Ch2 Insurance and Risk

• Definition and Basic Characteristics of Insurance

• Characteristics of An Ideally Insurable Risk
• Adverse Selection and Insurance
• Insurance and Gambling Compared
• Insurance and Hedging Compared
• Types of Insurance
• Benefits and Costs of Insurance to Society

Hwang Yawen
1. Definitions of Insurance

(Commission on Insurance Terminology of the American Risk and Insurance Association

Definition 美國風險與保險學會-保險術語委員會)

Insurance is the pooling of fortuitous losses by transfer

Basic Characteristics of Insurance
of such risks to insurers, who agree to indemnify
insureds for such losses, to provide other pecuniary  Pooling of losses (風險集合)
benefits on their occurrence, or to render services  Payment of fortuitous losses
connected with the risk. (p.43) (偶發損失之給付)

保險是透過將此類風險轉移給保險公司的方式來集  Risk transfer (風險移轉)

合偶發之損失，保險公司同意以提供所發生之其他
 Indemnification (損害填補)
金錢利益或提供與此風險相關之服務的方式來補償
(賠償)被保險人之損失。
2. Basic Characteristics of Insurance

Pooling of losses (風險集合, p.43-44) ✓ 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 (風險集合是指將群體中少數人之損失分散給整個
群體，故在此過程中，是以平均損失來取代實際損失,
p.43)

✓ A large number of similar, but not necessarily

identical, exposure units that are subject to the
same perils (需要有大量相似(但毋須完全相同)的曝
險單位，其面臨相同之危險事故, p.44)

✓ Purpose: to reduce the variation in possible

outcomes as measured by the standard deviation
(reduce risk) (目的：透過降低標準差之方式來降低
可能出象之變異程度→降低風險, p.44)
2. Basic Characteristics of Insurance

Pooling of losses (風險集合, p.43-44)  The expected loss remains the same (形成風險
集合後，預期損失維持不變，p.44)
Example of Pooling (p.44)
1) Without pooling (for each owner)  The probability of the extreme values have
Loss Probability declined → SD becomes lower (p.44)
Expected loss=5,000
0 0.9 SD=15,000
50,000 0.1
 As additional individuals are added to the
2) Pooling (for each owner)
pooling arrangement, the standard deviation
Possible outcome Probability Sharing loss continuous to decline while the expected value
Both safe 0.81 0 of the loss remains unchanged (隨著新個體加入
Only A is destroyed 0.09 25,000 至風險集合中，標準差會持續下降，然而，預期損
失仍然不變, p.44)
Only B is destroyed 0.09 25,000
Both destroyed 0.01 50,000
Expected loss=5,000
SD=10,607
3. Law of Large Numbers

✓ Law of large numbers: the greater the number of exposures, the more closely will the
actual results approach the probable results that are expected from an infinite number
of exposures (大數法則：當曝險單位越多，則實際結果與在無限多個曝險單位下之預期結果會越接近,
p.44)

✓ If there is a large number of exposure units, the actual loss experience of the past may
be a good approximation of future losses (因此，若存在大量之曝險單位，則過去之實際損失經
驗可以作為未來損失之良好估計值, p.45)

For insurer?
保險公司透過風險集合，當有越多同質性危險之被保險人加入下，
這些人之平均損失變得較可以預測，且會更接近”預期損失”
→ 準確地計算保費
 3. Law of Large Numbers
1 Payment of fortuitous losses (p.45)
✓ Most insurance policies exclude
intentional losses (故意損失)
✓ A fortuitous loss is one that is
unforeseen, unexpected, and occur
as a result of chance (偶發損失係指
無法預見、不可預期、且偶然發生之損
失)
✓ The loss must be accidental (損失必
須是意外的)
(Law of large numbers → randomly)
2 Risk transfer (p.45)
✓ A pure risk is transferred from the insured
(被保險人) to the insurer (保險人), who
typically is in a stronger financial position
to pay the loss than the insured
3 Indemnification (損害填補, p.45)
✓ The insured is restored to his or her
approximate financial position prior to
the occurrence of the loss (保險僅能幫助被
保險人回復到在發生損失之前之大致財務狀況)
4. Characteristics of an Ideally Insurable Risk

1 Large number of exposure units (有大量曝險單位)

Private insurers generally
insure only pure risks (商
業保險公司一般僅承保純粹風 2 Accidental and unintentional loss (意外且非故意之損失)
險, p.45)

3 Determinable and measurable loss (可確定且可衡量之損失)

There are ideally six
characteristics of an 4 No catastrophic loss (非巨災損失)
insurable risks (理想可保風
險之特性, p.45-47)
5 Calculable chance of loss (損失機會可計算)

