r ,.,.. ~~~ ~~"".

"- ,
'.
...
,\
\ -
;i:
;-
"
.I'
!
." ,J "..'-
;' CHAPTER -2
, .
f;
:"
" .];c DEFINING THE INSURANCE EVENT.
:,:
~i IDEALLY INSURABLE LOSS ~~O~ESV;-~)
f,
;f~ The fol.lowing exposures are ideal for insurance
,if;' covera
ge' ( r::./ ,n~ ~~\)ioQ..v) .
, , r .
:[ , .A large group of similar items exposed to the same
* '
~ j peril(s).( \~ tfb WO~) .
,..
'.
'f: 8 Accidental losses.
" ; \
11 .Definite losses capable of causing economic
]~ -hardship.
1"
1~; 8 Extremely 10~_.QrQ.b.a!bility of a catastrophic loss to
~;" the insurance pool.l~\"\D--\Y"'-"', ~~L\.-)-~'~-
11,
'};-
,,' .
~i Large numbers; l\~ ~ ~~1'e. tY'- ~ e..-~j)
1, It means that number of exposures large enough to
r .
,~' allow for predictive accuracy. The size of the insUrance
,
-~ pool is large enough to estimate results with sufficient -
i! ac~~~~to_lcula~e.a ~ound insur~n~e pr~mium.lf::,~i~x 't..~ 'y\\" ~~)
'I' : The exposure units need to be similar so that the
~: ! insurer can calculate a fair premium. The fire damage
done to brick homes will ordinarily be less than that
suffered by wooden homes. It would be therefore not
fair to combine them in the same insurance pool and
charge each insured the same premium rate based on
the combined losses <;>fthe pool.
Losses must be accidental and beyond the insured's
control
Non accidental or exp~ted reductions of economic
value, such as w~\gnt:c!lear7 are not insurable events. ,.
-L- nil. ...".+ I
'A ' L l~. f ~ ) ~ W"::>~...f:- ~ \) rt">-")..(A
S2J
it Ii ,
'.. .
I cfm'- " , L_.-
r' -
"
..
~~ J .
~'[ t, ~ mJ-- ittA/1.Je.,t- ~ "\ ',~
I '~~ &Il, c.,-ne~ -t:.Jct f-rroe:- i~l!.C'; II~ (;;.:J -r
i IIi I)ractice, intentiol1c:l!: losses are 3- fraud and are
f ---
, against public policy. Thus if discovered, an insurance f
company vvillnot pay for an insured's intentionally
caused loses. rVioreover, m~ntionallosses may cause.
c c,'imina! charges such as ~ or .theft to b.e brought
~ against the person responsible for such crimes.
., ;
: Accidental lasses; .
~ r f- N~~-fraudule~t losses arising from an insured's
-;? negligence are insurable. This is the case when, for
;1 example, an insured's had driving causes an accident. A
good example of the application of the principle of
accidental losses occurs with life insurance, for which
suicide within a year or two of a policy being purchased .:
is considered non accidental. Insurers do not pay such I
losses. If a suicide occurs beyond that period, the lo~s i
is considered accidental, the result of mental illness. I
..eu..(\D "",,'v \/r/'lu I
Losses must be d_eflnJte, measurable, and of sufflc~nt r
.~everitv to cause economic hardship V
11
Insurable events must be definite and verifiable.
Otherwise there would be many disagreements between .~
insurer and insured to determine whether a loss has
I occurred. Thus individual can be insured against the l
loss of house as the result of a fir but cannot be insured I
I
against its loss as the result of a fire but cannot be !,
insured against its loss as the result of its being !
haunted. :,
The damage caused by insurable events must be I:
measurable in economic terms. The loss of loved pet r
can cause a family much grief, but such discomfort i
cannot be measured economically. Thus losses of pets i
are excluded from standard home owners' insurance I
!
contract. As a rule, insurance should be purchased only ;
when losses are large and uncertainLTh~~~rge
l~y~c}J!J e) I :
i
!
51
I
~-:!
I
i;
::~ ' -
rr!' J i " ..~
,c! ' ,'I ,.:to:,
, 1 ',' .
: .~ !
; wi'.
i ,"! available on aJdvanced funding. Captive insurance
"I -/ conlpanies appeal to,some organizatrons because the
i .i organizations see one or mo~e of the following potential
I I .I
I .I advanta ges'~
I '(~i.
..Improved Loss Preventio~ Incentives. Th~~ ~
r I offers a chance to reap ?Irectly t~e beneflt~ of
f successful loss control.
~ ~
t .Improved Claims settlements. This advantage-
c includes the ability to cover claims or exclude
claims with more flex.ibility than a commercial
.' .
Insurer.
.Improved profitaoility. This includes the
investment potential from investing cash flow or
avoiding premium taxes.
.Economies of scale. A captive insurance
~ " .--" ' ..
operatIon also allows Gomp~nles wIth many
subsidiaries to combine the insura'nce needs of
these subsidiaries under one insurance
-' ' ,~
program. "In areas such as the automobile""~
i .liability expo.sure,. a self insur~nce fa,cility
combined with retnsurance might allow
I considerable saving compared to the cost of
I each subsidiary com'pany purchasing its own
coverage, ~""'\IW,-,'
I .V..' ~ I-, ,II} I_J~ p~ W I'~~,ll~~ ~-"l~t.~)
rJv" ~t",- ,.1.11""'" ~,., /. C-h WY\ I. r ~ J ...'
DeductIble/RetentIon; Some companies have
taken the middle:':6f-the-road posrtion between
, c%mmercial" insurance and forming a captrve iRsurer.
! ~ do this by c,areful use of the deductible provision
in their insurance policies. The dedu"ctible provision,~
or the self-insured retention, determines the amount
that the insurer must pay.
~ISK I rarl~rt::r
,
;
! 70
,
i
" i
\
\
1
l -"-..0,' -," oil --!-"~:::';;=...=_. -.
,I j~
~
.' .,
.I
, '.' \ ..,
".~
Insurance is the best risk transfer mechanism. It .'.
-,
means the original pali% exposed to a 10'5s is able to .; ~
obtain a substitute paliy to bear. the risk, Risk transfer : ~~
, i~ a fea~ure of all iris~rance transaGtion~ because the : r J-
\ uncertainty of who wIll pay for the loss IS transferred.' \. '11
,
/ f~om the individtJal to the insurance pool. ., :' 1 ' -
~,D- ~~~O~,J .,()O ) 'I nn J.
