RMI 270 Ch. 1 & 2 Notes
RMI 270 Ch. 1 & 2 Notes RMI 270
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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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