6 Economically feasible premium (具經濟可行性之保費)

4.
2. Characteristics
Basic Characteristics
of an Ideally
of Insurance
Insurable Risk
1 Large number of exposure units (p.45-46)
Fire
(有大量曝險單位) insurance
✓ A large group of roughly similar, but not
necessarily identical, exposure units that
are subject to the same perils
✓ Purpose: to predict average loss based on 100,000 males
the law of large numbers (才能準確的計算保費) (aged 30)
這些大量且同質性的危險單位必須面
臨共同的風險

Life
insurance
3.
2. Characteristics
Basic Characteristics
of an Ideally
of Insurance
Insurable Risk

2 Accidental and unintentional loss (p.46)

(意外且非故意之損失)
✓ The loss should be unforeseen and
unexpected by insured and outside of the
insured’s control (損失必須是被保險人無法預見並
不可預期的，且被保險人無法操控) Depreciation (折舊)

✓ Reason
 The law of large numbers is based on the
random occurrence of events
 Moral hazard (道德危險因素) is increased if
the insured deliberately intends to cause a
loss
 It is poor public policy to allow insureds to Suicide (自殺)
collect for intentional losses (允許被保險人獲
得故意損失之補償將是不好的公共政策)
4.
2. Characteristics
Basic Characteristics
of an Ideally
of Insurance
Insurable Risk

3 Determinable and measurable loss (p.46) 5 Calculable chance of loss (p.47)

(可確定且可衡量之損失)
✓ The loss should be definite as to cause, time
place and amount (應能明確知道損失之原因、時
間、地點與金額)
• Most life insurance meets this requirement
• Examples in the textbook
✓ Purpose: to determine if the loss is covered
under the policy, and if it is covered, how
much should be paid (目的：確定損失是否涵蓋
在保單範圍內，同時，若包含在內，則應支付多少
金額)
• Example in the textbook
(損失機會可計算)
✓ The insurer must be able to calculate both the
average frequency and the average severity of
future losses with some accuracy (保險公司必須
能夠準確地計算未來損失之平均發生頻率和平均損失
幅度/嚴重程度)
✓ Purpose: to establish a premium that is
sufficient to pay all claims and expenses and
yields a profit during the policy period (目的：
損失機會可計算是用以確定能計算足以支付所有理賠
與費用，並在保單期間內可以產生利潤之保費)
4.
2. Characteristics
Basic Characteristics
of an Ideally
of Insurance
Insurable Risk

4 No catastrophic loss (p.46-47)

(非巨災損失)
✓ A large proportion of exposure units should not incur
losses at the same time (損失不應造成大部分曝險單位同時發生損
失)
✓ In order to make sure that the pooling technique is
workable (確保風險集合方法可以運行)
✓ Exposures to catastrophic loss can be managed by
 using reinsurance (再保險)
 dispersing coverage over a large geographic area (以地理
區域方式分散風險)
 using financial instruments, such as catastrophe bonds (使
用金融工具分散風險，例如：巨災債券)
4.
2. Characteristics
Basic Characteristics
of an Ideally
of Insurance
Insurable Risk

6 Economically feasible premium (p.47)

(具經濟可行性之保費)
✓ The insureds must be able to afford the premium (保險費必須是被保險人有能力負擔的)
✓ To have an economically feasible premium, the chance of loss must be relatively low
(為達到具經濟可行性之保費，損失機會須相對較低)
4.
2. Characteristics
Basic Characteristics
of an Ideally
of Insurance
Insurable Risk
Based on these requirements: (p.47)
➢ Most personal, property and liability risks can be insured

➢ Market risks, financial risks, production risks and political risks are difficult to insure
4.
2. Characteristics
Basic Characteristics
of an Ideally
of Insurance
Insurable Risk

Exhibit 2.1 Fire as an Insurable Risk (p.47-48)

