Professional Documents
Culture Documents
Irm CH 2 and CH 3
Irm CH 2 and CH 3
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DEFINING
THE INSURANCE
EVENT.
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IDEALLY
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The fol.lowing
exposures
are ideal for insurance
g e' ( r::./ ,n~
~~\)ioQ..v)
.
covera
, r
.
.A
large group of similar items exposed
to the same
peril(s).( \~
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INSURABLE
8 Accidental
LOSS ~~O~ESV;-~)
losses.
11
.Definite
]~
-hardship.
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8 Extremely
~;"
losses
capable
of causing
economic
10~_.QrQ.b.a!bility of a catastrophic
the insurance
loss
to
pool.l~\"\D--\Y"'-"',~~L\.-)-~'~-
11,
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Large
numbers;
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The exposure
units need to be similar
so that the
insurer
can calculate
a fair premium.
The fire damage
Losses
must be accidental
and beyond
the insured's
control
Non accidental
or exp~ted
reductions
of economic
value, such as w~\gnt:c!lear7
are not insurable
events.
'A ' L
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nil.
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IIi I)ractice,
intentiol1c:l!: losses
are 3-fraud
f
--against public
policy.
Thus if discovered,
c
~
company
vvillnot
pay for an insured's
intentionally
caused loses. rVioreover, m~ntionallosses
may cause.
c,'imina!
charges
such as ~
or .theft to b.e brought
against the person
responsible
for such crimes.
.,
Accidental
lasses;
N~~-fraudule~t
losses
and are
an insurance
~r
f-
arising
from
an insured's
-;?
;1
negligence
are insurable.
This is the case
example,
an insured's
had driving causes
when, for
an accident.
good example
of the application
of the principle
of
accidental
losses occurs
with life insurance,
for which
suicide
within
is considered
a year or two
non accidental.
being purchased
do not pay such
.:
I
losses.
If a suicide
occurs
beyond that period,
the lo~s
is considered
accidental,
the result of mental illness.
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of a policy
Insurers
"",,'v
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and of sufflc~nt
V
r
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Insurable
events
must be definite
and verifiable.
Otherwise
there would be many disagreements
between
insurer
and insured
to determine
whether
a loss has
occurred.
Thus individual
can be insured
against the
loss
of house
as the
result
.~
lI
be insured
I
I
against
insured
its loss
against
but cannot
be
of its being
!,
!
haunted.
The damage
caused
by insurable
events
must be
measurable
in economic
terms. The loss of loved pet
can cause a family much grief, but such discomfort
cannot be measured
economically.
Thus losses
of pets
are excluded
from standard
home owners'
insurance
:,
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contract.
when
As a rule,
losses
l~y~c}J!J
insurance
are large
should
be purchased
only
and uncertainLTh~~~rge
e)
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organizations
see one or mo~e of the following
advanta g es'~'(~i.
..Improved
f
t
c
the
potential
r I
~
Insurer.
.Improved
profitaoility.
This includes the
investment potential from investing cash flow or
avoiding premium taxes.
.Economies
of scale. A captive insurance
~
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'
..
operatIon also allows Gomp~nles wIth many
subsidiaries
to combine the insura'nce needs of
these subsidiaries
under one insurance
~
program. "In areas such as the automobile""
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.liability
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coverage,
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DeductIble/RetentIon;
Some companies
have
taken the middle:':6f-the-road
posrtion between
c%mmercial" insurance and forming a captrve iRsurer.
~
do this by c,areful use of the deductible
provision
,
!
in their insurance
or the self-insured
that the insurer
~ISK
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;
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Insurance
pali% exposed
mechanism.
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It
to a 10'5s is able to
obtain a substitute
paliy to bear. the risk, Risk transfer
i~ a fea~ure of all iris~rance transaGtion~
because the
\ uncertainty
of who wIll pay for the loss IS transferred.'
f~om the individtJal to the insurance pool. .,
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transfer;
it is risk reduction
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coverage
has
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Catastronh1'c
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Loss exposures
vvith catastrophic
potential
are not.
insurable
events.
Catastrophic
loss exposure
is ar
potential
loss that is unpredictable
-and capable
of
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producing
an extraordinarily
large amount of damage
relative to the assets held in the insurance
pool.