J~ ~'(\"'- ", ~ ~~Mi~ \~,c..-t:..xxP-.~ ,-
/ Insurance-Ltif).v,-~~ 'I'r'\..{c.~"~~""',~':) "'f~ IJ. l~~ -
;/ From the risk manager's viewpoint, insurance ; f
/' C
represents a contractual transfer of risk. From,., ; ,.q
society~s viewpoint, insurance is more than mere~risk 1
transfer; it is risk reduction be-cause the po.olingof
numerous risks allows better loss predictability.
"" After deciding to insure a paliicular loss ;
exposure, he risk manager sti,ll faces many decisi,ons.
These include choosing an insura.nce company'., .
choos\ng an \nsurance agent or broker, and choosing
an \nsurance po\\cy. ,Atter the \nsur~nce coverage has
been arranged, the'r\skmanager's work sti\\ is not
complete. He must make sur~ the company does not
violate any {he terms of insurance ag~eement. If the
contract is conditidnal on the' company's employing a
: security guard or maintaining a ,fire sprinkler system,
the risk manager must be sure that these conditions
are met so that the contract is not breached.
~'.o J) --r- \ 1 ~ yv-O ~""'- ~
D 1\ .~,~~,i'61.,... *********** '
,H -"):.~:t.- ~\~ "',,;"
l--\J\~'C.& v.t'(\r~" r
" ' 1\ n"_. In{~~ I
'"1 -\ ",","\""f'~vJ\1:.vJ ~ ~r I L- '- ~'f -N '."d"."
, ...{~c~ rib
1-'<>1:~~ ~ ,
.f7'f) tI.~ \,C-'-t,~,nVI'~~ .,~L\ ,~, .l \\ -'\ (\ 1:
,) ~-\..~v... r' ~v~~~~~ ~ 'Jctc \ D"-.L~ I ,~- WV,.A-t..""\ '-~ VJ~~V<,
..-? 1. VI CAl":> db ~ \-\-]P~,""" .1
, " -0 ;nJ.,~ ~<\~l.: MIV\;~js~~/1I1"\Ivl\~~~ II I
~'f'Y1V\\~ C- ~~-_::=:-~J)"::'~ ':--:---11.(- ".,'
( ~:~~~~~~~~~~~j '\IY\c. ~ -
o/e .~ ~ '
I )Cc>-\t~ \'" V~~ct e.N"~~ -fo'{ ~~ '('WJ\'\;~~~.cJ
71
'", ~~~ 1 {~.~ 1a~ ~plt)(Jl ~ ;t1-~ 1iiJ II"-~ ~ ~ J'~!
~ .A- 0 '(\ I I -A.Af'Il~ cJi: \~A~
II
/ ," ~v...~ I
\ ;~~~::=!=;":..,.,,c
~ .111
-!i: ..:
".
Co
.,
, {
'\ ;
:-1
\1
-;~
I,;;
! Catastronh1'c lass'es I
~ ~'-" '-'~, ~IJ' "~ ,~~~~'-'
~ Loss exposures vvith catastrophic potential are not.
I c~, insurable events. Catastrophic loss exposure is ar
potential loss that is unpredictable -and capable of i
producing an extraordinarily large amount of damage
::; relative to the assets held in the insurance pool.
c~:, Catastrophic losses are the subject of the state, Insurer
cr~ normally do not provide insurance for catastrop.~ic
}"
~: losses due to the following reasons;
c~ -
!1,; .The loss potential is catastrophic.
.The loss potential is geographically restricted I
\
mostly to flood plains and river valleys.
.The government at the federal level has be
ability to pass zoning ordinances restricting
use of flood prone areas.
.Those people most exposed or most likely to
have claims would be most likely to purchase
this coverage.
When only the people most exposed to a particular loss
want coveraqe, this loss is not an insurable event
An insurance system operates successfully when
many people or business firms faced with similar
exposures transfer their potential losses to a pool,
paying a relatively small premium for the right to collect
losses payments from the pool. Using the law of large
numbers, the pool is able to predict losses accurately
and charge a premium appropriate to the risk. The
syst~~ succeeds if th~ premium is small relative to the
potential loss. Because they are risk averse, most
people are willing to pay a relatively small certain price
to avoid a relatively large, uncertain loss. People have a;
price, however, beyond which they Vlfill not pay toI
transfer a risk.
J
co-
~, iC
,i\! ; '),
~' --
'ii"
,r14
;.1
!,I;1
:,j!,
~r~
_.,"_,I;/'- ,--- ~
'-"~
r-~_'~~""'~ ""'-"""" ~ ~ -, --
~~ -,-~'~ !
, ~
; ..
1. ' I
;;
1 ;r
~ {'), -\oar
'.'~ t ~ ~ ' .J \. ..\. ,-'t- ' ~ ~ a,.-- ~ -{;.,~
,(" TERROR[S~/[ II'.JSURAf\!CE \M'~'~ ,~,,-t~ (~V \\..;) V\~
,--,~.'_. OQ~ Y1~~~.) .
September 11, 2001 terrorist. attacks on the World.
Trade Centre in New York and the [:'entagon, in
Washington produced the most insured damage in \\
history, with current estimates of the insurance claims
ranging from $40 to $60 billion.
INSURED LOSS ESTIMATES FROM THE SEPTEMBER
f~TRE ~NQ e~!'JT1~ ,-,wc"'~~eo~~ 1~ C.-'6M~~~ i... ,) ~~
(\)~~.e.,~'s~-?I.\o~;l-}\>co.I)'.)-S'"""--~' ~,~ _","1 ~~ (). \~\).\~
'1.~~~ ~;
.Aviation liability claims arose from deaths, Injuries
and property damage suffered because of cla'ime;d
negligence of airlines, airports, security services
and others in not providing adequate security -$4-
$10 billions.
.Aviation b.YlL!claims arose from the loss to the
aircraft involved in the attacks -$500 million.
.Life insuranc;e claims arose from about 3,000
people killed'in the attacks. Insurers paid claims for
both group and Individually purchased policies -$3
billions.
8 Property insurance claims arose from the
destruction of the World Trade Centre towers, other
buildings, and other property including !
automobiles -$9-$12 billion.
.Business interruption claims arose from the lost
profits and extra and continuing expenses of
businesses that were forced to close, relocate, or
were unable to operate in a normal manner after the
attacks %10-$12 billion.
I
,
--.!
).1 I
1'"
~}~
I c"
'"
_:~j~, "
( , '"
\'
'I ;
;~
1" .
