Risk and Insurance - Essay Example

Surname Professor’ Name Class Name Date Risk and Insurance Executive Summary A risk is a term commonly used to express the probability of potential damage, constantly of person or companies. The risk is often used in the business world to denote insecurity in a different situation calculated or estimated upon occurring. Risk management on the other side is the process of identifying the potential damage, the risk, or the loss identifying. In this case, the company identifies the techniques to handle the risk exposures (Vaughan et all, 26). Risk management is an extension of the effort of controlling the risks in which losses are insurance transferring the economic result of arising. Life is full of risks, some are preventable while others are non-preventable. The risk can similarly be reduces or minimised, while others can never. Natural riskarethe risks one cannotcontrol, minimise or prevent, whereas humanerisk are preventable or cannot be minimised yet dependent on the extent of probability to which they pose to occur. The issue of preventing arise id the main conceptof insuring companies. They set in to ensure one is secure, even when the loss occurs. No one can predict the occurrence of a certain losses, hence every one opting to conduct an insurance company does such in that they evaluate the chances of the unlikely event occurring (Archer et al, 23). The probability of getting inn accident the first five years of driving a car are uncertain, ono one can predict the exact accident time so as not to avoid it. Therefore, the insurance company sets into minimise the damages while offer compensation of the loss. Taking an example of a car accident, the type of the risk involved will be the loss of the vehicle, bodily injury to the driver and one having to fic the car. The effects of the accident, or the loss here will be the spending time in hospital owing to recovery from the hospital, renting anew car to be taking you to works andlastly paying for the car which no longer exists. The costsassociated to this aredefinitely not low, the costofrepairing a car, medical bills, renting anew car are definitely high and tom some extend unbearable(Archer et al, 23). Learning Points from Risk and Insurance The modern world is full of unpredictable risks, with many of the coming from the artificial, and others from natural cause. Risks are varied in extent, ranging from the Accidents, fires, diseases or even deaths. However, the ability of these risks to cause damages in the society have been accompanied by the capacity of the man kind to create a retaliatory response to them (Vaughan et all, 27). This effect, therefore, has made it possible for the unpredictable cases to build opportunities for these risks to be contained in risk assurance, with companies insuring themselves against any potential losses. This paper, however, identifies that risk is classifieds into two broad categories, namely; a. The pure and speculative risk b. The main risks and the particulate risk. The good risk is the situation with two main possibilities, the loss or not. This type of failure causes effects which leave the company or an enterprise in the case which it was before the occurrence of the risk. The examples of the good risk are the road accidents, theft of goods and so on. Speculative risk on the other side is the danger with a chance of winning. An example of this is an investment in the stock market bringing either profit or loss, or investing in any business; the possible occurrences are the gains or gains (Seog, 125). The difference in a pure and speculative risk is very circuital inn any company aiming to insure their assets against any insuring company. The main risk is the type o risk majorly affecting large number of people in an individual setting, majorly the economy at large. Such risks re the occurrences which have enormous effects on large number and in many cases are uncontrollable. Such risks include the unemployment, inflation and all other negative economic indicators. Risk involving a natural disaster is also an important and primary risk (Seog, 125). Then lastly, the effects of terrorism attract is considered as a significant risk. A particulate risk on the other side produces a certain individuals of a society not the entire community. These type of risks are more personal in causes as well as consequences. These risks may include theft, road accident, risks of fire burn down and so forth. The importance of risking these two type is the extent to which the focus is into. Governments majorly concentrate on managing the occurrences of significant risks than the particular danger. This is by controlling the unemployment rates, inflation and so forth. While insuring for risks, the specific risks are more considered are the principal persons are concerned about their assets, hence insurance majorly is on particulate, and the pure danger (Powers, 124). Insurance companies are more concerned about insuring companies absolute risks since they have chances or either occurring tor not. In mitigating this risk, there are several options of consideration one is required not to drive at all, to avoid the risk occurrence again; becoming a safe driver on the road, while still contending with other drivers on the road, or lastly transferring the risk to someone else, the other party, in this case the insurance company. The insurance company is the only best insurance to deal with risks of this extent. The basic risk management have indicative tools which help one bring back or reverse the financial losses(Archer et al, 24). These tools severity cannot be reduced or transferred, hence one person taking care of the issue is a big burden. In risk control, there are two means which can be used to manage the situation of any occurring loss. These are the risk financing and the risk sharing. In risk financing, one either transferred s the risks, to an insurance company or you either retain the risk or fund its probabilityloss voluntarily. This over occurs when one opts to retain their risk exposures. In