This preview shows pages 1–3. Sign up to view the full content.
This preview has intentionally blurred sections. Sign up to view the full version.View Full Document
Unformatted text preview: 8/22 Class about: o Contract law of insurance o public policy of insurance What insurance policy is supposed to do and how it does it? Grade based on in-class open book final o Only prepared by you, your notes Insurance about: o Risk-transfer o Provides security to reduce risk o Enables productive investments o Protective mechanism for consumers History of insurance o People are risk-averse- spread risk of hazards o Lloyd's- shipowners would meet in coffeehouse- describe risks of voyage Underwriters would sign to assume risk for sums of money o Great fire of london- fire insurance became available o In US, Charleston, SC first place you could buy fire insurance o Ben Franklin helped popularize and make standard fire insurance in this country Would inspect building before insuring them Insurance industry today o Insurance brokers- work together to help place o Insurance agents - work in much smaller environments o Corporate risk managers- work w/ brokers to assess risk o Insurance co's have own underwriters to determine what pricing o Claims personnel - determine what should be covered and how much to pay. o Insurance co's also insure their own liabilities- reinsurers Eg. If $1 mil risk, insurer pays $200k, reinsure pays $800k o Reinsurers are also covered further- retrocessionaires Spreads the risk even further- policies diluted Globalization in a very important financial way What economic and public policy goals exist in every situation? o Diluting risk so that companies can stay in business o What types of risk should be in insured o Misconduct in insurance claims o Rules regarding interpreting contracts o Things that Congress say can't be done Nature and function of insurance How insurance works Function of insurance is to protect the policyholder in the event of future loss. 3 separate insurance functions Risk transfer from comparatively risk-averse to less risk-averse or risk- neutral parties Risk-neutral- only concerned about expected value of risk- probability of a loss multiplied by its magnitude if it occurs Risk-averse- prefers large risk of suffering small loss to a smaller risk of suffering large loss Risk-pooling or diversification- by insuring large number of insured posing homogenous and independent risks, an insurer can reduce the amount of variance in its expected losses to a very small range Insurer uses law of averages to figure how much risk costs and pool those risks and determine how much to charge for that risk 3. Risk Allocation - insurers attempt to set price for coverage that is...
View Full Document