640 Class 2 - Class 2 Insurance and Risk Management George...

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Class 2 Insurance and Risk Management George D. Krempley Bus. Fin. 640 Winter Quarter 2008
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Bus. Fin. 640 Website http://www.cob.ohio-state.edu/fin/winter2008/640.htm
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Methods of Handling Risk Avoidance Loss control Retention Non-insurance transfers Insurance
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Risk Management Matrix Type of Loss Class Loss Frequency Loss Severity Appropriate Technique 1 Low Low Retention 2 High Low Loss control and retention 3 Low High Insurance 4 High High Avoidance
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Frequency Frequency measures the number of losses in a given period over the number of exposures to loss. If Sharon Steel Corp. had 10,000 employees in each of the last five years… And, there were 1,500 injuries over the 5-year period… Then, the loss frequency would be 0.03 = 1500/50,000 employee-years.
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Severity Severity measures the magnitude of loss per occurrence. If the 1,500 injuries cost a total of $3,000,000… Then, the expected severity of loss would be $2,000.
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Expected Loss The Expected Loss is simply the product of the frequency and the severity Expected loss = Frequency x Severity In our example, the Expected Loss equals $60 0.03 x $2,000 = $60 Also known as the “pure premium”
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Definition of Insurance Pooling of fortuitous losses by transfer to an insurer, who agrees to indemnify insureds for such losses, and render services connected with the risk.
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Basic Characteristics of Insurance Pooling of losses Payment of fortuitous losses Risk transfer Indemnification
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Requirements of an Insurable Risk Large number of exposure units to predict average loss
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