taking the risk and funding it voluntarily, one identifies the potential risk and decidesto accept it together with its consequences(Archer et al, 23). The last option of financing the risk is the involuntary; financing, where you identify the risk, but there is available insurance on the risk. The other method of risk control is risk sharing. Where one decides to share the risk so as not to suffer the consequences alone. An example of this is when a business owner. In this type of riskcontrol, the owner of the business while opening up the new businesscan share the risks with other owners of the same business oi the location, by simply incorporating their business(Reavis, 90). In the example of the driving accident taking the drive’s ability to get rid of the risk altogether, there would havebeen no need for theinsurance. The only case of avoiding this is by altogether avoiding deriving, and quit the roads while packing the car at home permanently. Logically, this may not be the applicable to most of risk takers drivers(Reavis, 90). However, if the cost of the probable loss occurrenceis reasonable to you, then one may not needtheinsurance, with all factors like the government traffic laws on insurance held at constant. Some risks involve high severity of loss but a low frequency of loss. In these kind of risks, the risk transference who are the insurance company is mostly the moist appropriate t] protection technique. Insurance is always convenient fir thermoses which will impact on the life’s of you and your loved ones in significantfinancial inconvenience. In some instances, the clients are required topurchase an insurancecover, foe instance motor vehicle owners. Some other class of losses are how costly and of high frequency, suchrisks are hard to insure because the process of insurance may be costly for them(Reavis, 92). The suitable method to mitigatethese risks may be the retention orreduction. Some losses are too inexpensive that are worth taking for the ownerto pay them out, rather than depositing extra money over the insurance companies each month. Risk and insurance concept, therefore, sets in as a risk management strategy, the safest of all. In this case, the concept works with companies insuring their assets against certain potential hazards, like fire for instance., risk insurance assures a company of financial and asset refund incise any risk occurs. Many insurance markets are crowding in the companies trying to get clients or risk insurance (Vaughan et all, 28). Upon insuring for the potential, risks, the company is therefore required to contribute the certain amount of cash as a premium to the insuring company, regularly over ascertain period , possibly a year or a moth, depending on the agreement. Insurance is a general world standing in place of compensation whenever a potentially risky event occurs. There re different types of insurance in the market. Many insurance companies are offering different insurance covers to customers. The insurance covers range from life insurance to commercial insurance and many other types of insurance (Boggs, 66). The concept of insurance covers different concepts, with the issue of pooling of riskbeing the key business agendas for the insurance investment. A person contracting an insurance company for a certain insurancecover is required to provide a certainamountof money for the beginning, then another instalments termed as premiums. These premiums are the reasons the company is able to fully compensate the client in event of a loss(Boggs, 66). The concept of pooling together of risks is majorly done by the continued premiums made by client to boost chances of an accidental risky behaviour happening. The comncept of pooling together of risks work in the business of insurance companies. In this case, many or a large group ofindividuals seek an insurance company to insure against any particular loss. Thispeoplepaycertain premiums, in monetary form in differentamountfollowing the extent of the risk and the agreement with the contractinginsurance firm. These individuals’ premiums collectively are called the insurance bucket or the pool(Boggs, 66). The concept worked in an assumption that notall insured individuals will suffer the insured risk, or the loss, that the only few or none will suffer the loss. This is anassumptiondrafted from the number of individuals insuringare too many. Insurance similarly works on another assumption, that all individuals seeking the insistence do not entirely suffer the loss at the same time, each speculative loss occurs at its own time for an instance, people with an auto insistencewithinsurance companies yet only a few of these individuals get involved in real accidents. Risk and insurancesimplyenables the client to pay for the probability of a loss top occur at any event while the insurance companies for every single event occurring(Boggs, 66). The pooling together of risks may not be limited tocertaininsurancecovers, with some going to even lifetime. Especially the life insurance, where one can insure against the probability of death happening anytime. When managing risks, there is need of a comprehensive risk management process, which helps anyone who is determined to insure against any potential loss. The re were so many optionsrote manage a risk, but one has to settle for only one, based on effectiveness as well as the costs incurred. A client isobliged to either goingdirect to the insurer of the insurance cover through an agent or basically to bind by the policy (Reavis, 67). The process of managing a risk is well drafted, pending formal policies, being issued by the insuring company. There are different types of agents in insurance covers, these are the captiveagentsand the independent agents. According to (Reavis, 66)Captive agent s are these agents representing the insurance company, and are only required to do the same business with that only insurancecompany. In this case, the agent id formallyemployed by the insurance company to market the company, make more clients abide by the company while as well sellinginsurancecovers