FIN 512 Chapter Notes - Chapter 1: Operational Risk, Credit Risk, Social Insurance

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indigospider592

16 Oct 2011

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Principles: law of large numbers insurance companies can charge small premiums for large loss exposures, an insurance policy is a contract. Risk/return tradeoffs- the more risk one is willing to accept, the higher the possible return. Risk management- limiting the size of the bet so you are not wiped out if you take the wrong side. Risk - an uncertainty about the occurrence of a loss. Exogenous risk- risk that we have no control of. Objective risk - risk that is determined by analysing past experiences. Standard deviation - average difference of each loss from the average. Subjective risk the uncertainty is based on a person"s mental condition and the subjective probability is based on an individual"s personal estimate of a chance of loss. Use inductive reasoning to come to conclusions about objective risks. Use deductive reasoning where the probability is obvious. Pure risk- where there is a chance of loss or no gain insurable.

Related Questions

Commercial Insurance is a large stock property and liability insurer that specializes in the writing of commercial lines of insurance. The board of directors has appointed a committee to determine the feasibility of forming a new subsidiary insurer that would sell only personal lines of insurance, primarily homeowners and auto insurance. The new insurance company would have to meet certain management objectives. One member of the board of directors believes the new insurer should be legally organized as a mutual insurer rather than as a stock insurer. Assume you are an insurance consultant who is asked to serve on the committee. To what extent, if any, would each of the following objectives of the board of directors be met by formation of a mutual property and casualty insurer? Treat each objective separately.

a. Commercial Insurance must legally own the new insurer.

b. The new insurer should be able to sell common stock periodically in order to raise capital and expand into new markets.

c. The policies sold should pay dividends to the policyholders.

d. The new insurer should be licensed to do business in all states.

Characteristics of an Insurable Risk

1) Large number of similar objects
2) Losses are accidental/unintentional
3) Losses can be determined/measured
4) Losses should not be catastrophic
5) Large Loss Principle
6) Insurable Interest

Insurance companies (or insurers) prefer their risks to have thesix characteristics of Insurable risks. Can you think ofany insurable risk that lacks any one of thecharacteristics? You can name the risk, loss exposure orperil and explain what characteristics this lacks.

rosekangaroo385

This week we discuss the operations of an insurance company. As stated before, the primary technique for risk management is transferring the risk, usually to an insurance company. Every risk manager should have a strong understanding of how an insurance company operates, prices its products, underwrites the risk, sells, and services the customer. (If you don't have an employer at this time you can call an insurance agent and interview them about the commercial risks and how they help their clients manage those risks). This helps tremendously if a claim arises. Ask the risk manager of your company who provides the property insurance and respond with an overview of that insurance company. Include their history, current business model, and premium volume.

orchidhyena774

FIN 512 Chapter Notes - Chapter 1: Operational Risk, Credit Risk, Social Insurance

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