Theme 6 Risk and Insurance Risk Risk is

Theme 6: Risk and Insurance

Risk • Risk is a state of uncertainty where certain situations may result in loss or another undesirable outcome. • Pure risk: is a chance of loss with no chance for gain. Example: accidents resulting in physical injury Illness/Death Destructive acts of nature • In order to reduce negative consequences of risk (and in particular, pure risk), what has been created?

Insurance • Insurance: a method for spreading individual risk among a large group of people to make losses more affordable for all. • Insurable risk: is a pure risk that is faced by a large number of people and for which the amount of the loss can be predicted.

Types of Insurance • Personal risk: is the chance of loss involving your income and standard of living. o life, health, and disability insurance • Property risk: is the chance of loss or harm to personal or real property o home, car, or other possessions could be damaged or destroyed by fire, theft, wind, rain, accident, and other hazards. • Liability risk: is the chance of loss that may occur when your errors or actions result in injuries to others or damages to their property. o liability when driving, on the job

How It Works • There is risk all around us. (you could fall, get in an accident, get mugged…) • If there is a predictable risk, a group of people could spread the risk by paying in small amounts (premiums) over time, and pool that money to cut back on financial weight of those risks. • Example: If you have 25 students in a room, and we can assume that one of you will be in a car accident in the next year which will cost $10, 000, an insurer can allow you all to pool your resources. How do we determine each student’s premium?

How It Works (Continued…) $10, 000/25 = $400 person over 12 months $400/12 = $33. 34/month • Insurers set premiums based on statistical probability by estimating the potential losses through a number of criteria and data. • The higher probability of loss occurring, the higher the premiums. • Why does Florida have very high property tax?

• Insurance is not meant to enrich- only to compensate for actual losses incurred. o Indemnification: is the process of putting the policyholder back in the same financial condition he or she was in before the loss occurred. o Underinsured: is when one has insurance, but it does not bring them back to a state financial equilibrium after damage has occurred. (in the event of a claim, the owner of the policy will take a loss…an “L”)

Winners v. Losers • Winners are individuals who pay more in premiums than their costs for what is insured. o Examples? • Losers are individuals whose costs exceed their premiums. o Examples? • Pre-Existing Conditions => Often seen to be predetermined losers o What are examples of pre-existing conditions?

Insurers Economic Model • As For-Profit industries, how do insurance companies make money? • Profit = (earned premium + investment income) - (incurred loss + underwriting expenses) • Float: available money that an insurer has collected from premiums, but has not paid out in claims. o The float is invested and collects interest until claims need to be paid out.

Risk Management • While you cannot eliminate risk, you can manage it. • risk management: is an organized strategy for controlling financial loss from pure risk. 1) Identify risk 2) Assess seriousness of risk (Risk Assessment) 3) Handle Risk o Risk shifting or Risk transfer: pass risk to another (buy insurance) o Risk avoidance: don’t engage in the activity that could result in the loss. o Risk reduction: take measures to lower the chance of risk (fire alarms, security systems, seat belts, don’t smoke) o Risk Assumption: accept the consequences of risk (self insure by saving money for smaller risks, don’t insure a beat up car for as much and pay for your own repairs)

Reducing Costs • Lower your deductible (the specified amount of a loss that the insured must pay before the insurer’s obligation to pay begins. o The higher the deductible ($1500 v. $500), the less you pay in premiums. o Beware: you don’t want your deductible to be a reason not to take care of yourself. • Group insurance => insurance through a job or a credit union • Discount opportunities o For teenagers, go to drivers education and get good grades o Multi-line insurance- having more than one type of policy through the same company (home and auto)

Property Insurance • Renters Insurance (~$15 -$30/month) o personal property (if your property is damaged o personal liability (if someone is injured because you are liable even if it isn’t your fault) o Extended coverage- Often coverage might cover up to $25, 000, but if you have some expensive items and you want to extend the coverage, you can pay extra per month. Sometimes, it requires appraisals.

Homeowners Insurance • Homeowners insurance covers: • Hazards, Crimes, and Liability o Because water damage is a Hazard, if you have a leaking pipe or damage caused even by negligence, it may still be covered…ALWAYS ASK! o Liability coverage: homeowners are responsible for guests (someone you ask to come over) and uninvited guests (people who have permission like delivery people or even solicitors). • You are not responsible for trespassers. • An attractive nuisance is a dangerous place, condition or object that is attractive to children. For example, a pool. Even if the homeowner takes precautions, if something happens to a child who sneaks over, you are HELD LIABLE.

Auto Insurance • Cost • premiums are determined by: o o type of car (model, style, age) Driver classification (age, sex, marital status) Driving record Location (city, county) • Discounts: o Multi-policy discount: insuring more than one vehicle with the same insurer. o Getting good grades (usually B average or higher-high school and college) o Safety features

Auto • Types of coverage o Liability (if you injure another) o Collision (covers damage to your car if you are at fault) o comprehensive coverage (covers damage to your car from something other than a car accident…tree falls on it, vandalism, a deer runs out) o personal injury protection (PIP) (if you injure yourself or others in the car) o FULL COVERAGE is everything

Health and Life • Health insurance is a plan for sharing the risk of high medical costs resulting from injury or illness. o employment based insurance o individual plan (very expensive…why? ) o government plans (Medicaid or Medicare) • Types of coverage: o Basic health coverage- medical, hospital, and surgical costs o often does not include cosmetic or elective surgeries) o Major medical coverage- protect against catastrophic expenses of a serious injury or illness. o Dental and Vision

SLPS Plan

Managed Care Plans • Managed Care Plans rely on a network of health care professionals (“Is that doctor in your network? ”) • Health Maintenance Organization (HMO): a group plan offering prepaid medical care to its members. o Patients choose doctors on the HMO including primary care physician. o Primary Care Physician have to give the go ahead before you see any specialists (acting as a gatekeeper to keep costs down). o Preventative care is usually covered 100% to create an incentive to stay healthy. • Preferred Provider Organization (PPO): a group of health care providers (doctors and hospitals) who band together to provide health services for set fees. o This plan lets you go out of network, but charges more. o Because there is more flexibility, it is usually more expensive.

Government Health Care • Medicare: government-sponsored health insurance for people age 65 or older. o Run by Social Security Administration (SSA)- Premiums are deducted from social security payments. • Medicaid: government-sponsored health insurance for people with low-incomes and limited resources. o Medicaid is joint federal-state program with the federal government paying 50% of each state’s separate system.

Disability Insurance • Disability insurance: is an insurance plan that makes regular payments (usually monthly) to replace income lost when illness or injury prevents the insured from working. • Short-term: usually last between three and six months. • Long-term: Can go up to retirement.

Life Insurance • Life Insurance: provides funds to the beneficiaries when the insured dies. o One must consider the needs of their family after they die. Consider: how much income will be needed to pay the ongoing expenses of daily living. o Based off of personal and medical history, age, health, gender, and other variables. o Beneficiaries are those who receive the funds. (you can leave different percentages to different people) 1) Term (Temporary) life: life insurance that is temporary (example: it is a 20 year plan). 2) Permanent Life: remains in effect the insured’s full lifetime and builds cash value. (cash value is a savings accumulated in a permanent policy which you can receive if you cancel it. ) NOTE: You can take a loan against your life insurance policy. If you don’t pay it, the firm can take the money from the funds paid to your beneficiaries.

Healthcare System Design • If you were designing a healthcare system, what would it look like? • Assignment: o Need to create a healthcare system o Write down FIVE aspects of your healthcare system and how it works for the people you are designing it for.