INTRODUCTION TO INSURANCE.pdf

INTRODUCTION TO INSURANCE For You TABLE OF CONTENTS The Nature of Risk Forms of Risk Analysing Risk Insurance – A Risk Transfer Mechanism Insurable Risk Risk Management The Market Place Case Study Additional Notes : – Heinrich Triangle – Class...

INTRODUCTION TO INSURANCE For You TABLE OF CONTENTS The Nature of Risk Forms of Risk Analysing Risk Insurance – A Risk Transfer Mechanism Insurable Risk Risk Management The Market Place Case Study Additional Notes : – Heinrich Triangle – Classes of Insurance – Goverment Supervision THE NATURE OF RISK The Uncertainty Of Loss THE NATURE OF RISK Uncertainty Certainty 2 Types of Uncertainty Rejected Outcome Desired Outcome Example : Example : – Risk of losing job – Chance of winning – Risk of fire bet – Chance of raining Forms of Risk A. Pure Risk vs Speculative Risk − Pure Risk : Loss or Break Even − Speculative Risk : Loss, Break Even or Profit Forms of Risk B. Fundamental Risk vs Particular Risk − Fundamental Risk :  Impersonal, both in origin & consequence  Not normally caused by 1 individual  Impact wide range of people  Ex : war, inflation, changing customs, typhoon, waves − Particular Risk :  Individual events  Impact Locally  Ex : Theft of property, accidental damage to personal effects, explosion of a boiler, etc. Forms of Risk C. Physical Hazard vs Moral Hazard − Physical Hazard : Physical/Tangible aspects influence occurrence and/or severity of loss Ex : – Life Insurance : Old age – Health Insurance : Smoke − Moral Hazard : Attitudes and conduct of people Ex : – low salary  strike  – Sports car vs saloon family car Bad Ones Good Ones Analysing Risk 1. Frequency & Severity − High Frequency ~ Low Severity  Ex : Health insurance  sickness − Low Frequency ~ High Severity  Ex : − High Frequency ~ High Severity  Ex : Analysing Risk 2. Statistical Risk Analysis − Descriptive Statistic → Data collection, presentation & description − Inferential Statistic → Estimation / Forecast 3. Probability Theory : Scale from 0 to 1 4. Physchological Aspects :  Insurance A Risk Transfer Mechanism 1. Primary Function of Insurance − Risk Transfer : by paying small premium − Common Pool : premium collected from client's payments − Equitable Premiums : fair premium based on the risk degree  Insurance A Risk Transfer Mechanism 2. Subsidiary Functions − Stimulus to business enterprise  Security − Social Benefits : create jobs − Savings : life assurance 3. Associated Functions − Investment of Funds : Premium → Investment − Invisible Earnings :  Insurance premium from A country → Reinsurance in other countries INSURABLE RISKS 1.Financial Value 2.Homogeneous Exposures  3.Pure Risk only 4.Particular & Fundamental Risks 5.Fortuitous → sudden & unpredictable 6.Insurable Interest 7.Not Against Public Policy 8.Reasonable Premium  RISK MANAGEMENT “The __________, ________ and Economic _____ of risks which could threaten the assets or earning capabilities of an organisation” Insurance Risk Management  Insurable Risk  Insurable Risk  Uninsurable Risk RISK MANAGEMENT PROCESS John Glenn says : The greatest antidote to worry, whether you are getting ready for a space flight or facing a problem in life, is _________. (Obat terbaik terhadap kecemasan, baik menerbangkan pesawat atau menghadapi masalah hidup, adalah ____________) The more you try to envisage what might happen and what your best response and options are, the more you are able to allay your fears for the future. (Semakin kamu membayangkan apa yang akan terjadi dan apa tanggapan dan pilihan baik yang ada, semakin kamu mampu menghilangkan ketakutan akan masa depan.) An effective summary of the risk management process. Risk Identification  Identify risk(s) that may cause Financial Loss  Insured risk(s) & Uninsured risk(s)  Risk Identification techniques : − Organisational Charts − Flow Chart − Check List  − Others : Fault Trees, Hazard Analysis, HAZOP Risk Evaluation  Evaluate the impact of risk to the company  How :  Qualitative : past records  Quantitative : statistic  Risk Control Final step which Risk Manager use all informations he has to make best decisions for his company to control the risk Financial : Physical :  Retention : Self Insurance  Elimination  Transfer :  Minimisation :  Insurance  Pre Loss Minimisation  Futures  Options  Post Loss Minimisation  Contracts SELF INSURANCE Advantages : Disadvantages :  Cheaper  Lack of claim fund :  Get Interest  Catastrophe  Fix Premium  High frequencies  Direct Control  Low investment return  No disputes in claims  Lack of risk prevention skills  Profit to the insured  Low claim statistics  Temptation to borrow claim fund  No tax relief The Market Place General Structure :  Insurance  Buyers  Intermediaries / Middlemen :  Insurance broker  Agent  Insurance consultant Purpose of Risk Management Remove All Risks ? Reduce the probability and/or severity of risk incidents down to _________ level CASE STUDY 1 Salary : Rp. 3,000,000.- / month Savings : Rp. 50,000,000.- Living cost : Rp. 2,500,000.- / month Debt : Rp. 7,500,000.- How to anticipate : Death Temporarily Disability Permanent Disability Sick Fired FIGURE 1 CASE STUDY 2 Car Value : Rp. 100,000,000.- Savings : Rp. 25,000,000.- How to anticipate : Fire Lost Scratches Fines FIGURE 2 HEINRICH TRIANGLE Relationship between frequency and severity to industrial accidents 1 Every 1 major injury, there are 30 minor injuries and 300 non- injury accidents 30 Result of studying several thousand 300 incidents CLASSES OF INSURANCE Combined & Comprehensive Policies – Combined Insurance Policy Ex : Flexas + RSMD 41ACC Advantages : – Cheaper 1 administration fee – 1 Premium & 1 Renewal Date – Easier to Market – Comprehensive 1 step on from issuing Combined policy Package, ie : Simas Rumah, Simas Ruko GOVERMENT SUPERVISION To Protect the Public : Solvency margin Compulsory Insurance  Provision of funds  Eases the state's burden  Response to National Concern  Protection