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RISK & INSURANCE

DEFINISI RISK
Risk exists whenever the future is unknown
(C.Arthur Williams,Jr & Richard M.Heins – Risk Management and Insurance, McGraw-Hill, 1985)

Risk is the possibility of an unfortunate occurence;
Risk is a combination of hazards;
Risk is unpredictability – the tendency that actual results may
differ from predicted results;
Risk is uncertainty of loss;
Risk is the possibility of loss (Prof. Dickens & Dr. W.M. Stein – Risk and insurance – 1995)
Risk is any situation where outcomes are uncertain
(Scott E.Harrington & Gregory R. Niehaus – Irwin & McGraw-Hill -1999)

Kesimpulan : risk is uncertainty of the outcomes which results in the
probability of loss

.RISK & INSURANCE JENIS RISK: .Liability risk. .Credit risk .Economic losses associated with death.BUSINESS RISKS: Price risk Credit risk Pure risk PERSONAL RISKS:.Property damage risk.Pure risk > damage to asset legal liability worker injury employee benefits .INDIVIDUAL RISKS (PERSONAL RISKS) . BUSINESS RISKS: .Price risk > commodity price risk exchange rate risk interest rate risk . poor health and outliving one’s savings.

payments made to injured or ill employees. . destruction.RISK & INSURANCE Risk may be classified in many ways: .some losses will occur (financially). the cost of liability claim) .financial & non-financial risks .deterrent effect on economic growth . expropriation of assets.fundamental & particular risks .static and dynamic risks .to be prepared > accumulate reserve .indirect losses arises as consequence of direct losses (loss of profit.direct losses (losses from damage.pure & speculative risks Pure risk: where the random outcome can only result in loss Major types of losses : .produce feeling of frustation & unrest . extra operating expenses) Peril & hazard Peril is a cause of loss Hazard is a condition that may create or increase the chance of a loss There are 3 categories of hazard : physical hazard moral hazard morale hazard MANAGEMENT OF PURE RISK The greatest burden with risk is: .

develop and select methods for managing risk .increased precautions 2) Loss financing = obtain funds to pay for part or all of the losses .investment in information .evaluate the potential frequency and severity .retention (self-insured) .reduced level of risky activity .monitor the performance and suitability of the risk mangement methods on an ongoing basis RISK MANAGEMENT METHODS 1) Loss control = actions that reduce the expected cost Of losses by reducing the frequency of losses and/or severity of losses .hedging .diversification .implement the risk management methods chosen .RISK & INSURANCE RISK MANAGEMENT PROCESS Key steps : .other contractual risk transfer 3) Internal risk reduction .insurance (transfer of risk) .identify all significant risks that can reduce value .

If the economic losses that actually result from a given peril. can be shared by large numbers of people who are all subject to the risk of such losses and the probability of loss is relatively small for each person. Sharing losses. Insurance does not decrease the uncertainty for the event will occur. . the insurer is able to make predictions as a whole (using theory of probability). Insurers use a concept known as risk pooling. on some equitable basis. but it does reduce the probability of financial loss connected with the event. by all members of the group. Transferring or shifting risk from one individual to a group 2. then the cost to each person will be relatively small The primary function of insurance is the creation of security.RISK & INSURANCE THE NATURE AND FUNCTIONS OF INSURANCE Insurance has 2 fundamental characteristics : 1. such as disability. By combining a sufficiently large number of homogeneous exposure units. nor does it alter the probability of occurence.

illness. small periodic contributions by the individuals providing a fund out of which those who suffer loss may be reimbursed (Riegel & Miller) KUHD ps 246: asuransi adalah suatu perjanjian. called the insurer. kerusakan atau kehilangan keuntungan yang diharapkan.RISK & INSURANCE DEFINISI ASURANSI Quoted from McGill’s LIFE INSURANCE: Insurance is a device for the reduction of the uncertainty of one party. called the insured. dengan mana seorang Penanggung mengikatkan diri kepada seorang tertanggung. at least in a part. etc in return for regular payments. dengan menerima suatu premi. or society. death. through the transfer of particular risks to another party. yang mungkin akan dideritanya karena suatu peristiwa yang tak tertentu. or by a State to provide a guarantee of compensation for loss. damage. of economic losses suffered by the insured (Pfeffer) Insurance is a social device whereby the uncertain risks of individuals may be combined in a group and thus made more certain. Kamus: insurance is a contract made by a company. . who offers a restoration. untuk memberikan penggantian kepadanya karena suatu kerugian.

2. 5. and inherent in this idea is the assumption that only a small percentage of the group will suffer losses at any one time. 4.RISK & INSURANCE CHARACTERISTICS OF INSURABLE RISKS 1. 3. and we must be able to set some value on the extent of it) The loss must occur by chance (the loss must be fortuitous or accidental – it must be the result of a contingency) The loss must not be catastrophic (the insurance principle is based on a notion of sharing losses. The loss must be significant . The loss rate must be predictable (there must be a sufficiently a large number of homogeneous exposure units to make the losses reasonably predictable) The loss must be definite (the loss produce by the risk must be definite and measurable – when a loss takes place.

3. 2.g. Coordination of benefit) Exclusions . CONTRACTUAL PROVISIONS THAT LIMIT COVERAGE 1. 2. and also to reduce moral hazard. but the insurer is unable to distinguish between the two types of consumers and charge different premiums.RISK & INSURANCE FACTORS THAT LIMIT THE INSURABILITY OF RISK 1. 3. or adverse selection) Application of POLICY LIMIT Pro Rata and Excess Coverage Clauses (e. 4. A common way to limit the amount of coverage is DEDUCTIBLES (to reduce the cost of processing small claims that occur relatively frequently. Premium loadings > insurers administrative and capital cost Moral hazard > the effect of insurance on the insured’s incentives to reduce expected losses Adverse selection > situations in which consumers have different expected losses.