;~ (~~-l(C;al-lce!!:~i CIa_rillS ,arose,f['om businesses in
-['Jevv York City and elsewhere that did not proceed
with sch'eduled events because of the attacks -$1
-billion. ~
The September 11 attacks also produced billions of
dollars in uninsured losses, including the cleanup costs
---
in New York, the damage to the Pentagon, and the
uninsured business interruption losses suffered by the
tourism industry throughout the world. Moreover, he .
cost of increased security to prevent or mitigate'the cost
of future attacks and the cost reflected in the economy
in general and the stock market in particular are real and'
must be added into the final estimate to the total
damage caused by this only one terrorists attack. /i1
Lt.)~ ~
DEFINING TERRORISM
Terrorism means activities against persons,
organizations or property of any nature that involve the
following or preparation of the following;
.Use of threat of force or violence; or
CP1".J-",Ji:.. h f d .ommlsslon or t reato a angerous act; or
~
.Commission or threat of an act that interferes with
or disrupts an electronic, communication,
information or mechanical system. l.\~Pt C.(rV.1~)
GAMBLING LOSSES ARE NOT INSURABLE EVENTS
~
GEjJ1blitlg and in~urance are 1?.PQj~. Gambling
creates risk (uncertainty) where none previously
existed. Insurance reduces risk through pooling and the
operation of the law of large numbers. Insurance against
gambling losses is not economically possible.
Insurance against gambling losses is not economically
possible. If gambling events were insurable, the gambler
would be put in the enviable position of being unable to
,
54
;}":J.,
f~:
!iI"
;" "
2,
!i~
~i~
";,~.c
--"-'~~_c- ---
~ .
"
i~ ' .
" /'
;;' '
;:~ [ose. t_avv prohibits us:{ng inSllt.~arlce contracts for
r; garnbling by insuring property one does not OVVI1, or
t; insuring lives in which one has no legal interest.
"\:' .
BJ~ CLASSIFICATION A,~D 1~.S.~B~~E I\~~ '
if ;1'11wu-o1l~ a.,'vi'vj M pie..miuw. ~ ~I'bl.. Iftro.-. ,'L I'~ ~~ !6~'~~ 9Il..-~ -
SUBSIDIZA TION ~~~
Each insured's mathematically}ff share of losses
and expenses is based on the expected probability of
loss for the risk class in which the exposure is 'placed.
Subsidization occurs if each insured dos not pay the
mathematically fair price for insurance. If the insured is
paying more than the mathematically fair price, the
insured provides the subsidy If the insured is paying i
less than the mathematically fair price, the insured !
receives a subsidy.
It means every insured in a pool must contribute a
premium matching with the risk he, is carrying at the
time of taking the insurance cover.
~VERSE SELECT/Dlll rsj LfY'cdtj ft4 ~ ~-""""' I'~ ~ .!"'Ut:Ac ~ ,'\"1 ~
Adverse selection me-ans accepting a risk by the ~ ~\
insurer which is above average risk, at a normal rate of
premium. For example, adverse selection occurs when
people who know their health is deteriorating try to
purchase health insurance to cover the cost of a needed
operation. Adverse selection raises serious ethical and I
moral questions, but it is an ever-present fact in the
insurance market.
Applicants for insurance with a greater than average
chance of loss would certainly apply for insurance. If
these above average risk applicants succeed in
purchasing insurance at average rates, the insurer is a
victim of adverse selection. J
/',0/' ,~(" 55
~,..
{';c;
~~ ;
~
( c-",.".
~ :.':
..r
.0
'\ :;
";
"
;~
')
Ii
~: PRINCIPLES OF RISK CLASSfFICA TIOr\!
In GeneRal. Ra.1'e Cla.5SIP1C8.1IOn ra,CliORS ,an Be evaluated on the
following four points; .
.(SA-t ' .
Se aratJon and class homo e eit ..
':J If the insurer has constructed its risk classes
"'
7 carefully, each class will have a significantly different
"JI; expected loss (separation). Moreover, each member of a
!; given class will have approximately the same chance of
1 loss (class homogeneity). This rule prevents combining
;} males ages 20 and 40 in the same life insurance pool
;{;; and causes a mathematically fair insurance exchange.
, !
.J :
i '
::; ; Reliabilitv:
': : If insurers decide to use a particular factor for
, ;
;'. classifying insureds, information about the factor
.)1 ,should be easily obtained and not subject to
'; ,Jilmanipulation by the insured. The variables of age and
i sex would meet this standard, but asking an applicant
...,;;1 how many miles are driven each year or whether drugs
,
[" or alcohol are used would not do as well because
"~ insureds can provide false information.
Incentive value,. I
Factors used for risk classification should reward
good insureds (those with below average loss potential)
with better insurance rates.
Social afceptabilitv;
There should be no discrimination on the part of
insu:er in ~cce~n~the risk such as individual's genes,
credit scoring r~ce'i!: etc.
I
[ .
:i
,
~ BRANCHES OF INSURANCE I
;:
!
:
:1.&'1. 56
;;
I';f ~". ;~ ..
~t'-
_,;ri
" ,-,..,~,-=~._o=".,'~, -'~~~."""""="""""""""""~L-""""':""" , "",...,
" .1
t i
"1 ..~ t
"
iI. ' I'
';~' QQ.Y.sB~.ME.Jil : ~-~J i
., Social security .
.Unemployment
Life l'-Jon life
Life Fire
Annuity Marine
Medical Exp. Bondiilg
~~saJjJY.
Automobile
Liability
Crime
Workers-
Compo
Fire insurance; cJ..#
It generally covers sta1\onary property also called ' .
r~&.e.s1ate. However, land .is not covered. Another I
j simple way of putting it is ~hat ~ire insurance generally
\; .covers buildings and their ~:@reiliS~/tin addition to the
j peril of fire, more broadly based property insurance
~: policies provide payment for damage caused by such
.:~ perils as windstorm, riot, and vangj;!}jm. Another type
)';.! of coverage associated with property insurance is I
f business income (interruption) coverage, which
"
Ii: provides payment for indirect losses associated with
'J ~~ damage done by fires and other covered perils.
~! .
'I '
Jr. Marine insurance
'I
.t~. It generally covers mobile property. Ocean marine
:,
;~l insurance covers ships and their cargoes. Inland
'~; f marine insurance covers property moving on planes,
it i j
;~t ( :1 ""11!..l1}J ~ hi' .p " ~ (/1/'01 Y\/'
~.M~~~~-'
j;c ." / ., .,{VI () :
f~~~~ L ,." \/ C1" !