Catastrophic
losses are the subject of the state, Insurer
normally
do not provide
insurance
for catastrop.~ic
losses due to the following
reasons;
.The
loss potential
is catastrophic.
.The
loss potential
is geographically
restricted
mostly to flood plains and river valleys.
.The
government
at the federal level has be
I
\
most exposed
to a particular
loss
event
An insurance
system
operates
successfully
when
many people or business
firms faced with similar
exposures
transfer
their potential
losses to a pool,
paying a relatively
small premium
for the right to collect
losses payments
from the pool. Using the law of large
numbers,
the pool is able to predict losses
accurately
and charge a premium
appropriate
to the risk. The
syst~~
succeeds
if th~ premium
is small relative
to the
potential loss. Because
they are risk averse,
most
people are willing
to pay a relatively
small certain
price
to avoid a relatively
large, uncertain
loss. People have a;
price, however,
beyond
which they Vlfill not pay toI
transfer a risk.
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TERROR[S~/[
II'.JSURAf\!CE
,--,~.'_.
September
11, 2001
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terrorist.
attacks
OQ~
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(~V
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with
ranging
from
INSURED
f~TRE
current
estimates
{'),
~ a,.-- ~ -{;.,~
-\oar
V\~
on the World.
in
of the insurance
\\
claims
LOSS ESTIMATES
~NQ e~!'JT1~
,-,wc"'~~eo~~
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(\)~~.e.,~'s~-?I.\o~;l-}\>co.I)'.)-S'"""--~'
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.Aviation
liability
claims
arose from deaths,
Injuries
and property
damage
suffered
because
of cla'ime;d
negligence
of airlines,
airports,
security
services
and others
in not providing
adequate
security
-$4$10 billions.
.Aviation
b.YlL!claims
aircraft
involved
.Life
insuranc;e
people killed'in
both
group
arose
from
in the attacks
claims
arose
the attacks.
and
Individually
the loss
-$500
to the
million.
policies
billions.
8 Property
insurance
claims
arose from the
destruction
of the World Trade Centre towers,
buildings,
and other property
including
for
-$3
other
!
automobiles
-$9-$12
billion.
.Business
interruption
claims arose from the lost
profits
and extra and continuing
expenses
of
businesses
that were forced to close, relocate,
or
were unable to operate
in a normal manner
after the
attacks
%10-$12
billion.
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CIa_rillS ,arose,f['om businesses
in
York City and elsewhere that did not proceed
with sch'eduled events because of the attacks -$1
-billion.
Lt.)~ ~
DEFINING TERRORISM
Terrorism
means activities
against persons,
organizations
or property of any nature that involve
following
or preparation
of the following;
.Use
of threat of force or violence; or
.ommlsslon
C P1".J-",Ji:..
or t h reato f a d angerous act; or
the
.Commission
or disrupts
information
54
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CLASSIFICATION
A,~D 1~.S.~B~~E
I\~~!6~'~~
if ;1'11wu-o1l~
a.,'vi'vj M pie..miuw.~ ~I'bl..Iftro.-.
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SUBSIDIZA TION
'
9Il..-~
-
~~~
Each insured's
mathematically}ff
share of losses
and expenses is based on the expected probability
of
loss for the risk class in which the exposure is 'placed.
Subsidization
occurs if each insured dos not pay the
mathematically
fair price for insurance.
If the insured is
paying more than the mathematically
fair price, the
insured provides the subsidy If the insured is paying
receives a subsidy.
It means every insured in a pool must contribute
a
premium matching with the risk he, is carrying at the
time of taking
the insurance
cover.
selection
me-ans accepting
.!"'Ut:Ac
~ ,'\"1
~
a risk by the
market.
Applicants
for insurance
with a greater than average
chance of loss would certainly apply for insurance.
If
these above average risk applicants
succeed in
purchasing
insurance
at average rates, the insurer is a
victim of adverse selection.
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PRINCIPLES
OF RISK
CLASSfFICA
TIOr\!
In GeneRal.Ra.1'e
Cla.5SIP1C8.1IOn
ra,CliORS
,an Be evaluated
following four points;
.(SA-t
'
on the
.
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::;; Reliabilitv:
': :
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,
value,.
Social afceptabilitv;
:i
,
BRANCHES
OF
INSURANCE
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., Social
~-~J
security
.Unemployment
Life
l'-Jon life
Life
Fire
Annuity
Marine
Medical
Exp.
