Insurance Principles and Risk Management

The calculated cost of an insurance claim, excluding expenses and profits.

The total premium charged by an insurer, encompassing pure premium, expenses, and profits.

The danger that an insurer's liabilities may surpass its assets, potentially leading to financial collapse.

A strategy where insurance companies collect a large number of individual risk exposures, thereby reducing risk by increasing the predictability of average losses.

The mathematical principle showing that the average result of a large number of trials of a random event approximates the expected value.

The allocation of the commercial premium (e.g., 60% for loss costs and 40% for expenses/profit).

A model that explains why people buy insurance despite paying more than their perceived risk, based on how people value different outcomes.

A measure used in insurance to quantify the variability or uncertainty associated with predicting future claims.

Risk management is crucial for growth, survival, and maximizing profits.

Reducing risk leads to a better balance between risk taken and potential return.

Decisions should aim to minimize risks by employing certain criteria.

Risk reduction measures must offer a better return than the cost involved.

People prefer to keep what they have rather than take chances for more.

Spending on risk control and retention is growing than on insurance.

Specific criteria are used for evaluating options to reduce risks.

Risk reduction often produces positive results over time rather than immediately.

Evaluating risk is increasingly important for reporting and corporate governance.

Company policies and ethics play a role in risk management decisions.

How individuals view and react to risk, influenced by past experiences, position, wealth, and background.

How group attitudes and beliefs can influence an individual's willingness to take risks.

Inability of the private sector to provide necessary goods/services causing price hikes, requiring state intervention.

Goods/services provided by the state with zero costs that everyone can access.

Goods/services primarily provided by the private sector; people pay for these.

Goods/services that are beneficial but the private sector may not provide adequately, making state provision necessary.

When liabilities of an insurance company exceed its assets, often due to claims exceeding premiums.

Profits or returns made by insurance companies from investments to cover insurance deficits.

Whether or not an insurance company can continue to operate profitably.

Pooling risk involves collecting a large number of individual risk exposures to achieve better predictability of average losses across the group. This allows insurance companies to better estimate and manage their payouts.

Insurance companies leverage the Law of Large Numbers. This principle states that as the number of insured individuals increases, the actual results observed will converge closer to the expected average outcome. This reduces uncertainty for insurers.

Risk refers to the possibility of an undesirable outcome, while uncertainty implies a lack of knowledge about the future. Uncertainty creates risk; the higher the uncertainty, the greater the potential for risk.

When markets fail to provide essential goods, government intervention is often needed. This can involve direct provision of goods or regulating the market to ensure availability and affordability.

Utility theory suggests that people make decisions based on maximizing their overall satisfaction. Individuals may choose to buy insurance, even at a cost, as the peace of mind and certainty it offers outweighs the potential financial loss.

A graph showing how a person's perceived value of different outcomes changes depending on their financial situation, age, and other personal factors.

A strategy where you choose the option with the best worst-case scenario, focusing on minimizing potential losses.

Events or situations that have negative impacts and could lead to significant losses.

The most negative outcome that could occur in a particular situation.

A decision-making approach where you focus on minimizing potential losses, even if it means sacrificing potential gains.

A situation where an individual or entity considers purchasing insurance to protect against potential risks.

The average amount of loss you anticipate over a period of time, based on historical data and probabilities.

The negative value or dissatisfaction associated with a particular outcome.

The act of acquiring an insurance policy to protect against potential risks.

Choosing to bear the financial responsibility for potential losses yourself without buying insurance.