;,~~ ~ -f" -Yq""
I ~/"J~
"'
I ~ L.-OI.u"" -../U () Y
, (3 -{=:1\e.A~ vJ- ~tJ(,1\ -~(~ 1 S~II ..4IJ ?~J'~,k :
',,:, ) _1 Od"'-'1 J -
':"f , V\U u..)' tl- r"
';;;;~'i: ~- " '
,
I
( .c~
, t"'"'
, .';~;1~;~;;,-;
l.ra[l1s~ ar-ld iruc['cs. T[~11s$-categor)r is often called
.transpoliatron insurance.
Oe..-!lf.
~as~alt)' l~nYr?m:;.e .
It describes several different fiel..ds of insurance
-including autom~bile insurance, liability insurance,
crime insurance, workers' compensation, and accident
and health insurance
i:
~ Bonding .
1
; It is a special type of protection in which one party
(the surety) guarantees the performance (surety bond)
or the honesty (fidelity bond) of a second party to a
third party. If the second party's poor performance or
dishonesty result~in a loss to .the third pa,rty, the .~-t{l
surety must pay. ;~ rl:Ji,"~ 1'1J'1)~ IOJIolf~-t ~r.:eIf)~""~""'L (JY"'r-~
Life insurance
It describes insurance based on human life ~~..,..,., I~II'V\.PI~
contingencies. If the covered peril is death, the J..- Wh~L lik
contract is c~IJJ;R I~!e in~ur~~~~~. If the peril.is survival, 1~~1t (.,l.;o
I the contract IS cal'ecr~ ~rilfiMY. The annuity 3- ~'VV\1 f;jj 1I~
i guarantees that the insured will not have to survive ~ '1 W't if I
without money. If the covered peril is sickness, the
coverage is called medical expense insurance. If the
covered peril is disability, the coverage is called
disability income insurance. I
Credit insurance I
Credit insurance is an example of insurance I
coverage for a speculative risk. In a credit insurance :
arrangement, the insurance company provides
payment to its insured (the lender) if the insured's
credit losses exceed a specified amount. In other
words, the insurer pays the lender if the lender losses
money because its debtors fail to repay their debts. I
S8
_.~r~;
~-C--""".~"'"..."-~""'-""'"'C':","".""""""',,"':="'1"""~,"".~'!""'='.~"""':1:Z!"C"':'(.;;~~l:.'.:t~,,!,[";;~;".:..,
)f'r ., .(
I
~~JLITY if\\~URAt~
l.~I~ ~~ ~ p.".,.".
Legal liability insurance .
It provides protection against the financial impact
of lavi/suits. ;~~~'f1"L~if.e.- ~~ ~~8(
America, Europe especially UK is a li!lgiQ!:! ,~~,
society. When we have disagreements that are not
quick~y resolved t? our s~tisfaction'\Jwe s~p',:.~~~
our friends, enemies, social clubs) Q~~Qy~!Irnr~t
physicians, insurers, church'es, government, teachers,
school boards, butchers, bakers) candlestick makers,
and our parents. Using the courts to resolve our
differences is better than the alternative. But it is !
,
costly. Direct costs include attorney fees and court. i
costs. Indirect costs include higher costs of goods and I
services) elimination of products and services(like I
vaccines and closed beaches), and a hostile I
environment where fear of I~w suits inhibits business
and personal activity.
"-
Legal background: The peril of legal liability arises out
of the general rule of (English common) law that people
are responsible for any loss (injury) they cause another
to suffer. The law creates here categories for
describing situations in which one person injures
another;
.Breaches of contracts (c,'v: t) ;
I
.Criminal acts
.Torts or civil wrongs.
Breaches of contract involve a failure, without a legal
excuse, to perform contractual duties.
Criminal acts are those acts which in general are
; wrongs against society.
i
,
i
\
"
t 59
i' I
, I
;.
,
.~I ,-_. ~"."' """"";::,,.,-"',",':'
0,,\
( "f~
.~
.f
.'.:.
",,\
,c"
'"
,;r, .\~ ., Torts. or" ci'vil v,trol-tgs: involve Ut-lrea::sonable conduct
'Ii ' ' iirc '
.,~ to\f\!ard another person. Touching another person
t without permission may be both a civil and criminal
wrong. R~~.e..s.s._d.ri~ng is another act that could be .
both a civil and a criminal wrong.
NEGLIGENCE ;-- --
Negligence involves doing something a .
reasonable person would not do, or not doing. '
something a responsible person would do, which
results directly in some injury to another person. A
reasonable person is one who have normal
possession of all faculties and senses; ~ho thinks,
speaks and acts based on reason)and who is honest
and moderate in all activities. Violating the reasonable
person standard can result in a court imposing legal
liability for a person's direct acts or omissions of A C-D.l\.R..
actions. U) T",,- ~~~~~ &"-.-{..~ 0\ ~ v~
i f ' u') ~c. ~~~~~~~e~~~~ .I-~~if~~~
Ii\\) ~ ~ ~ \3(~ ~ 1lJ.b h~ I ~}~ sIl.- ~f\ -U -p ."
Vicarious liability; Courts can also impose liability for ~~ ~~
th~~~gli9~~t-~~ts of another parties; Vicarious liability ?~ ~Y"\ c~
means a person is liable bec~use of an~ther person's ~Jj~4
acts. For example. ElllE\Qyer ~~J3,.,sponslble for the ~ v
acts of his employee; ~~~!~.1~~~!Qn.lQI~ for the
acts of his servants.
Joint and several liabilities; If a party is one among
~~~~I":~~p~~'S"ible for a-loss, even it its contribution
was the slightest of all, it is fully responsible for
making restitution to the injured party if the other
defendants are financially unable to do so.
~~g~ence.~~~~~~; Wh~n a caseL goes to co~rt, ?ften
the purpose IS to determine the~ats. After revIewIng
the evidence, judges or juries determine the facts.
60
!%, .
..;
I"
~ ~-"-
~~J/~tlt ' "
;, Gi) v ~ ~ (:4~~~~:;l) "r .
i 6
;-
, ::i
, Ollce a judge C) I jur}! d'etermines the facts~ the judge ~ b /\
applies the apprQpriate legal retl1ed~uU-~'t<-- dl ~ r l~ ~
I ! ~-- ~ ': :O~~
\ " M4 '"""'I ~ -~
VOl ~ .r I. I
Pfalntlff/Defendant; There are two parties to a .
.'negligence lawsuit. The plaintiff~ is ~he party, claiming
, injury. The defendant is the party from whom recovery
,f( c) is sought. In addition to human beings, business ~
(,t firms, government units, and other organizations may t/\.f'tl.t?: C'(
be plaintiffs or defendants in lawsuits.
..
