MTHEL131 Final: Lecture 11
13 Jun 2017
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Ex: individual bought a new car worth ,000 (different from their old car which was ). You are concerned since your new car can get scratched, can get in an accident. Getting in a car accident, damaging car = risk. How to manage risk: risk avoidance: effective, but impractical never take the car out of the driveway, loss prevention drive slowly, observe speed limits, risk transfer burden of getting into car accident is on a third-party (insurer) Types of risk: speculative risk: transfer that could result in a financial gain or loss. Insurance is not available to cover speculative risk: pure risk: only one outcome: loss, never gain. Most important assets: ability to earn income (life, house, car. Peril: an event that gives rise to a loss. Ex: theft, natural disasters: earthquake, flood, etc. Named perils : what incidents are covered by your policy. Theft and fire are always named perils but flood is not always a named peril .