Bondiilg
~~saJjJY.
Automobile
Liability
Crime
WorkersCompo
generally
covers
sta1\onary
property
Fire Itinsurance;
cJ..#
r~&.e.s1ate. However,
land .is not covered.
j
simple
\; .covers
also
called
'
Another
way of putting
it is ~hat ~ire insurance
generally
buildings
and their ~:@reiliS~/tin
addition
to the
j
~:
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perils as windstorm,
riot, and vangj;!}jm.
Another
type
of coverage
associated
with property
insurance
is
f
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business
provides
~~
damage
'J
income
payment
done
based property
insurance
for damage
caused
by such
(interruption)
for indirect
by fires
coverage,
which
losses associated
and other
covered
with
perils.
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Marine insurance
It generally
covers
:,;~l
insurance
covers
marine insurance
'~; f
it
mobile
property.
Ocean
marine
Inland
on planes,
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It describes
several different fiel..ds of insurance
-including
autom~bile
insurance,
liability insurance,
crime insurance, workers'
compensation,
and accident
and health insurance
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Bonding
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insurance
Credit insurance
coverage
is an example
for a speculative
insurance
arrangement,
the insurance
company provides
payment to its insured (the lender) if the insured's
credit losses exceed a specified amount. In other
words, the insurer pays the lender if the lender losses
money because its debtors fail to repay their debts.
I
I
of insurance
risk. In a credit
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~~JLITY if\\~URAt~
l.~I~
~~ insurance
~
p.".,.".
Legal
liability
It provides protection
against the financial impact
of lavi/suits.
;~~~'f1"L~if.e.~~
America, Europe especially UK is a li!lgiQ!:!
,~~,
society.
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environment
where
and personal
inhibits
and
business
activity.
Legal background:
The peril of legal liability arises out
of the general rule of (English common)
law that people
are responsible
for any loss (injury) they cause another
to suffer. The law creates here categories
for
describing
situations
in which one person injures
"-
another;
.Breaches
of contracts
(c,'v: t)
.Criminal
acts
.Torts
or civil wrongs.
Breaches of contract involve
a failure,
;I
without
wrongs
against
a legal
are
society.
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Ut-lrea::sonable conduct
'
wrong.
;--NEGLIGENCE
Negligence
involves doing something a
reasonable person would not do, or not doing.
something
a responsible
results directly in some
.
'
reasonable
person is one who have normal
possession
of all faculties and senses; ~ho thinks,
speaks and acts based on reason)and
who is honest
and moderate in all activities.
Violating the reasonable
person standard can result in a court imposing legal
liability for a person's direct acts or omissions
of A C-D.l\.R..
actions.
U) T",,- ~~~~~
&"-.-{..~0\ ~
v~
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Vicarious
liability;
th~~~gli9~~t-~~ts
u')
Ii\\)~~c. ~ ~~~~~~~e~~~~
~ \3(~
~ 1lJ.bh~
Courts
of another
parties;
.I-~~if~~~
I ~}~ sIl.-~f\
-U -p
liability
Vicarious
for ~~
liability
~~~!~.1~~~!Qn.lQI~
?~
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for the
60
!%, .
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Pfalntlff/Defendant;
There
are two
parties
~ b
to a
be plaintiffs
or defendants
.'negligence
lawsuit.
The plaintiff~ is ~he party, claiming
, injury. The defendant
is the party from whom recovery
c) is sought.
In addition
to human beings,
business
firms, government
units, and other organizations
may
,f(
(,t
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l~ ~
t/\.f'tl.t?:
C'(
in lawsuits.
..
Establishing
negligence
ana' damages;
To establish
case of negligence,
the law requires
the plaintiff
to
prove all of the following;
.The
defendant
had a legal
duty
to protect
a
\
the
plaintiff.
.The'defendant
.The
failed
plaintiff
to perform
suffered
defendant's
failure
an injury
to perform
that
duty.
as a result
that
:
of the
duty.
Judgment;
if each of the three elements
of a negligent
act is established
to the satisfaction
of the judge and
jury, the plaintiff
usually
a specific
official
parties
i~' entitled
to a favorable
judgment,
sum of money.