Establishing negligence ana' damages; To establish a
case of negligence, the law requires the plaintiff to
prove all of the following; \
.The defendant had a legal duty to protect the
plaintiff. i
.The'defendant failed to perform that duty. :
.The plaintiff suffered an injury as a result of the
defendant's failure to perform that duty.
Judgment; if each of the three elements of a negligent
act is established to the satisfaction of the judge and
jury, the plaintiff i~' entitled to a favorable judgment, I
usually a specific sum of money. A judgment is the i
,
official decision of the court as to the rights of the --0/1 I'
parties to a sUit.l~'~~~ ~) ~Its f6~) ",It (,. ~~ ~~ ~ ~ IJ.o\IU' ~'-{... f
COMPENSATORY DAMAGES Ii
~ -I,
f
I
Punitive damages; these are awards made to plaintiffs :.
not as compensation for injuries suffered but as a
means of punishing defendants for outrageously
offensive acts.
L...W /rb~" r-'-
R~J1!.:?E.-1oq.uitur; It means things speak itself. In loo.me-
cases, the plaintiff's injury is the obvious result of the I
61
i
;;
",,""-
, ." .., ""', ."';' "! ""':""7~:
~ -
~.: .~. r'?7" ~ e.- (r"f"'" ~ C J/r~a~ j~t1: q J-1
,
..!~
~
!~ .
defends.ot's activlty. [[1 such cases, the court ma)'
.apply the doctrinej vvhitZh is a legal doct,'ine of
evidence allowing the jury to infer negligence on the
pari of the defendant. -
DEFENSES IN A NEGLIGENCE SUIT
Contributory negligence; At common law if I can be
shown the plaintiff's own negligence contributed to or
led to the injury sustained, the court will not allow
recovery of damages from the defendant under the
contributory negligence rule..'.;~ llU,d!IVtt'J ~ ~~ ~~~
Comparative negligence; The comparative negligence
doctrine allows plaintiffs some recovery despite
contributing to their own injuries. Damages are
reduced to the extent plaintiff contributed to the injury
or damage to the property,..Normally 25% damages are
reduced at the maximum.
Assumption of the risk; It means the plaintiff
knowingly assumed the ris~ of injury. If the defendant
establishes assumption of the risk, the plaintiff will not
be awarded a judgment. For example, if the plaintiff
challenged the defendant to a wrestling match, the
plaintiff may not collect damages when his arm is
broken during the contest.( '(~jb'" ~~~I'!:o -e-t.-.4~ w.~
***************
Cva-t' (jv,:) 1'~t[,l2.~ ~~ 6~\J -e.. ~--e.~)Oti ~4
't\;,L ~~bc-tltl..b~
I
62
::"
.t'i
i~
T~ -, ~ '~'c,--~-'."," -".,..,..-,~..,-,,~
3 ' , .
~ '>,'.
I ..
~~ ,,~..'
,y, p
, .I'
..'I. .I
.
"
J "
!i
i
';
;!
:'
;',
:'
CHAPTER-3
RISK MANAGEMENT
..
THE NATURE OF RISK
The conceQtof rlk; ..
Risk is present everywhere. We frequently hear news
on television or radio such as; some major fire,' -
explosions, earthquakes, collision on roads or a
workman falling to his death from a building. ;
There may be certain news appearif'"!g in the
newspapers e.g'.' fires, robberies, airplanes crashes, etc; )
All of us might be involved with one of these events
.i such as car accident, our house may be robbed ,or
i damaged by fire or Wtmay suffer some disease preventing
[ I
; ,
;
.56
:
,
,
,
;
,
~!
( '
r!!
: : j.
; I' t l' .~' ..
! ~ .'I- 'l' .
"I '~ US going for work, Businesses can also be involved in risk' ':.' ,'." '~ : e.g," factory may be destroyed by fire, stock could be ' ' -
, stolen, computer record damaged or injury caused to the .
.: employees or third party on the premises,
Behind every risk anxiety and grief exist for those who .
are closely involved but very few know that ther'e is a .
i' '.' sophisticated mechanism lies behind oeach ri,sk and if thatl
.\ is used, properly may result into. alle~iat~ the,financialI
hardshIp caused. That mechanIsm IS called Insurance.,
-
t Risk is at the very centre of insurance.
I
; .
I Qg!lnition of.1l.J5. .
.Risk is the chance of loss,
.Risk is the possibility of unfortunate ocqurrence; 1
.Risk is a combination of hazards, ~~ ~~; ~ '( i~~
.Risk is the ~ncertainty as to the occurrence of
economic loss, '
.Ris'k is unp!edictability, the tendency that actual result
may differ 'from predicted results,
.Risk is the objective doubt concerning the outcome in
a given situation. ' .
The best suited definition so far as insurance topic is
concerned is luncertainty of losses'. This definition
avoids situations where,no likelihood of loss exists .C:tnd I
also those situations which will definitely happen. ~~ ~d, in ~
~.!!f~..d~ill!Y.~DS:!~g~ill.~~ We. are living in he world of uncertainty in most of our
actions throughout life, such as;
"
.We do not know if we will. pass an examination,
.If we will succeed in the job interview given or able to
get promotion,
I Similarl there is a lot of uncertaint in business e. .
57
!
t ' .';10';";
", '
.'
..
.' "
.If we Invest in new machinery will the output be up to J'
expectation?" ,.
e If we launch a new product wiU it se"ll as expected?
.If we build a new factory will it burn down?
0 Will thieves steal our finished product from. the ~
warehouse? "
However in certain cases we have certaint such as'
0 We know that if we reduce the number of machines '
used, our fuel bill will~ome down.
.
.If we employ four new people., pay roll will increase.
FORMS OF RISK;
As far as insur9nce subject is concerned we are
concerned with those risks which involve some loss that is
capable of financial measurement. There are two types of
risk; "
,
; Pure and Speculative risk~
j ..
: Pure risk
:
; In certain situations a loss or a bre"ak even position
i may materialize. Driving a motor car is an example. Every
: time yo~ take your car on the road you run a risk and :
.(: there is the urlcertainty of loss, you may damage your car !
~j 1 or injure another person or damage his property. In case i
t: ,; you get home free of incident then we could say you have :
brgJs.e.n~vEn. , .1:
Speculative risk :
You may experience a loss, breakeven or a profit. '
You may purchase share at 2~ each and after a year
there may be three positions. Its worth 'may be.20p"and .
you have suffered a loss, its price remains 25p, this is
58
.
; "
I ; 3~~'~
: , "'," ."~~
" .
break even point or its price may increase to 30p and in .' ';
this case you will gain profit by the sale. .' ,'.
