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RMI 270 Ch. 1 & 2 Notes

by: Danielle Notetaker

RMI 270 Ch. 1 & 2 Notes RMI 270

Danielle Notetaker
GPA 3.8

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About this Document

This material is from week 1 of class.
Dr. Fitzgerald
Class Notes
Risk Management, Insurance
25 ?




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This 2 page Class Notes was uploaded by Danielle Notetaker on Wednesday January 13, 2016. The Class Notes belongs to RMI 270 at Ball State University taught by Dr. Fitzgerald in Spring 2016. Since its upload, it has received 29 views. For similar materials see in Risk Management And Insurance at Ball State University.


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Date Created: 01/13/16
RMI  270  Notes   Chapter  1     Risk  vs.  Uncertainty   • Risk-­‐  objective,  real,  measurable   o Ex:  automobile  accident,  death,  electric  shock,  earthquake,  flu   • Uncertainty-­‐  subjective,  state  of  mind,  cannot  measure   o Ex:  fear,  anxiety     Types  of  Risks   • Pure  risk-­‐  there  are  only  the  possibilities  of  loss  or  no  loss   • Speculative  risk-­‐  both  profit  or  loss  is  possible   o Ex:  lottery   • Fundamental  risk-­‐  risk  affects  entire  economy  or  large  numbers  of  people   o Ex:  hurricane   • Particular  risk-­‐  affects  only  the  individual   o Ex:  death   • Personal  risk  –  the  risk  personally  affects  you   o Ex:  risk  of  death,  risk  of  becoming  disabled     • Property  risk-­‐  cause  a  loss  to  property   • Liability  risk-­‐  covers  any  situation  that  you  could  be  sued     Major  Pure  Risks  include:   • Premature  death  of  family  head   • Insufficient  income  during  retirement   • Poor  health  (medical  bills,  loss  of  income)   • Involuntary  unemployment   • Physical  damage  to  home  (tornado,  fire)   • Legal  liability     *Hazard  =  increases  the  chance  of  loss   *Peril    =  cause  of  loss     Types  of  Hazards     • Physical   o Ex:  ice  on  sidewalk   • Moral   o Ex:  unethical/dishonest  person  buys  home  insurance  and  then   purposefully  burns  their  house  down   • Morale   o Ex:  accident  prone/careless  people   • Legal   o Ex:  someone  sues  you       Types  of  Loss   § Direct  loss     o Ex:  Your  car  is  totaled  in  an  accident.  Your  car  is  a  direct  loss.   § Indirect  loss   o Ex:  Your  car  is  totaled  in  an  accident,  so  you  have  to  pay  for  a  rental   car.  The  cost  of  the  rental  car  is  an  indirect  loss.   § Exposure     § Consequential  loss  (type  of  indirect  loss)   o Ex:  The  power  in  your  house  goes  out  for  5  days.  The  consequential   loss  is  all  the  food  that  spoiled  in  your  fridge.     Chapter  2   Characteristics  of  Insurance:   § Risk  transfer   o Ex:  transferring  the  risk  of  death  to  life  insurance  company   § Pooling  concept   o Ex:  You  create  a  pool  of  money  to  use  if  something  were  to  go  wrong.   § Law  of  large  numbers  –  the  greater  the  number  included  in  a  sample,  then   more  accurate  results  will  be,  this  narrows  the  standard  deviation   § Insurance  reduces  uncertainty   § Exchange   o Ex:  You  will  give  a  life  insurance  company  money,  and  they  exchange   it  for  a  life  insurance  policy.     Benefits  of  Insurance:   § Indemnification   § Reduction  of  fear  &  worry   § Source  of  investment  funds   § Loss  prevention   § Enhanced  credit   § Encourages  innovation       Costs  of  Insurance:   § Operation  (cost  of  doing  business)   § Fraud  (moral  hazard)   § Inflated  losses        


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