A judgment
is the
decision
of the
to a sUit.l~'~~~
COMPENSATORY
~
court
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DAMAGES
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Punitive
damages;
not as compensation
means
offensive
of punishing
defendants
:.
for outrageously
acts.
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R~J1!.:?E.-1oq.uitur;
It means
cases, the plaintiff's
injury
things
speak
is the obvious
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CHAPTER-3
RISK MANAGEMENT
..
THE NATURE
OF RISK
The conceQtof
rlk;
..
Risk is present everywhere.
We frequently
hear news
on television or radio such as; some major fire,' explosions,
earthquakes,
collision
on roads
workman
falling to his death from a building.
or a
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etc;
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US
e.g," going
factory for may
work, be Businesses
destroyed
,
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computer
record
employees
Behind
orevery
third
are
involved
closely
'.'
sophisticated
.\
is used,
hardshIp
Risk
damaged
very
mechanism
properly
caused.
is at the
few
lies
know
behind
may
result
into.
That
mechanIsm
very
centre
be in risk'
caused
to the
or injury
partyanxiety
on the and
premises,
risk
grief
but
involved
could
exist
that
for
those
ther'e
oeach
ri,sk
and
'l'
':.'
,'."
' ' '~
-
who
if thatl
alle~iat~
the,financialI
IS called
Insurance.,
of insurance.
.
Qg!lnition
of.1l.J5.
.Risk
is the
chance
.Risk
.Risk
is the possibility
is a combination
.Risk
is the
economic
of loss,
of unfortunate
of hazards,
~ncertainty
as
to the
ocqurrence;
~~
~~;
occurrence
is unp!edictability,
may
.Risk
differ
'from
predicted
results,
is the objective
doubt
concerning
the
situation.
'
suited
definition
best
those
'( i~~
of
situations
so far
which
will
world
actions
such
life,
as
of losses'.
likelihood
~.!!f~..d~ill!Y.~DS:!~g~ill.~~
We. are living
in he
throughout
tendency
that
actual
the
result
outcome
in
.
concerned
is luncertainty
avoids
situations
where,no
also
'
.Ris'k
The
loss,
a given
insurance
topic
This
definition
of loss
exists
definitely
happen.
of uncertainty
is
.C:tnd
~~
in most
~d,
of our
as;
"
.We
do
.If
we
not
will
know
if we
succeed
will.
in the
pass
job
an examination,
interview
given
or
able
to
get promotion,
Similarl
there
is a lot
of uncertaint
in business
e.
57
..
is a
;
I
~!
stolen,
by
can fire,
also stock
be
.'I-
in ~
",
..
.'
.' "
.If
e If we launch
J'
,.
.If
we build a new factory will it burn down?
0 Will thieves steal our finished product from. the
warehouse?
"
However
in certain cases we have certaint
such as'
0 We know that if we reduce the number of machines
'
FORMS OF RISK;
As far as insur9nce subject is concerned we are
concerned with those risks which involve some loss that is
capable of financial measurement.
There are two types of
risk;
"
risk~
:
;
i
..
:
.(:
~j1
Pure risk
In certain situations a loss or a bre"ak even position
may materialize.
Driving a motor car is an example. Every
time yo~ take your car on the road you run a risk and
there is the urlcertainty of loss, you may damage your car
or injure another person or damage his property. In case
:
!
i
t: ,;
or a profit.
':
brgJs.e.n~vEn.
Speculative
then we could
.1:
a loss, breakeven
25p, this is
58
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~~-=:::::::::-:..;.!Ii,~j~~~-f.
.~
.' ';
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-.
E~ndamenta/.
r'~ risks
Fundamental
."~~
of the
occurrence
.i
,
E-micular
c
;!
g.b~ge
"
risk$~
!n classific~~
factors
unconcerned'with
the driver.
~vsical
haza~
I
~
S9
,
;:'
('r"
, ,.
."
.:.
'. .
.~:
, -which
the occurrence
of the risk
'
(frequency)
FIRE
Q.Q.Qdphysical
Property
features_~
contains
brick or concrete
;~Q
v1~imber
phvsicalfeature~
walls,
packaging
THEFT
storage
sprinkler
of dangerous
fir~1Q.Q..::!':i.gllis and
and a'larm sy~tem.
chemicals,
oils,
materials.
