Lesson 2 - LESSON 2 Defining the Insurable Event 1 Insurable Loss Exposures Introduction Not all exposures to loss are insurable Which ones are

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1 LESSON 2: Defining the Insurable Event
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2 Insurable Loss Exposures Introduction – Not all exposures to loss are insurable - Which ones are? What criteria is used to produce a financially viable and sustainable result? Accurate prediction of losses Adequate advance funding
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3 Characteristics of Ideal Insurable Loss Exposures Point of view of the insurance company Large number of homogeneous units Accidental and unintentional losses (from the point of view of the insured) Definite in time and in place, measurable and of sufficient severity to cause economic hardship Non-catastrophic
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4 Characteristics of Ideal Insurable Loss Exposures Point of view of the insured Does the exposure warrant protection? Is the probability of loss low? (How much is the premium for low probability exposures?)
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5 Exhibit 2.1 Risk of Fire as an Insurable Risk
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6 Exhibit 2.2 Risk of Unemployment as an Insurable Risk
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7 Insurance Works Well When. .... The industry adheres to the above guidelines resulting in: A balance that is maintained between the number of insured exposures and the number and severity of the losses in the pool.
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8 Insurance Will Have Difficulties Or Fail To Function When. ... More and more people collect Frequency and/or severity increases Price must rise Fewer people buy Risk premiums increase Pool shrinks in size and cycle starts again ! Results in small pools, many collecting and unaffordable premiums
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9 Large Losses Recently Hurricane Andrew (1992) – $16.3 billion Hurricane Katrina (2005) - $60 billion (est.) Result: Companies reconsidered exposures Some did not renew policies Some went out of business Catastrophic Insurance Program examples Federal Flood Insurance
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This note was uploaded on 10/08/2011 for the course FINANCE FINANCE taught by Professor Don'tknow during the Spring '09 term at American Internation College.

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Lesson 2 - LESSON 2 Defining the Insurable Event 1 Insurable Loss Exposures Introduction Not all exposures to loss are insurable Which ones are

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