COMMERCE 4FP3 Lecture Notes - Lecture 8: Home Insurance, Liability Insurance, Vehicle Insurance

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12 Mar 2019
Insurance: protection against possible financial loss
Life insurance replaces income that is lost if the policyholder dies
Health insurance helps meet medical expenses not covered by universal health care when
policyholder becomes ill
Car insurance helps cover property and personal damage caused by the policyholder's car
Home insurance covers the policyholder's place of residence and its associated financial risks, such
as damage to personal property and injuries to others
An insurance company or insurer, is a risk-sharing firm that assumes financial responsibility for
losses from an insured risk
People purchase a policy (a written contract of insurance) and the firm assumes a risk for a fee
called the premium (the amount of money a policy holder is charged for an insurance policy)
Insured: a person covered by an insurance policy
Policyholder: person who owns an insurance policy
Types of risks
Risk: chance or uncertainty of loss; may also mean "the insured"
Peril: the cause of a possible loss
o Protection against perils such as fire, windstorms, explosions, robbery, premature death
Hazard: a factor that increases the likelihood of loss through some peril
o E.g., defective housing is a hazard that increases the likelihood of the peril of fire
Most common are personal risks, property risks, and liability risks
o Personal risks: uncertainties surrounding loss of income or life due to premature death,
illness, disability, old age, or unemployment
o Property risks: uncertainties of direct or indirect losses to property due to fire, windstorms,
accidents, theft, and other hazards
o Liability risks: loss possibilities due to negligence resulting in bodily harm or property
damage to others
o All types of pure risk (risk in which there is only a chance of loss; aka insurable risk)
Speculative risk: risk that carries a chance of either loss or gain
o E.g., gambling, starting a small business
Risk management methods
Organized strategy for protecting assets and people
Long-range planning process
4 general risk management techniques:
1. Risk avoidance: to avoid the chance of loss altogether
Avoid a car accident by not driving to work
2. Risk reduction: reduce the chances of a loss occurring, or reducing the adverse effects of
losses that do occur
Installing smoke alarms or fire extinguishers
Wearing a seatbelt to avoid serious injuries if you are in an accident
3. Risk assumption: taking on the responsibility for the loss or injury
Self-insurance: process of establishing a monetary fund to cover the cost of a loss
Doesn't eliminate risks, only means covering losses
4. Risk shifting: transfer the cost of the loss to an insurance company
Planning an insurance program
Step 1: set insurance goals
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Goal is to minimize personal, property, and liability risks
Should define what to do to cover the basic risks present in your life situation
Covering basic risks = providing a financial resource to cover costs resulting from a loss
E.g., goal is to buy a new car
Must plan purchase and to protect yourself against financial losses - so you buy
Must set goals to reduce the impact of the following events:
Potential loss of income due to premature death, illness, accident, or unemployment
of a wage earner
Potential loss of income and extra expense resulting from the illness, disability or
death of a spouse
Additional expenses due to the injury, illness, or death of other family members
Potential loss of real or personal property due to fire, theft, or other hazards
Potential loss of income, savings, and property due to personal liability
Step 2: develop a plan to reach your goals
Step 3: put your plan into action
To put your risk management plan to work ask yourself:
What should be insured?
For how much?
What kind of insurance?
From whom?
Step 4: review your results
Remember that your needs change throughout your life cycles
Property and liability insurance
Property owners face two basic types of risks:
1. Physical damage - caused by hazards such as fire, wind, water, and smoke
Can cause destruction of your property or temporary loss of its use
E.g., windstorm causes tree branch to break into your windshield
2. Loss of use - due to robbery, burglary, vandalism, arson
Liability: legal responsibility for the financial cost of another person's losses or injuries
o Legal responsibility is commonly caused by negligence (failure to take ordinary or
reasonable care in a situation)
Strict liability: person is held responsible for intentional or unintentional actions
Vicarious liability: one person is held responsible for the actions of another person
Homeowner's insurance: coverage for your place of residence and its associated financial risks, such as
damage to personal property and injuries to others
Provides coverage for buildings and other structures, additional living expenses, personal
property, replacement value of your home, personal liability and related coverage and specialized
Personal articles endorsement: additional property insurance to cover the damage or loss of a
specific item of high value
Household inventory: a list or other documentation of personal belongings, with purchase dates
and cost information
Replacement value of your home - limit of insurance purchased should reflect the cost to rebuild
your home
o Not its current market value
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