility of loss the insureds exposure loss. It is usual to use the word insurance to cover events (such as fire) that may occur at some time where as word assurance refers to an event (such as death) that must occur at some time (Life assurance).

 Loss means being without something previously possessed, in insurance loss is undesirable or unplanned reduction of economic value of money. Direct loss are the immediate or first and indirect loss is the secondary loss. House fire is direct loss and living in hotels is secondary loss. A peril is the cause of the loss, Examples of perils include fires heart attacks and criminal acts. Hazards are the condition that increase either the frequency or the severity of losses. Moral hazard: If some body burns down a building to collect insurance is example of moral hazard. Morale hazard: why should I care, I am insured is the example of morale hazard.

What is Risk ands its types

Risk: The variation in possible outcomes of an event based on chance or the greater the number of the outcomes that may occur, the greater the risk Pure risk: refers to possibilities that can result in only loss or no change. A factory either burns or it does not burn but there is no gain from its burn. This is example of pure risk. Speculative risk: Refers to possibilities that may result profit or loss. Most investments, including the stock market investment are classified as speculative risk.

Risk Management
Is the logical process used by business firms and individuals to deal with their exposures to loss or it is a strategy of preloss planning for post loss resource.

The mathematical basis for insurance

Insurance pools reduce risk by applying a mathematical principle called the law of large numbers The law states that greater the number of observations of an event based on chance the more likely the actual result will approximate the expected results.

What are the Benefits of insurance

Stability in family, insurance prevents families from experiencing the great hardships caused by unexpected losses of property or premature death of family income provider Insurance help in planning process because the business planner knows the property loss will not mean financial ruin Facilitates credit transaction because creditors are more willing to lend money if the debtors death does not make collection of the loan difficult. Without insurance only big business could be sustain the losses and remain in operation and small business will be closed down after having big losses. Continue.

Benefits
Insurance companies are very important financial intermediaries, annually insurance companies collect billions of dollars in peoples saving and reinvest these amounts in economy. Insurance companies support many organization which support, contribute directly to society welfare.

Insurable loss exposure

Gambling and speculative risks are the two categories of uninsurable exposure to loss. Insurance against the gambling losses is not economical possible because head I win, tail I collect my insurance. Losses from investing in common stock and from business is not insured because insurance would put the owner in a position of being the indifferent to operating results. An insurance system cannot operate successfully when the members of the system are indifferent to losses

Ideally insurable loss exposure

Accidental Losses Definite losses capable of causing economic hardship Extremely low probability of a catastrophic loss to the insurance pool.

Accidental Losses
For an insurance system to operate successfully, the losses it pays for must be accidental and beyond the insureds control. Non accidental or expected reductions of economic value such as depreciation or wear and tear are not insured. Definite loss: For an insurance system to pay the members loss, it must be a verified, definite loss. For example individual can be insured against the loss of a house as the result of the fire but cannot be insured against the loss as the result of its being troubled. As a rule, insurance should be purchased only when losses are large and uncertain. This is known as the large loss principle.

Catastrophic Losses
Definition: We define catastrophic loss exposure as a potential loss that is unpredictable and capable of producing an extraordinary large amount of damage relative to asset held in the insurance pool. Reasons for increasing costs of catastrophic losses a) The surge in demand for skilled labor and building material after catastrophic losses, which increase the rebuilding cost b) Delays in rebuilding that increase insurance payments for additional living expenses of property owners whose homes are destroyed. c) Some localities try to force insurers to pay additional rebuilding costs associated with meeting the requirement of more rigors post loss building codes.

Methods of Handling risk

(1)

Avoidance: You can avoid the risk of being attacked in high crime rate area by staying out of the area. control: Loss control consists of certain activities that reduce both the frequency and severity of loss by two major objectives; loss prevention and loss reduction (a) Loss prevention aims at reducing the probability of loss so that the frequency of losses is reduced. (b) Loss reduction is reduce the severity of a loss after it occur.

(2) Loss

(3)

Retention: (a) Active Retention: Active risk retention means that an individual is consciously aware of the risk and deliberately plans to retain all or part of it. (b) Passive Retention: certain risks can also be retained passively. Certain risks may be unknowly retained because of ignorance, indifference or laziness. (4) Non insurance Transfers (a) Transfer of risk by contracts: Unwanted risks can be transferred by contracts, For example the risks of defective television set can be transferred to retailer by purchasing the service contract. (b) Hedging the price risk: is the technique for transferring the risk of unfavorable price fluctuations by purchasing and selling the future contracts

(5)

Incorporation: If a firm incorporates, personal assets cannot be attached by creditors for payment of firms debt. Insurance; First the risk transfer is used since a pure risk since a pure risk is transfer to the insurer. Second, the pooling techniques is used to spread the losses of the few over the entire group.

(6)

Basic characteristics of insurance:

1. 2. 3. 4.

Pooling of the losses Payment of fortuitous losses Risk transfer Indemnification

 Pooling is the spreading of losses incurred by the few over the entire group, so that in the process, average loss is substituted for actual loss. A fortuitous loss: is one that is unforeseen and unexpected and occurs as a result of chance. Risk transfer: means that a pure risk is transferred from the insured to the insurer, who typically is in stronger financial position to pay the loss than the insured. Indemnification: means the insured is restored to his or her approximate financial position prior to the occurrence of the loss.

Types of insurance
(1) Private insurance (a) Life and health insurance (b) Property and Liability insurance (2) Government Insurance (a) Social insurance (b) Unemployment

(1) Private Insurance (a) Life and health Insurance: Life insurers pay death benefits to designed beneficiaries when the insured dies. Life insurer also sells both group and individuals retirement plans that pay retirement benefits. In addition life and health insurers sell individual and group health insurance plans that cover the medical expenses from sickness or injury. (b)

(b) Property

and liability insurance:

(1) Fire insurance and allied lines (2) Marine Insurance (a) Ocean marine (b) Inland marine (3) Casualty Insurance a) Automobile insurance b) General liability insurance c) Burglary and theft insurance d) Workers compensation e) Glass insurance f) Boiler and machinery insurance g) Nuclear insurance h) Crop hail insurance i) Health insurance

(1) Fire Insurance & Allied lines: Fire insurance covers

the loss or damage to real estate and personal property because of fire, lightening or removal from the premises.
(2) Marine Insurance: Marine insurance is often called

transportation insurance because it covers the goods in transit against most pure risks connected with transportation.
(a) Ocean marine insurance provides protection for all

types of ocean going vessels and their cargoes. (b) Inland marine insurance covers the property moving on planes, trains and trucks

Causality insurance: Causality insurance is a broad field of the insurance and covers whatever is not covered by fire, marine and life insurers. Automobile insurance: covers the legal liability arising out of the ownership or operation of an automobile. Burglary and theft insurance: covers the loss of property, money, and securities, because of burglary, robbery and other crime perils. Workers compensation insurance covers workers for a job related accident or diseases. Glass insurance: provide broad coverage for glass breakage in covered building.