~_od phvsicalfeature~
c.'(~ong
building
construction,
security
~:
,j:;
i I
l'
:!
pbvic~1 f~atur~~
~d
;f ;
Wearing
;: ,l
I
'
MOTOR'ACCIDENT
':::
'" ,
physical
'
feature~
density populated
drivers,
.usage in non-
areas.
" .,
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---1
1..,
", ,
.:
1.
I.
i~
:'
..';",
,-
..
LIABILITY
.')
,
,
,
!,
;'
."
Good
physical
features;
l)se of protective
Bad physical
clothing,
~~
goggles
features;
industrial
.~
oils, creation
of(d~s!
processes.
(~I"(~
~nd_v~~~)n
A~'\:o..-~.
..
MARINE
Good physical
features;
Employment
of trained and competent
staff.
I
Bad ph~sical
f~~tures;
..'
Use of poor equipment or maintained
cargo on deckl~
~~~'4'),.
~J
vessels,
-
storage
of
PE"RSONALHEALTH
'1
Good
VVorking in cQD.Q-.enLalatmosphere.
blood pressure:
L),1\.f.A19<
~
physical
features;
Bad physical
features;
A history of illness, hazardous
mining.;
Normal
occupation
weight
and
e.g. coal
~V\.~cM/L'!..!:-3)
",
.1
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MORAL
HAZARD
.1
'~
C!:
'", ,
61
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It relates
insured.
to the attitude
It is just as imporiant
and conduct
as physical
of the person
hazard.
;
;.
;J
or
I
.:
Society;
Society can a1so Influence the level of risk
and the incidence of claims, such as vandalism or wilfful
fire. :Society is now more cautious
..
ANAL YZINGRISK
Frequency
and severity;
When we evaluate a risk.
we must be clear that it incorporates
both he frequency
with which an event may take place and the severity of
each incident which does happen. Chemical plant is' very ..I
risky and an example of severity of loss because when
loss does take place. ,it involves a very high financial loss.
Converse)y,.' in a large departmental
store the breakage of
glass window can happen frequently and aggregate cost
of broken glass is high,
The concept of frequency ~nd severity is very
impoliant in the insurance world, i.e. there is a high
62
1~.~'
!
i
i
gr~~'1'1
'
;!
,~,
"
frequency
high
of
low
severity
severity
incidents
':
low
fre9~ency
o~:!~~'::;~:;~::;:-:f~---
incident~,J:'1~
6"
andll\a
6"1,,\'", Go'~'co ,)
',I
of,
-41
't
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ut'~
Probability
likeliho~d
-;
theory;
that
measuring
given
t~ing.s
the
.
earthquake,
period.
Likelihood
it is less
Probabilities
will
likelIhood
motor
It can
of death
at a certain
accident,
to occur,
likely
to
the
occur
measure
happen.
plane
is measured
it is certain
on
Grash
a scale
probability
than
be
an
, -
~ppli.ed
in ..;
age,
etc:
a fire;,
within
fromO
is 1,
event
the
to
1 .Where
If probabilIty
having
..
is 0.2
a prob'ability
of 0.9.
I
Relative
risk
frequency;
is that
known'.
past
total
Such
data
example
commercial
accidents
the
available
on
vehicle
and
average
~ach
v~hicle
experience
own
business
measure
understand
.,
risk;
legs
on
'nature
this
a collision
of the
50
experience
next,
y~ar
~~tP)
It is an
risk
were
there
may
few
events,
such
risk
.e.g.
etc.
The
the
For
there
using
insured
to' help
of likelihood.
the
has
the
1500
or very
In certain
exist
is based
analyzing
In certain'cases
aspect;
probabilities
year
0.0333..\-l.~
stars'
Psychological
where
past
having
of London
meC;:isure
of
By
is not
industry.
a fleet
available
film
at by
and
the
pro.bability;
fingers,
a person
arrived
year.
1 QOO i.e:
Lloyds
pianists'
over
in measuring
outcomes
insurer
is ope(ating
by
past
the
insurer
j Subjective
occurred,
with
problem
possible
are
of one
divided
main
of all
speculations
an
no.t be
The
number
probability
is 50
I;
.'
, ,,'
factor,
circumstances
us,
~e
whole
and
risk
important
how
even
often
assign
our
of insurance
statistics
to which
enable
we
to
are
exposed.
63
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C'o'-c
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:'.:1-.il.,..
