Introduction to Risk Management and Insurance Finance Department of Shanghai University
Introduction to Risk Management and Insurance Finance Department of Shanghai University
1. Fundamentals Terminology Risks---Risk Management---Insurance Mathematical Foundation of insurance---Law of Large Numbers Definition of insurance Financial definition---Redistribution Legal definition ---Contracts Others, the insurer the insured a premium a Policy, the Insured's Exposure to Loss, Right duty
1. Fundamentals & Terminology ▪ Risks---Risk Management---Insurance ▪ Mathematical Foundation of Insurance---Law of Large Numbers ▪ Definition of Insurance Financial Definition---Redistribution Legal Definition---Contracts Others: the Insurer, the Insured, a Premium, a Policy, the Insured’s Exposure to Loss, Right & Duty
Terminology Loss Chance of loss Peril Hazard Moral Hazard morale hazard Proximate cause Insurable loss, Direct losses indirect losses Pure risk, speculative risk, risk management
▪Terminology: Loss, Chance of Loss, Peril & Hazard: Moral Hazard, Morale Hazard Proximate Cause Insurable Loss: Direct Losses & Indirect Losses Pure Risk, Speculative Risk, Risk Management
Building Blocks of an Insurance Premium A. The actual Cost of the losses B. The Expenses of Operating and Maintaining the Insurance pool C. An Allowance for Unexpected Losses or the risk Factor for the Insurance pool D. Earnings on Investment An Insurance premium=A+B+C-D Sometimes an insurance premium can be priced below the level of expected losses
▪Building Blocks of an Insurance Premium A. The Actual Cost of the Losses B. The Expenses of Operating and Maintaining the Insurance Pool C. An Allowance for Unexpected Losses, or the Risk Factor for the Insurance Pool D. Earnings on Investment An Insurance Premium=A+B+C-D Sometimes an insurance premium can be priced below the level of expected losses
2 Insurable Loss Exposures Not all potential losses are a good subject for nsurance I. Ideal insurable loss exposure 1. a large group of similar items exposed to the same peril 2. Accidental losses 3. Definite losses capable of causing economic hardship. 4. Extremely low probability of a catastrophic loss to the insurance pool
2. Insurable Loss Exposures Not all potential losses are a good subject for insurance I. Ideal insurable loss exposure 1. A large group of similar items exposed to the same peril. 2. Accidental losses. 3. Definite losses capable of causing economic hardship. 4. Extremely low probability of a catastrophic loss to the insurance pool