Introduction to Risk Management & Insurance

Personal Finance

Mr. Lamberti

Risk Management

A plan to recognize risks, identify the consequences of those risks, and the creation of a plan to handle the risks.

NOT just insurance! Challenge: Identifying the short-term and

the long-term consequences.

Risk Management

A plan to protect yourself, your family or your property against a financial loss, including a business.

Characteristics:

1. Dynamic - Plans change over time as you age, have children, retire, etc.

2. Insurance is just one piece of the plan

Types of Risk

Peril Anything that might cause a loss

Hazard Anything that increases the likelihood of a loss

Negligence The failure to take reasonable, ordinary measures to prevent a loss

Risk Management Strategies

1. Avoidance – Simply don’t participate in an activity to avoid the peril.

2. Risk Reduction – Taking precautions to reduce the likelihood of harm.

3. Risk Assumption – Taking responsibility for the negative results of a risk or decision.

4. Risk Shifting – Transferring or sharing the loss with an insurance company.

Insurance

Protection against a financial loss. You can’t predict the future, so you must

prepare for a worst case scenario. Insurance will not help for a long term

physical or emotional loss.

Automobile

Fire / Natural Disaster

Death

Terminology

1. Insurer A business that agrees to pay for a loss

2. Policy A contract to share the risk of a loss

3. Policyholder Purchaser of the policy

4. Premium Fee paid by policyholder to insurer

5. Insured All parties covered by a policy

6. Coverage The terms and specifics of the protection provided

7. Deductible See next slide!

Deductible

A set amount you must pay per loss as a combination of risk shifting and risk assumption.

Example – You have a $500 deductible on your car. You get in an accident an do $2,000 damage. You pay $500, the insurer pays $1,500.