, ,,;{
'- ,~
'c!~
'.!~
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fWY""
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II)
.fI.:1.
riJ t~-
tWff"
IX;
Chance;
people
about the
xl,.
-J,, ..
:1
.!:
unemployment.
..
ITHE-- RISK MANAGEMENTY
PROCESS
.,
,
,
Risk management
activities occur before, during, and
after losses. More planning is done before losses occur.
,
process
requires
.
the following
.,
-.I
.Step
one;
potential
exposure.
loss
"
",:e\..$~eelb-twq~ ~
o.se th~ most efficie'nt m~thods
I ,,,In..~ltt''1 )?ontrol~g
ana financIng loss exposures
and'
I
i
Implement them.
.Step
three; Monitor
'P]L
'.
outcomes.ll~~~"'~~':")
of
1Y\e..\.~\&~'S\"'>
~~"-~~)
Step
one;
.,
r--,--
Identification
and
measurement
of
.:
exposures')
'.'
losses.
of income
arising
..~~
I""'-D-C~
b~)
the possibilities
into
~
~\"(~
following
from lawsuits.
~~ \'~
\.,~~'
c.
64
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...1
, ,~
I"r,,~c'."i"'7
,':,,'" , ',:
.Losses
jj
caused
retirement
by the death,
disability,'
..,
or unplanned
of key people.
'; ..
",
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1
"
..-
~
Direct
,
i
Property
-<~~CAJ'\JI;-~~
losses
~'~
J)-
!
:
production
manager
or accountant
to identify
significant
.changes
in property h01dings. The risk m~nagement
procedures
manual should establish a system for notifying,
the risk management, department when property is
acql,jired or sold. ..~,.f2:jt~~~,1
,'I,~~i~'
Checklists;
many insurance organizations
provide a
property checklist that may, be used to identify and value
potentialo property los,ses. ,0'1~ 0 ,q~,.. c.tAt~"~p.~.
Property insurance
Identify
.Owned
i
I
and value;
buildings,
checklist
equipment,
and land
\
!I '
.Property
.Stationary
.Property
under
construction
or leased
vehicles.
.Owned
Identify
special
Propertvis
I!
': ,
I
,
.0..
ft,
,,'
1 .',
'J!(
.~~;,
~
,;:
'" ,
perils
cost)
tow,hich
exposed;
6
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.'
,~
..'
.~~
'
.'
"""'~C~'"'_-'.,~r""""""'"
-~-~-.
':~~"~~C-
c:,
,'"
..
.-
.Terrorism
!) ..Radiation
.f
';.
..
.Explosion
.Flood
..Earth
.Theft..
movement
.Contamination
~
\) ',,- ~
Flow Charts
.~'
\~
e~~)
~~
~~
""
r~ ()., A'
,.\"'"t:. "i..JCO'IQ
~
~~~.~
~)
\~~ \~"'{~~~d
vJ~
~'v~~ ~'-'
~)f
~O/DO"~~'
\V\.O.IV'O
.i
J
).h-~~ ~~~
""V
~oJIi~ p'l't)~~,~
1~~~~)
--
suppliers, or concentration
of valuable property. .Flow
.
charts also help reveal the consequential
impact of losses.
L0ssoflncome,
'
.
Indirect
losses; These are more difficult to identify
than direct property losses. We can'see a machine and
measure its, but we cannot s~e the (ost profits if the
machine IS unavailabfe for three months. Often it is difficult
to estimate how fong a machine or a building will be
unavai1able after a loss, or whether a loss will occur during
a busy season or a. slack periO9. Despite this it is the
responsibilities
to the risk manger to make careful
estimates
and judgments
size of dIrect
.1
losses.
.!
!
I
Direct
The risk
should
ask informed
people
how losses;
long it would
takemanager
to resume
physical
\i
66
i
I
.".,
~ 1~
addition
would
before
normal
operations
expenses
.'
",,:'~ ,,:. 4
resume.
-"
Liability
losse~~~;:~':\
u,.~~ ~
.e...;)
.!
-j
somebody
must pay legal damages
court to the injured party.
.1
-\
injuring
awarded
by a
.Cost
of legal defense. A defense can be expensive
even in cases where a court.. finds the 'victim's claims
groundless,
false or fraudulent.
In some cases, the
legal defense costs more than the damages awarded
to parties claiming injury.
