Loss Matrix
- Indicated $ amount associated with each combination of:
1. Risk Management Alternatives
2. Future States of the World
Tax Examples for Deductions
- Insurance Premium
- Safety Program
- Cost of Uninsured Losses
All Tax Deductible
Worry Value
- How much we value uncertainty
- Cost associated with decision making
- Cost of anxiety concerning a decision
- Unique to the decision maker
- Subjective Risk
Worry Value Equation
- Pmax - P*
- The max above and beyond the P* that a person is willing to pay to reduce uncertainty
Worry Will Increase If:
- If variability of losses increases
- The level of confidence in the estimate of P* decreases
- The size of max probable loss increases
- Probability of max possible loss increases
- The Financial strength of firm/individual decreases
- The level of insurance coverage decreases (Assuming all other things are equal)
Principle of Subrogation
-The right for an insurer to pursue a third party that caused an insurance loss to the insured. This is done as a means of recovering the amount of the claim paid to the insured for the loss.
Purpose of Subragation
- Hold negligent 3rd parties at fault
- Control moral hazard
- Keeps insurance premium rates low
- Proceeds from subrogation are extra dollars for you and your insurance company
Subrogation Issues
- Insured can not impair insurer’s right to subrogate
- Insurer can not subrogate against their own insured’s
- An insurer can keep proceeds from subrogation only after their insured has been fully idemnified
Principle of Utmost Good Faith
- Parties to an insurance contract are held to a high standard of honesty
- If violated, insurer can avoid the coverage or deny claim
Representation
- Statement made by applicant
- What if statement is false? It is misrepresentation.
When can an insurer deny a claim in representation?
- If material
When can an insurer not deny a claim in representation?
- If not material
Innocent Misrepresentation of Material Fact
- Lack of knowledge as defense? No defense by uninsured
- Applicant speaks at their own risk
If a statement made is an opinion or belief rather than a fact?
- Have you ever had cancer?
- If wrong, insurer must show fraudulent behavior to deny claim
Concealments
- Failure to provide important or relevant information to the insurer
- Failure to reveal material fact to the risk
- Must volunteer material facts
Tests of Concealment
- Did the uninsured know of certain fact
- Was the fact material?
- Important Issue: Did applicant know the withheld fact was material?
Difference between Concealment and Misrepresenation
- Big difference is whether or not you were asked
Warranties
- Conditions agreed to by an insured in order to receive insurance
- Burglar alarm, working sprinkler system
- Conditions of coverage - insured guarantees
- Suppose breach of warranty exists; any breach of warranty will void the contract
- True even if unintentional
Insurance
- Pools the risk; risk sharing agreement
- Some collect nothing, others collect replacements
Why do people buy insurance?
- What is commodity?
- certainty, safety, peace of mind, security
Insurance
- Combines the loss exposures of individuals into a group
- Uses funds paid into by members to pay for losses of anyone with membership in the group
How does insurance mechanism work?
- Trade an unknown for a know
- Unknown loss for a known loss (premium)
- Involves transfer of Risk
- From insured to insurer
- Pooling - share total losses among a group
- Allows for a decrease in the total amount of uncertainty in a particular situation
Insurance Contract Indemnification
- Insurer agrees to indemnify the insured in the event of a loss
Full Indemnification
- Place insured in the same financial position as before the loss occurred
