Professional Documents
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Chapter 2 S
Chapter 2 S
Insurance Mechanism
Takeoutapieceofpaperandwriteit
down.Letsseewhatpeoplewould
dotocheatinsurancecompanies!
2-2
Agenda
Definition and Basic Characteristics of
Insurance
Characteristics of An Ideally Insurable Risk
Adverse Selection and Insurance
Insurance vs. Gambling
Insurance vs. Hedging
Types of Insurance
Benefits and Costs of Insurance to Society
Outcome
Understand the terms above and their
applications in an insurance contract
Understand the basics of different types of
insurance contracts
2-3
Definition of Insurance
Insurance is the pooling of ______
losses by transfer of such risks to insurers,
who agree to indemnify insureds for such
losses, to provide other pecuniary benefits
on their occurrence, or to render services
connected with the risk
https://www.youtube.com/watch?v=M1yzSOxxAjk
2-4
Example:
$15,000
2-5
Risk transfer
Indemnification
2-7
Characteristics of an Ideally
Insurable Risk
1.Large number of exposure units
to predict ________
Lossofafinger?
2-8
2-10
2-11
In class exercise :
Risk of Fire as an Insurable Risk
Takeoutapieceofpaperandanswerthequestions
2-12
2-14
2-15
Gambling
Insurance is a technique
for handing an already
existing pure risk
Insurance is socially
productive:
2-16
Insurance
Risk is transferred by a
contract
Insurance involves the
transfer of insurable risks
Risk is transferred by a
contract
Hedging involves risks that
are typically uninsurable
Remember the requirement
for insurable risks?
2-17
Types of Insurance
Private Insurance
Life and Health
Property and Liability
Government Insurance
Social Insurance
Other Government Insurance
2-18
Private Insurance
Life and Health
Life insurance pays _____ benefits to beneficiaries when
the insured dies
Health insurance covers _____ expenses because of
sickness or injury
Disability plans pay ______ benefits
Commercial lines
coverages for business firms, nonprofit organizations,
and government agencies
2-20
2-21
Trytofindmoredetailsyourselves
2-22
2-23
Government Insurance
Social Insurance Programs
2-24
Loss Prevention
Insurers support loss-prevention activities that reduce direct
and indirect losses
Enhancement of Credit
Insured individuals are better credit risks than individuals
without insurance
2-25
Minor fraud?
Will you claim for insurance for work-related
injury which is actually a sport injury?
You have property insurance, an expensive
mirror (HKD2000) is broken due to your
carelessness, will you claim for the insurance
saying the mirror is broken with unknown
cause?
Would you stay home after your have
recovered from illness to continue collecting
compensation?
2-28
Case application
Based on the definition of insurance mentioned,
indicates which of the following is considered
insurance.
a. A TV set is guaranteed by the manufacturer against
defects for 90 days.
b. A new set of radial tires is guaranteed by the
manufacturer against road defects for 50,000 miles.
c. A builder of new homes gives a 10-year guarantee
against structural defects in the home.
d. A cosigner of a note agrees to pay the loan balance if
the original debtor defaults on the payments.
e. A large group of homeowners agrees to pay for losses
to homes that burn during the year because of fire.
2-29
Appendix (Reference)
Basic Statistics and the Law of Large
Numbers
2-30
2-31
or EV X i Pi
Amountof
Loss(Xi)
Probability
ofLoss(Pi)
X i Pi
$0
0.30
$0
$360
0.50
$180
$600
0.20
$120
X P
$300
i i
2-32
2 Pi X i EV
2-33
2-34
2-35
2-36
2-37
Question 1
Compare the risks of
Fire with
War
in terms of how well they meet the requirements
of an ideally insurable risk
Nomodelanswersgiven
2-38
Question 1.1
As a private insurer, you are considering
insuring buildings of a flooding zone, which
of the requirements of insurable risk are
not met?
2-39
Question 2
Explain the following benefits of insurance
to the society
Indemnification for loss
Enhancement of credit
Source of funds for capital investment and
accumulation
2-40
Question 2
Explain the following benefits of insurance
to the society
Indemnification for loss
Enhancement of credit
Source of funds for capital investment and
accumulation
2-41