In business environment speculative risks are very
common such as exporting to a' new market or I,aunching .
a new product. -
~ .;.!Ii,~j~~~-f. ~ .~ ~-=:::::::::-:.- J
)
.E~.!l!damental and partic~larr il5:l .
.
E~ndamenta/. r'~
Fundamental risks arise out of the nature of the
society we. have or from some physical occurrence
beyond the control of man, e.g. ~ inill..e.timn, changin~
,,; 9.~EJgfJ)S, natural causes such as typhoons, tornadoes ,etc.
i
.
,
i E-micular risk$~ .
Particular risks are those risk which are based on
c individual events and its Impa'ct is felt locally e.g. theft-of
;! property, accident'damage etc. I
! g.b~ge !n classific~~
" With the pace of changes' in the society~ classification
or risk is also changing. In the past unemployme"nt was,
consider'ed due to the fault of. employee, ~ow it is,
considered a risk arising due to the malfunctioning of the
economic system', Another example is of mbtor acGident.
Instead of considering only fault of a driver in the past, it
may' be due to other'combined factors unconcerned'with
, I
the driver.
~vsical haza~
, S9
~
I
~
,; ~ ;:' ('r"
: ."
.
, ,
.
.: '. .
.~: : It relates to the EbYlg.~ or t.9.D.9j.Q~ aspects of the risk '
, -which are likely to influence the occurrence (frequency)
and or severity of loss. .
Where the likelihood and severity of loss as
compared to an average risk is high, it is t~rmed as poor
or unfavorable physical hazard. Conversely, if aspects.
which are likely to reduce both these factor these are
called good physical features. Examples are; -
, FIRE
i
Q.Q.Qd physical features_~ .
Property contains brick or concrete fir~1Q.Q..::!':i.gllis and
metal fire doors automatic sprinkler and a'larm sy~tem.
;~Q phvsicalfeature~
: v1~imber walls, storage of dangerous chemicals, oils,
~ packaging materials.
THEFT -
~_od phvsicalfeature~
c.'(~ong building construction, security locks and bolts and
"{'):J\~~ Intruder alarm system.
.-
, I !
~ : ~ pbvic~1 f~atur~~
,j:; Light weight constructed walls or roof such as timber or
i I normal window catches, possession of jewelry, wines etc. I
l' '
: !
MOTOR'ACCIDENT '
:
':: : ~d physical feature~
;f ; Wearing of seats belt, matured drivers, .usage in non-
'" ,
;: ,l density populated areas.
" .,
;J;
~_d phvsica~ f~atur~ I
I
I
.'
hI! '
---1
f
/ 1
I .., ,
i " ,
~ .: :'
1. Use of vehicle in areas of high traffic density. Taxi remains ..';",
I most of the period on road. Cars, which, are costly to ,-
repair i.e. Rolls Royce. ..
I. i~ LIABILITY ~
t .')
, ,
, !,
;'
." Good physical features; ~~
l)se of protective clothing, goggles and masks.L.Po \~'bV-"'\ ~
Bad physical features; .~ (~I"(~ ~ .
; The use of chemicals oils, creation of(d~s! ~nd_v~~~)n A~'\:o..-~.
: industrial processes. ..
MARINE
Good physical features;
Employment of trained and competent staff.
I
Bad ph~sical f~~tures; ..' ~J
Use of poor equipment or maintained vessels, storage of -
cargo on deckl~ ~~~'4'),. -
PE"RSONALHEALTH
'1 Good physical features;
1
~ VVorking in cQD.Q-.enLal atmosphere. Normal weight and
blood pressure: L),1\.f.A19< ~
Bad physical features;
A history of illness, hazardous occupation e.g. coal
mining.; ~V\.~cM/L'!..!:-3)
",
.1
..,Ir MORAL HAZARD
.1
'~
C! :
'" ,
, 61
I
I
I '
f '
t
,.
'1 .'
.
\' .'
~ \.'
" , .':' , .r
,.1 It relates to the attitude and conduct of the person ~
'~ insured. It is just as imporiant as physical hazard.
;
;.
The insured' (the person or firm insuring); Bad.
moral hazard on the pari of the insured is to submit f9ls.e
or exaggerated claims or where required information for
..'
, assessing the risk is withheld (concealed) or
misrepresented deliberately or innocently. .
Poor moral hazard may be carelessness i.e. the
;J insured fails to take reasonable ca.re to prevent loss or
damage to his property or safety of his employees and the
I .
third party. Where the risk is"very high Insurer will. not
accept the same.
Employee; Where the employer/employees relations
are poor or ages are low, employees will ,hot be loyal and
risk will be high such as willful- fire -raising, vandalism etc.
,
Society; Society can a1so Influence the level of risk
I and the incidence of claims, such as vandalism or wilfful ..
.: fire. :Society is now more cautious about their rights:
I
ANAL YZINGRISK
Frequency and severity; When we evaluate a risk.
we must be clear that it incorporates both he frequency
with which an event may take place and the severity of
each incident which does happen. Chemical plant is' very ..I
risky and an example of severity of loss because when !
loss does take place. ,it involves a very high financial loss.
Converse)y,.' in a large departmental store the breakage of i
glass window can happen frequently and aggregate cost i
of broken glass is high,
The concept of frequency ~nd severity is very
impoliant in the insurance world, i.e. there is a high
62
1~.~'
i gr~~'1'1 '
;! ,~,
, ',I .'
" j frequency of low severity incidents andll\a low fre9~ency of, , ,,'
~ high severity incident~,J:'1~ o~:!~~'::;~:;~::;:-:f~--- -41 .
6" 6 6"1,,\'", Go'~ 'co ,) 't !I'
, ut'~
f ; Probability theory; Probabilities measure the , -
r ': likeliho~d that t~ing.s will happen. It can be ~ppli.ed in ..;
-; measuring the likelIhood of death at a certain age, a fire;,
.
earthquake, motor accident, plane Grash etc: within a ..
given period.
Likelihood is measured on a scale fromO to 1 .Where
it is certain to occur, the probability is 1, If probabilIty is 0.2
it is less likely to occur than an event having a prob'ability
of 0.9.
I Relative frequency; The main problem in measuring
risk is that total number of all possible outcomes is not
known'. Such speculations are arrived at by analyzing the
past data available with the insurer and industry. For
i example an insurer is ope(ating a fleet of 1500
J commercial vehicle and over the past year there were 50
! accidents on average ~ach year. By using this experience
: the probability of one v~hicle having a collision next, y~ar
is 50 divided by 1 QOO i.e: 0.0333..\-l.~ ~~tP)
j Subjective pro.bability; In certain'cases there may
no.t be past experience available or very few events,
occurred, Lloyds of London has insured such risk .e.g.
pianists' fingers, film stars' legs etc.
