Risk Management ECONOMICS AND PERSONAL FINANCE CREDITS: JILLYNE KEENE, SHANNON GUNN
Risk management - Credit to Jillyne Keene, thank you!
Jul 17, 2015
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Risk ManagementECONOMICS AND PERSONAL FINANCE
CREDITS: JILLYNE KEENE, SHANNON GUNN
What is risk?
Risk is the chance of loss.
Q. What risk is this man facing?
A. The risk of dismemberment or death from falling off of the tightrope.
Is risk part of everyday life?
Yes!
Ex. You have a 1 in 150 trillion risk of being struck by a comet, asteroid, or meteor.
What is another example of an everyday risk?
How do you deal with risk?
You use one of the following risk management methods:
▪ Risk avoidance
▪ Risk reduction
▪ Risk assumption
▪ Risk shifting
What is risk avoidance?
Risk avoidance is not engaging in activities that are likely to cause loss.
Ex. Not texting while driving
What is another example of risk avoidance?
What is risk reduction?
Risk reduction is engaging in activities that are likely to prevent loss.
Ex. Eating a balanced diet and exercising
What is another example of risk reduction?
What is risk assumption?
Risk assumption is accepting full responsibility for a potential loss.
Ex. Establishing a monetary fund to cover the cost of a specific loss (self-insurance)
What is another example of risk assumption?
What is risk assumption?
Risk assumption is accepting full responsibility for a potential loss.
Ex. Establishing a monetary fund to cover the cost of a specific loss (self-insurance)
What is another example of risk assumption?
What is risk shifting? Also known as Risk Transfer
Risk shifting is transferring the risk to an insurance company.
Ex. Purchasing life insurance
What is another example of risk shifting?
What is risk shifting? Also known as Risk Transfer
Risk shifting is transferring the risk to an insurance company.
Ex. Purchasing life insurance
What is another example of risk shifting?
What is insurance?
Insurance is protection from potential financial loss.
Ex. You purchase zombie insurance if you want to be protected from the possible financial loss of being turned in a zombie.
What is another example of insurance?
What is insurance?
Insurance is protection from potential financial loss.
Ex. You purchase zombie insurance if you want to be protected from the possible financial loss of being turned in a zombie.
What is another example of insurance?
Insurance Policy
▪The insurance policy is the name of the product you buy to transfer risk to an insurance company
How do I get insurance?
You purchase an insurance policy from an insurance company.
You will talk to an insurance broker., someone who sells insurance.
Ex. You can a purchase life insurance policy from the New York Life Insurance Company.
What is another company that sells insurance?
How much does insurance cost? Based on Risk Factors
The price of your policy will vary based on your risk factors.
Ex. Professional athletes pay more for disability insurance than fans do because they have higher risks of sustaining disabling injuries from playing sports than fans do from watching them.
What is another example of how risk factors will affect the price of your policy?
How does insurance work?
Insurance is based on the following principles:
▪ Pooled Risks
▪ Law of Large Numbers
What is the principle of pooled risks?
By pooling resources, individuals can spread the risk of financial loss from destructive events.
Ex. 100,000 individuals purchase health insurance from Geico. Each policy costs $1,000 a month. Thus, Geico has $10,000,000 each month in its insurance fund to pay for the medical expenses covered under this policy for these policy holders.
What is the law of large numbers?
The more data you collect and analyze, the more accurately you can predict the theoretical probability of various destructive events.
Ex. Each cigarette you smoke reduces your life expectancy by 12 minutes.
Premium
▪Premium = the amount of money you pay per month
▪$/MONTH
Coverage
▪ Coverage = the amount of money the insurance company will pay if you need its services (ex. Wreck your car, go to hospital)
Deductible
▪ Deductible = the amount of money you pay when you have a loss, such as when you get in a car accident. You may incur $2,000 worth of damage, but you only have to pay your deductible, which may be $500.
▪$ COST TO YOU
Claim
▪ Claim = the formal request for payment sent to the insurance company to cover the loss
▪$ TOTAL COST
Risk Management
▪ Seinfield Risk Management -https://www.youtube.com/watch?v=laKprX-HP94
▪ PWCS Risk Management department: (career connection)
▪ http://pwcs.riskmanagement.schoolfusion.us/modules/cms/pages.phtml?sessionid=698b2dcd62443852cd0a0c50aa8f0bc2&t=e48ab60ba67556b5058ecf82da47ef0d&pageid=280243
▪ Actuary job – (career connection) -https://www.youtube.com/watch?v=m6UchgBmM_g
▪ Challenger – a case study in risk management – (sad) (8 min) https://www.youtube.com/watch?v=mG8BPB_oPlg
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