The goals of this chapter are: Determine when insurance should be used, describe the role property and liability insurance has in managing potential losses in real property and legal liability, indicate how personal insurance can reduce losses in human exposures, . | Lecture Personal financial planning Chapter 11 Other insurance Chapter 11 Other Insurance 1 Chapter Goals Determine when insurance should be used. Describe the role property and liability insurance has in managing potential losses in real property and legal liability. Indicate how personal insurance can reduce losses in human exposures. Explain how significant the federal and state government are in limiting risks. 2 When Is Insurance Suitable Insurance can be attractive when infrequent but severe losses that can cause hardship to you are present. Hardship means the losses can have a material impact on the household s overall financial condition or current cash resources severity . Insuring against all losses is extremely costly and therefore inefficient. When losses happen very often high frequency insurance companies end up adding on their overhead costs to the losses. 3 When Is Insurance Suitable cont. Loss frequency and severity High Severity Low Severity High Frequency Retention Retention Low Frequency Purchase Insurance Retention 4 Risk Management and Insurance Terms Business Risk A risk taken for potential reward. Pure risk A risk that carries no financial reward. Uncertainty No knowledge of outcomes. Risk The exact outcome is unknown but the probabilities of alternative outcomes are known. Perils Exposures to the risk of loss. Hazards Exposure to increased probability of peril. Physical hazard A deficiency in physical property that increases the possibility of loss. Moral hazard Hazard that arises from actions taken by the insured person which increase the possibility of loss. Morale hazard Hazard that arises from a person behaving negligently because he or she has insurance coverage. 5 Risk Management and Insurance Terms cont. If insurance companies had perfect information they could place clients in risk classes based on probabilities of losses at the beginning of the business relationship and provide less expensive policies for the average client. But
