21. The problem of risk and the notion of insurance. Functions of insurance company.

The problem of risk and the notion of insurance. Functions of insurance company

Risk is uncertainty or lack of predictability. In the case of insurance, it refers to the uncertainty as to loss that a person or a property covered by insurance faces. Insurance companies frequently refer to the insured person or property as the risk. The most common risks are classified as personal risks, property risks, and liability risk.

Personal risks are the uncertainties surrounding loss of income or life due to premature death, illness, disability, old age, or unemployment.

Property risks are the uncertainties of direct or indirect losses to personal or re property due to fire, windstorms, accidents, theft, and other hazards.

Liability risks are possible losses due to negligence resulting in bodily harm property damage to others. Such harm or damage could be caused by an automobile professional misconduct, injury suffered on one's property, and so on.

Personal risks, property risks, and liability risks are types of pure risk

Risk classification. by ability to influence the risk;

external – risks can’t be prevented, a person can’t manage it by himself, he can only try to cope with outcomes and decrease losses,

internal – risks can be managed, predicted, prevented or provoked on the contrary

By time of occurrence:

Analysis of retrospective risks(past), their nature and mitigation techniques, allows one to plan for current and perspective risks more precisely, allows to forecast threats and losses by risk outcome;

Pure (A category of risk in which loss is the only possible outcome; there is no beneficial result (no opportunity for gain , are generally insurable)),

Speculative(A category of risk that, when undertaken, results in an uncertain degree of gain or loss, are made as conscious choices and are not just a result of uncontrollable circumstances, = financial risk, In most instances, speculative risks are not insurable)

By size of losses:

catastrophic(insolvency), critical risk (losses are equal to amount of gain), admissible (allowed, tolerated)(losses are limited by amount of profit)

By risk factor;

political, economic risks.

Most common types of risks: Personal risks, Property risks, Liability risks

Other types of risks: Price risk; Innovation risk, Audit risk; Industry related risk; Production risk, Interest rate risk; Investment risk: = business risk (loss of value through competition, mismanagement, and financial insolvency), = valuation risk (The danger of investing in companies that appear overvalued) and = force of sale risk (Being forced to sell your investments); Currency risk(Transaction exposure refers to the extent to which the future cash transactions of the firm may be affected by any changes in the currency exchange rate. Economic exposure measures the impact of changes in exchange rate on the firm&'s cash flows and earnings.) Credit risk(default risk and counterparty risk); Financial risk( volatility of returns: worse-than-expected or better-than-expected); Enterpreneural risk; Commercial risks.

Insurance is a form of risk management primarily used to hedge against the risk of a contingent loss. Insurance is defined as the equitable transfer of the risk of a loss, from one entity to another, in exchange for a premium.

Insurance (business approach): the system of transfer of the risk of a loss from one entity to another, in exchange for a payment. ,an area of business where insurers provide insurance, reinsurance and mutual insurance; and where brokers and actuaries proved services related to insurance and reinsurance, contract whereby one party (called the insurer), in return for a consideration (called the premium), undertakes to pay the other party (called the insured), a sum of money or its equivalent in kind upon the happening of a specified event that is contrary to the interest of the insured

Life insurance replaces income that would be lost should the policyholder die. Health insurance helps meet medical expenses when the policyholder gets sick or helps replace income lost when illness makes it impossible for the policyholder to work. Automobile insurance helps cover property and personal damage caused by the policyholder's car. Home insurance covers the policyholder's place of residence and its associated financial risks, such as damage to personal property and injuries to others.

In the contract: Insured interest, insured risk, insured amount, contract expiration date; Definitions; Premiums; Coverage; Limitations/force major/ natural disaster / other acts made by insured/insurer/3rd party to benefit from the contract; Parties involved ;Responsibilities and obligations

The principal function of insurance company is to provide life, health, accident and other forms of insurance to individual institutional units or groups of units. The purpose of insurance is to help protect you and your family against financial hardship due to hazard, accident, death, and the like.

Risk management steps:

1) Identify the hazards: Source analysis: Risk sources may be internal or external to the system, Problem analysis: Risks are related to identified threats;

2) Evaluate the risks (risk assessment): Composite Risk Index = Impact of Risk event x Probability of Occurrence

3 Control the risks:

Physical: using various methods to prevent risks or reduce severity of loss, Financial: searching for financial sources in case of loss

4 Choose methods of risk management:

Avoidance (eliminate, withdraw from or not become involved);Reduction (optimize - mitigate);Sharing (transfer - outsource or insure); Retention (accept and budget)