4.
2. Characteristics
Basic Characteristics
of an Ideally
of Insurance
Insurable Risk
Exhibit 2.2 Unemployment as an Insurable Risk (p.48)
5. Adverse Selection and Insurance
➢ Adverse selection is the tendency of
persons with a higher-than-average
chance of loss to seek insurance at
standard rates (逆選擇係指損失機會高於平
均值的人會傾向於以標準費率買到保險, p.49)
➢ If not controlled by underwriting,
adverse selection results in higher-than-
expected loss levels (若保險公司未應用核
保來控制此風險，則逆選擇問題可能會導致
損失程度高於原本之預期, p.49)
➢ Examples in the textbook (p.49)
➢ Adverse selection is due from
asymmetries in insurance information
(逆選擇的問題源自於”資訊不對稱”, p.49)
➢ Adverse selection can be controlled by
 careful underwriting (selection and
classification of applicants for
insurance) (higher premium) (仔細的核
保機制，對被保險人/要保人進行選擇與分類。
一般來說，風險較高者，可提高其保險費率,
p.49)
 policy provisions (e.g., suicide clause
in life insurance, preexisting conditions
clause) (透過保單條款設計來降低逆選擇問
題，例如：壽險之自殺條款、排除既往症條
款, p.49)
6. Insurance vs. Gambling/Hedging
Insurance (p.49) Gambling
• Handles an already existing pure • Creates a new speculative risk
risk • Not socially productive
• Always socially productive (對整體 The winner’s gain comes at the
社會而言是獲利的) expense of the loser
both parties have a common interest
in the prevention of a loss

圖片參考 https://www.google.com.tw/search?q=%E4%BF%9D%E9%9A%AA+%E8%B3%AD%E5%8D%9A&source=lnms&tbm=isch&sa=X&ved=0ahUKEwji5Kzjlr3dAhVGzbw
KHQGhDO0Q_AUICygC&biw=1093&bih=501#imgrc=0Brg6xFmwSzhuM:
6. Insurance vs. Gambling/Hedging
Insurance
• Risk is transferred by a contract
• Involves the transfer of pure
(insurable) risks
• Moral hazard and adverse selection
are more severe problems for
insurers
Hedging (避險, p.49-50)
• Risk is transferred by a contract
• Involves risks that are typically
uninsurable (speculative risk)
• Fewer problems of moral hazard and
adverse selection for entities who buy
or sell futures contracts
7. Types of Insurance
Types of Private Insurance (商業保險的分類, p.50-52)
➢ Life and Health (人壽與健康保險, p.50)
✓ Life insurance pays death benefits to
beneficiaries when the insured dies
✓ Health insurance covers medical
expenses because of sickness or injury
➢Property and Liability (財產與責任保險, p.50)
✓Property insurance (財產保險) indemnifies
property owners against the loss or damage of
real or personal property
✓Liability insurance (責任保險) covers the
insured’s legal liability arising out of property
damage or bodily injury to others
✓Casualty insurance (意外保險) refers to
insurance that covers whatever is not covered
by fire, marine, and life insurance
6. Types of Insurance
Types of Private Insurance

➢Private insurance coverages can be grouped into two major categories (p.51-52)
 Personal lines (個人性險種): coverages that insure the real estate and personal
property of individuals and families or provide protection against legal liability (保
險範圍涵蓋個人和家庭之動產與不動產，或提供法律責任保護, p.51)
 Commercial lines (商業性險種): coverages for business firms, nonprofit
organizations, and government agencies (承保範圍包括企業，非營利組織以及政府機構,
p.51)
6. Types of Insurance
Types of Government Insurance

 Social Insurance Programs (社會保險, p.52-54)

a) Financed entirely or in large part by contributions from employers and/or employees or
both, and not primarily by the general revenues of government (社會保險基金之提撥完全或大
部分由雇主和/或員工來負擔，而非主要由政府一般稅收所提供. P.52)
b) Benefits and contributions generally vary among the beneficiaries according to their prior
earning, but the benefits are heavily weighted in favor of low-income groups (給付與提撥金
額通常與被保險人之薪資有關，但給付之設計會較有利於低收入群體, p.52)
c) Most social insurance programs are compulsory (一般具強制性, p.52)
d) Eligibility requirements and benefits are usually prescribed by statute (通常由法令規範納保資
格以及給付條件與內容)
Examples (p.53): (US) Social Security, Unemployment, Workers Compensation…
How about Taiwan?
 Other Government Insurance Programs (其他政府保險計畫, p.53-54 略)
8. Benefits of Insurance to Society
1) Indemnification for loss (損失填補, p.54)
✓ indemnification permits individuals and
families to be restored to their former
financial position after a loss occurs (損失
填補幫助個人和家庭在發生損失後能恢復到
先前之財務狀況)
✓ maintaining the financial security (維持財
務安全)
✓ “stability” is one of the most important
social and economic benefits of insurance
(“維持穩定”是保險最重要的社會和經濟功
能之一)
3) Source of investment funds (投資基金之來源,
p.54)
✓ insurance companies perform an important
role as financial intermediaries in the
economy
4) Loss prevention (損失預防, p.54-55)
✓ especially in property and casualty
insurance
✓ the loss-prevention activities reduce both
direct and indirect losses (損失預防措施可同
時降低直接損失與間接損失, p.55)

