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Finance 336 week 2

by: brenda salas

Finance 336 week 2 fin 336

brenda salas
California State University Northridge

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These are class notes for week 2 that cover information for the exam
principles of insurance
david russell
Class Notes
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This 2 page Class Notes was uploaded by brenda salas on Saturday September 10, 2016. The Class Notes belongs to fin 336 at California State University Northridge taught by david russell in Fall 2016. Since its upload, it has received 46 views. For similar materials see principles of insurance in Finance at California State University Northridge.

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Date Created: 09/10/16
9/7/16 FIN 336 (notes) 1. How much does it cost? (Insurance to your car) Expected (Loss) = (.87)(0) + (.07)(2,000) + (.05)(8,000)+ (0.1)(20,000) = $740  Weighted average of what they expect to have/spend.   Profit margins in auto are low [competitive market].   Loading (profit & expenses)= 35% ­ 45% ­> 40% Premium= $740 x 1.40 =$1,036   Retain the risk [to keep] also called self­insured  Should you insure at 1,036 or on average of self­insure 740?  Pure & speculative risk   Big insurance are more predictable Characteristics of insurable risk  Pain is not an insurable risk  In order to buy and sell you must have these insurable risk characteristics  Reinsurance: so that the company can pass along some of the risk, to spread their  insurance. Risk management  One risk that matters to the investor is the systematic risk. Steps in a Risk Management Program  How much are you willing to lose? How much can we afford to lose?  What are the possible frequencies and severities?   Umbrella is an excess liability policy  the highest rating is A.M Best Co. has an A++ (state farm) matters   Surplus is like equity  Rates: cost per unit of insurance /per coverage  Premiums:  Auto license 15/30/5: o 15,000 Most insurance will pay per person o 30,000 Most will pay of all claimants for accident (more than one person) o 5,000 most will pay for property damage Q: imagine you bought exactly twice as much insurance $30,000 per person you injured in car or $60,000 if it was more than one person. (30/60/10) why? A: most policies will pay almost the same amount of coverage. Most losses never reach the  policy limit of most.  


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