Psychological aspect; It is an important factor, how
a person meC;:isure risk; In certain circumstances even
where probabilities exist to' help us, ~e often assign our
! own measure of likelihood. The whole of insurance
,
; business is based on the risk and statistics enable to
.,
I; understand the 'nature of the risk to which we are
I
I exposed.
I
63
f ],:;
~i
;~i"f '., \ ,
iJf '1-- 1" j .fI.:1. riJ t~-
C'o'-c .
~ ;\ 1/, V tWff" IX;
:'.:1 -.il.,.. II)
, ,,;{ ." fWY""
'- 'c!~
,~ I
~ '
'.!~ Chance; You will not find talking people about the ~
xl,. (risk of winning the football match', they will say 'chance of
-J,- winning the match'. Similarly peop1e normally refer to the
, ..
:1 risk of unemployment rather than the chance of'
.!: unemployment. ~ f.
..
THE RISK MANAGEMENTY PROCESS
, I --
.,
: .
, Risk management activities occur before, during, and
, after losses. More planning is done before losses occur.
, .
The risk manage.ment process requires the following .,
-.I
steps; .
,
.Step one; Identify and measure potential loss
I exposure. c
" ",:e\.. $~eelb-twq~ ~ o.se th~ most efficie'nt m~thods of
I ,,,In..~ltt''1 )?ontrol~g ana financIng loss exposures and'
I Implement them. '.
i .Step three; Monitor outcomes.ll~~~"'~~':") 1Y\e..\.~\&~'S\"'> ~~"-~~)
'P]L .~~ tt1is 'p~int we can provide a mor~ comprehensive
definition of risk management. An ongoing process that
requ.ires the 0~ganizat10n to identify th'e level of risk it .
wants to maintain, to identify the risk it currently retains,
and to make insurance and other financial arrangements
to make the desired and the actual level of risk the same.' .,
, r--,--
i
Step one; Identification and measurement of .:
exposures')
Loss begin's with categorizing the possibilities into
four cl~sses; '.' ..~~ ~\"( ~
.Direct property losses. b~) I""'-D-C~ ~
.Losses of income and extra expenses following a
property loss. t~~~~~ ~
.Losses arising from lawsuits. ~~ \'~ \.,~~' ~ c.
64
I / :i;J: "r,,~c'."i"'7
( ..,;i1 I ,':, ,'" , ',:
, ,~ ..,
...1 .Losses caused by the death, disability,' or unplanned '; ..
j retirement of key people.
j .
"
,
'j ,
I 1 rt must be noted that before a loss occurs, ..-
" measurement is merely an estimate. Not all pre
;..Ioss e~timates will reflect accurately the actual amouoht of, ..
damagesoor the actual expo~_ure to'ioss. '}o-::~';>""~Ot)). o\<'I:..'\~'Lo} ~;J.
" ~ -<~~CAJ'\JI;- ~~ ~'~ J)-
Direct Property losses ,
Risk managers can identify potential direct property
losses in different ways. A walking tour of a factory, store,
or hospital can reveal many ';)f the propeliy loss
, ! exposures. Risk managers often arrange regular
i : interviews with knowledgeable employees such as the
: production manager or accountant to identify significant
0
.changes in property h01dings. The risk m~nagement
procedures manual should establish a system for notifying,
the risk management, department when property is
acql,jired or sold. ..~,.f2:jt~~~,1 ,'I,~~i~'
Checklists; many insurance organizations provide a
property checklist that may, be used to identify and value
potentialo property los,ses. ,0'1 ~ 0 ,q~,.. c.tAt~"~p.~.
Property insurance checklist
Identify and value;
i .Owned buildings, equipment, and land
I I
\ .Property leased from others
! ' .Stationary inventory (average cost)
I "
j .Property under construction
.Owned or leased vehicles.
Identify special perils tow,hich
Propertvis exposed;
I
6~
! )) , ':
ft,
,
I ,,' , 1 .'
'J!(
, ~~;,
.0..
.
~ i ,;:
'" ,
j ~
T .' """'~C~'"'_-'.,~r""""""'" -~-~-. ':~~"~~C-
rc:,
,~ .' ,'" ..
.~~ .-
..' :
' I: .Terrorism ';.
! ..Radiation ) ..
.f .Explosion
.Flood
..Earth movement .i
.Theft.. .~' ~'v~~ ~'-' .
.Contamination \~ e~~) ~~ ~~ ~)f ~ ~~' ).h-~~ ~~~
~ "" r~ ()., A' ,.\"'"t:. "i..JCO'IQ ~ \V\.O.IV'O O/DO" J .
\) ',,- ~ ~~~.~ ~) ""V
Flow Charts \~~ \~"'{~~~d vJ~ ~oJIi~ p'l't)~~,~ 1~~~~)
--
A flow chart graphically represents'the productiC?n.or
distribution process. Flow chart~ analysis displays the
firm's re1ations with suppliers, customers, utilities, an.d
.
modes of transportation. Risk mangers analyze flow
charts to spot production bottlenecks, sole'-source \
suppliers, or concentration of valuable property. .Flow .
charts also help reveal the consequential impact of losses.
,
L0ssoflncome '
.
Indirect losses; These are more difficult to identify
than direct property losses. We can'see a machine and
measure its, but we cannot s~e the (ost profits if the
machine IS unavailabfe for three months. Often it is difficult
to estimate how fong a machine or a building will be
unavai1able after a loss, or whether a loss will occur during
a busy season or a. slack periO9. Despite this it is the
responsibilities to the risk manger to make careful :
estimates and judgments about the potential size of dIrect .1
losses. .!
!
I
Direct losses; The risk manager should ask informed i
; people how long it would take to resume physical \
I .operations. of a total or parti~lloss occurs~ The ac.countant
should estimate how much Income would be lost In
66
,
i
I
~
."
.,
.' -
~ 1 ~ addition to how much fixed and continuing expenses ",,:'~ ,,:. 4
would occur before normal operations resume. .
-"
i f Liability losse~~~;:~':\ u,.~~ ~ .e...;) .
I 1 Liability losses arise from three sources; .
.! .An organization responsiple for negligently injuring .
-j somebody must pay legal damages awarded by a
.1 court to the injured party.
-\ .Cost of legal defense. A defense can be expensive
I
I even in cases where a court finds the 'victim's claims
i ..