.The
cost of loss prevention arising fr,om potential
Ii
I
legal liability.
i
,
Ivpi,al ~ources
af lia~i/~tv las~
.
.Bodily
or personal Injury" to ,employees,
clients,
or guests.
.Property
others.
damage
.Intentional
including
injury to people
illegal accusation
/.
~
j"
i r:
I
property
to
or their reputation,
or restraint of alleged
shoplifters.
.Wrongf.u1
hiring, termination,
/
customers,
sexual
harassment,
or
,
I
~ ~y<- OI"-"I)~
f
i
I
I
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i
I
,[
loss
(i
prevention,
.and loss
reductio,n.;
l ~\t/I.- ~
~"
.A
"r-IWI'i\'""1"'1-'j~t-4i;J--)'-'D
W,
67
"
..
."
..\
, "
,
Risk avoidance;
Sometimes
the best method of
"
dealing with an exposure to loss i.s,to avoid all possibility
of the loss occurring', It means the chance of loss'has
been eliminated.
In practice, it may mean not i.ntroducing
a new product, ending the production ,of an exi$ting
prod'uct, discontin~ng
some operations,
or selecting a
business location where a parti_c_ular peril is not present,
.I
individuals.
The exposure
not eliminated.
..,..
but
Loss prevention;,
Su'ccessful.loss
prevention
activities lower the frequency of losses. Exa~ple
of'loss
prevention activities include,.employ
security guards in
banks, driver training and , safety education
programs, and
.
warning printed on drugs and dangerous chemicals.
Loss
reduction;
Successful
loss reduction
activities
I
!
;
I
i
!
RiskFinancin~
"
alternatives;
.Risk
assumption
.-, ."" I.t'
tr " ~ c:~'"
.r:-o:.!~1\.
~".i\CI
.Self-Insurance
O S-'~ Ci'I/I
ILJVL;1
t I.. -,..,
:
"O"III.""\IJIQII\..JG
and financed
""' ...~
risk retention
68
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c;.
-:
..,.
-' ~ ,:.~.....,
.
c.
.
.on
reduction;
Successful
loss
reduction
activities
reduce
loss
severity. Despite the best loss prevention efforts, s,ome losses occur. Loss
reduction activities aim at minimizing the impact of losses. For example a
..loss
Risk FinancinQ
Risk financing determines when- and by whom loss costs are borne. Risk
financing includes the following alternatives;
.Risk
assumption
.Risk
.Self.insurance
..Insurance.
.~I)
Risk assumQtion;
It means that consequences of a loss will be borne by the party exposed
to the chance of loss. Business firms assume risks when;
.Loss
.Loss
.Loss
exposures are retained and recognized in arf-ttnfunded
accounts.
s~_h,
~~~
0..\~eIt-~-~
.A
self insurance or finite risk program is operated.
Firms assume many risks because the consequences
not be costly enough to justify
reserve
~'6 fu
.'
~~
1&)\
of a loss would
For
instance, most students assume the risk that their books will be stolen or
misplaced. If such a loss occurs, the students bear the cost of replacement.
0..-;
UU~IIIC~~
.(;---
IIIIII~
_1:_.-
VI~CII
Q~~UIIIC
11~r\ VI IV~III~
ILt;'III~
-~ .__1_":.._1..
VI 1t;'lclLIVt;'IY
~lllclll
-\--.
-1 ~
~ .-:: -,
.)
11.._1..-
VclIUt;'
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,..:~~~._~~--:--, -~-'--.~--==~-
~-~
~""-"~~
~~.~"
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such as hand tools or plates used by a restaurant. The ability to assume risk.
is a function of a firm's financial capacity; (Py b-1ti1.1f,.., w)"tt~)
I
I
"~
~
Self-Insurance;
Risk assumption
arrangements
..
'i
".
The Capfive
~~-
/tfsurance
Company;
-I
One approach
'
involves the use of a company formed to write insurance for a'parent, called
a captive insurance company. One motive in forming a captive is to save the
overhead and profits earned by commercial insurers.
to earn the investment
income
available
insurance
appeal
to
companies
A second incentive is
on advanced funding.
some
organizations
Captive
because
the
potential advantages;
.!
.l'EE!QY.ed-Claims
s~ttlement~
This advantage includes the
ability to cover claims or exclude claims with more flexibility
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