2) Reduction of worry and fear (減少憂慮和恐 5) Enhancement of Credit (提高信用等級, p.55)

懼, p.54) ✓ enhancing a person’s credit
✓ reducing the worries and fears before and
after a loss (可降低損失前與損失後之憂慮
和恐懼)
9. Cost of Insurance to Society
1) Cost of doing business (營運之成本, p.55) 3) Inflated Claims (浮報理賠, p.56)
✓ gross premium = pure premium + expense ✓ the dollar amount of claim may exceed the
loading (總保費=純保費+附加費用) actual financial loss (索賠金額可能超過實際
✓ expense loading: the amount needed to pay 財務損失)
all expenses, including underwriting and ✓ examples in the textbook
loss-adjustment expenses (核保與理賠費用), ✓ premiums must be increased to pay the
commissions (佣金), general administrative additional losses (必須提高保費才足以支付
expenses (一般行政費用), state premium 此額外之損失)
taxes (稅), acquisition expenses (新契約費
✓ higher premiums to cover additional losses
用), and an allowance for contingencies and
reduce disposable income and consumption
profit (偶發事件與利潤)
of other goods and services (因需支付更高的
2) Fraudulent Claims (保險詐欺, p.55-56) 保費以彌補額外的損失，而減少可支配收入
以及其他商品與服務之消費)
✓ examples in the textbook
✓ the payment of such fraudulent claims
results in higher premiums to all insureds
(因支付此類保險欺詐之理賠將會導致所有
被保險人的保費增加, p.56)
✓ Insight 2.2 (p.57-59)
 Probability and Statistics
✓ The probability of an event is the long-run
relative frequency of the event, given an
infinite number of trials with no changes in
the underlying conditions (事件發生機率係指在
給定無限次的試驗且基本條件沒有變化下，該事件之
長期相對頻率, p.64)
✓ Probabilities can be summarized through a
probability distribution (可用機率分配進行描述)
• discrete or continuous (離散或連續)
✓ A probability distribution is characterized by
 measure of central tendency (集中趨勢之衡量):
mean (the expected value) (平均數/期望值, p.64)
 measure of dispersion (分散程度之衡量):
variance or standard deviation (risk) (變異數或
標準差, p.65) (用以描述風險)
✓ Example in the textbook (p.64-65)
✓ Higher standard deviations, relative
to the mean, are associated with
greater uncertainty of loss; therefore,
the risk is greater (相對於平均數，較高的
標準差代表著損失不確定越高，因此，風險
更大, p.65)
There are two investment tools, A and B. Their
performances (monthly rate of return) during the
past two years are as follow:
A: average = 5%, SD = 15%
B: average = 5%, SD = 10%
Comparing the investment risks of A & B.
 Law of Large Numbers
✓ The law of large numbers is the Exhibit A2.1 Sampling Distribution Versus Sample Size
mathematical foundation of insurance (大數法
則為保險能成功運行之數學基礎)
✓ Average losses for a random sample of n
exposure units will follow a normal
distribution because of the Central Limit
Theorem (在中央極限定理下，n個曝險單位之隨機
樣本的平均損失將服從常態分配, p.65)
Exhibit A2.2 Standard Error of the Sampling Distribution
 Regardless of the population distribution, the Versus Sample Size
distribution of sample means will approach the
normal distribution as the sample size
increases (無論原始分配為何，隨著樣本個數增
加，樣本平均值的分佈會越接近常態分配, p.65)
 The standard error of the sampling distribution
can be reduced by increasing the sample size
(隨樣本個數增加，樣本分佈之標準差會下降,
p.66)
Law of Large Numbers

When an insurer increases the size of the sample of insureds

 Underwriting risk increases, because more insured units could suffer a
loss (核保風險增加，因為可能有更多被保險人發生損失, p.66)
 But, underwriting risk does not increase proportionately. It increases by
the square root of the increase in the sample size (但核保風險並不是以數量之
比例增加，其增加幅度為樣本大小增加的平方根, p.66)
 Insurers reduce their objective risk (當承保數量增加時，保險公司可降低
變異程度, p.66)

Exhibit A2.2 Standard Error of the Sampling Distribution Versus Sample Size
Law of Large Numbers
Assuming that the loss probability is 0.1%, sum insured is $1 million. Then, the net single premium is $1,000.
Case A: Only issuing one policy
Case B: Issuing 100,000 policies