I groundless, false or fraudulent. In some cases, the
legal defense costs more than the damages awarded
to parties claiming injury.
.The cost of loss prevention arising fr,om potential
legal liability.
i Ivpi,al ~ources af lia~i/~tv las~ .
, .Bodily or personal Injury" to ,employees, customers,
I clients, or guests.
.Property damage to the real dr personal property to
others. .
.Intentional injury to people or their reputation,
including illegal accusation or restraint of alleged
shoplifters.
.Wrongf.u1 hiring, termination, sexual harassment, or
/ in.vas!on o~ pr~~~cy ?f. employees .or jo~appl.icants.
: /. VIcarious liability arising when a firm hires or ,
j"
~ autho:i~es anoth~r party to act on its behalf and this I
i r: p~rty In~ures a ~~Ird party.
I ~ ~,{"t>t(.ct.~., v-ct} Mc;.- C~n't ~ ~y<- OI"-"I)~
f
i Step two: Lass control an.d risk financinQ .
I Loss control; It is designed to reduce loss cost and 1
I include the following risk management tools; risk (~6 C::, t:.~ 5"~)
avoidance,. loss prevention, .and loss reductio,n.; ~" .A
I (i l ~\t/I.- ~ ~ "r-IWI'i\'""1"'1-'j ~t-4i;J--) '-'D
I W,
i 67
I
I
,
[
!
; "
i ..
, ." ..\
, " , f
,
Risk avoidance; Sometimes the best method of .
"
dealing with an exposure to loss i.s, to avoid all possibility
of the loss occurring', It means the chance of loss'has
been eliminated. In practice, it may mean not i.ntroducing .I
a new product, ending the production ,of an exi$ting
prod'uct, discontin~ng some operations, or selecting a
business location where a parti_c_ular peril is not present, .
/.\"I,~ ~ ~~ Some risks are unavoidable. For example, the risk of
~ .,)'D'~ bankruptcy, the risk ofa liability suit, or the risk of ".
SZ;- premature death cannot be avoided by firms or
, individuals. The exposure to loss can often' br reduced but
!. not eliminated.
..,.. .
Loss prevention;, Su'ccessful.loss prevention
activities lower the frequency of losses. Exa~ple of'loss
prevention activities include,.employ security guards in
banks, driver training and safety education programs, and
, .
warning printed on drugs and dangerous chemicals.
Loss reduction; Successful loss reduction activities .
reduce loss severity. Despite the best loss prevention
efforts, some losses occur. Loss reduction activities aim at
minimizing the impact of losses. For example a loss
reduction device is the automatic fire sprinkler system
This system is not designed to prevent fires, but to I
j prevent .the spread of fires (reduce severity). !
;
I
i
! RiskFinancin~ i "
Risk financing determines when and by whom loss
CO$ts are borne~ Risk financing includes the fol1owing
i alternatives;
! .Risk assumption
.-, ."" I.t'
tr" ~ c: ~'"
O S-'~ Ci'I/I t I.. -,.., : ~ ""' ...~
I .r:-o:.!~1\. ~".i\CI ILJVL;1 "O"III.""\IJIQII\..JG
i .Self-Insurance and financed risk retention
i
!
68
rJl
~~- ---"-~= -
, -
.i
c;. I
I
r
-:
(,:.~ .., -' . ..,. .. ~ .
c. .
.
.on drugs and dangerous chemicals.
Loss reduction; Successful loss reduction activities reduce loss
severity. Despite the best loss prevention efforts, s,ome losses occur. Loss
reduction activities aim at minimizing the impact of losses. For example a
..loss reduction device is the automatic fire sprinkler system This system is
not designed to prevent fires, but to prevent the spread of fires (reduce .
severity). ,
Risk FinancinQ
Risk financing determines when- and by whom loss costs are borne. Risk
financing includes the following alternatives;
.Risk assumption
.Risk transfer other than insurance
.Self.insurance and financed risk retention
..Insurance.
.~I) Risk assumQtion;
It means that consequences of a loss will be borne by the party exposed
to the chance of loss. Business firms assume risks when; .'
.Loss costs are small and funded from current cash flow.
.Loss exposures are retained and funded with a cash reserve.
.Loss exposures are retained and recognized in arf-ttnfunded reserve ~ ~
accounts. s~_h, ~~~ 0..\ ~eIt-~-~ ~'6 fu 1&)\
.A self insurance or finite risk program is operated.
Firms assume many risks because the consequences of a loss would
not be costly enough to justify any_other risk management decision. For
instance, most students assume the risk that their books will be stolen or
misplaced. If such a loss occurs, the students bear the cost of replacement.
0..-; .(;--- _1:_.- 1_- ..:_1. -I: 1__: : -~ .__1_":.._1.. 11.._1..-
UU~IIIC~~ IIIIII~ VI~CII Q~~UIIIC ~II~ 11~r\ VI IV~III~ ILt;'III~ VI 1t;'lclLIVt;'IY ~lllclll VclIUt;'
/
') -\--. -1 ~ ,
\ ~ .-:: -, ,..:~~~._~~--:--, -~-'--.~--==~-
.) I
~-~ ~""-"~~ ~~.~" ~
.i
.;
..'. ."
I ." "
t: j
.,~
!
such as hand tools or plates used by a restaurant. The ability to assume risk. I
is a function of a firm's financial capacity; (Py b-1ti1.1f,.., w)"tt~) "~ I
~ ..
Self-Insurance; Risk assumption deliberate or unplanned, should n~t be 'i
confused with the concept of self-insurance. Self insuran~e plan implies that ".
adequate financial arrangements have been 'made in advance to provide
funds to pay for los~~s should they occur..
f1 j(1)/JIIl-~U ~jIW"t~::;~, ~~- -I
The Capfive /tfsurance Company; One approach t,o self insurance '
involves the use of a company formed to write insurance for a'parent, called
a captive insurance company. One motive in forming a captive is to save the
overhead and profits earned by commercial insurers. A second incentive is
to earn the investment income available on advanced funding. Captive
insurance companies appeal to some organizations because the
organizations. see one or more of the following potential advantages;
.l!!:!.E-roved Loss Prevention Ince.nti.v.es: This offers a chance to
reap directly the benefits of successful loss control. .!
.l'EE!QY.ed-Claims s~ttlement~ This advantage includes the j
ability to cover claims or exclude claims with more flexibility .~
II. '
than a commercial insurer. l
1
~
.,. I.
.' '.~: 1
i
,
l
.
1
i
!
:1
-'I
'- ~'." \';:;-~") ,- ..k
" "~- j; .)1
---~ -' ~~-- ~~--