to the clients, from the same insurancecompany. However, these agent are notobliged to work for other insurance companies. the other type is the independent agents. Independentagents represent many companies. These agents work independently on represent ng each company they choose, based on the best insurance covers they provide (Reavis, 67. Thisagents don’t work on specific insurance company, they are not obliged to any insurance company, they choose the busy insurance company for the specific client, based on the potentiallyrisk to be insured. For an insurance contract to bind, the agent or the insurance conduct an underwriting of the risk. Underwriting id the process of assessing the potential risk, evaluating it and determining the potential and ability for it uponinsurance. This is determined by theinsurer determining the likelihood of the risk to occur, while assessing the extent of loss of financial loss is likely to occur (Silver, 111). the information acquired in this assessment is then used to assess the amount the client will be paying each month as premiums, soas to put a cover of the potential risk occurrenceandavoid the leafy consequences. Underwriting similarly is used by the insurer to determine if the applicant meets the insurance company required insurance requirements(Silver, 111). Underwritingsimilarly helps the company be able to identify the different kinds of risks, the expected loss and the speculative losses. Expected losses will be charged higher on the premiums than the normal risk, since they are more certain to occur. After the process of underwriting the insurance company then issues the insurance contract to the applicant. An insurancecontract is a legalbiding document spelling out the coveragefeatures for the risk insured for, thefeatures, the conditions as well as the limitation of the insurance policy,. The insurancecontract if the document used to follow up any compensation after losses, as well as the court rulings are made on the insurance contract reference (Silver, 111). It is very critical that the applicant read all the provisions and the limitations of the contract, as well as ask questions where clarity is not projected before signing the contract. This makes it abled for the applicant to understand thecoverage of the insurance aswell as the extent to which risks it covers. There are many different insurance terminologiesused for insurance covers. Some of them include; i. Insured. The person ewido transfers the risks of the loss occurring to a third party via and agent is entirely compensated in the eventthat the loss occur. ii. Insurance rider or endorsement. This is an attachment to the policy indicating the insurance contract terms and conditions as well as all the regulations. iii. Insurance umbrella policy. An insurance umbrella is purchased when the insurance contract terms are not sufficient to add more covers on the probable risk occurrence. The umbrella policies are purchased to cover the losses occurring above the set limits already underlying policy or policies. . An example of this is the homeowners as wells the insurers (Silver, 110). This however, applies to the losses over the dollars amount found in the underlying policies. The terms and coverage are sometimes broader then the worse of the underlying policies. iv. Insurance interest. When one is insuring against someone or something, the insurer must provide a proofthat the incumbent loss will have impact financially in event that it occurs, the insurer will notcover the loss if they have no insurable interests. It’s worth taking to understandthat for the property insurance policies, the insurableinterest must be in existenceduring the underwriting and during the time of the potential loss(Silver, 110). This, however, unlike with theother property insurance, the lifeinsurance the insuranceinterest must exist in the time of insurance purchase only. Critical Analysis The crucial writing of the risks ns insurance pare has presents different types of the risks we witness in the societies we live in, there is a background and summary of the risks and insurance of basics, however, the critical thinking introduces this paper to the best insurance options for the risks available to the different enterprises. The risk and insurance topic covers many fields, with many companies insuring against potentially unaccusable events. The pure risks is a critical insurance risk upon, since it presents the real danger possibilities to be insure. Insurance is the best corrective method of dealing with any negatively occurring event, companies insure their business losses from adverse impacts of risks baby insuring them. Practical Implications The risk of comply losing its assets by theft or hacking or financial theft by employees or any other anonymous personnel is a real danger. The possibility of s a risk maybe below but the chances of the risk occurring are either yes or not, this risk has to be associated positively with the result it’s in. The only chances are that it will occur or not, with a no definite chance expected. Therefore, the companies should capitalist eon insuring the pure risk, instead of other type of risks (Blanchard, 78). Upon calculating its potential damages, a company should classify the risks, unto the classes discussed in this paper, hence make the best insurance. Conclusion Insurance companies are the parties with the policy holders to offer contracts to the risk insuring companies, risk insuring companies on the other side are the people with the potential hazards in their premises willing to offer calculated pooled premiums to the insurance company in favour of getting insured for their assists from any possible negative occurrence. This however format the basis of the risk and insurance, where the companies merely protect their premises from the chances of negative happenings from risky events. Works Cited. Archer, Simon, Rifaat A. Karim, and Volker Nienhaus. Takaful Islamic insurance concepts and regulatory issues. Singapore: John Wiley & Sons (Asia) Ltd, 2009. Print. Page 23 Blanchard, Ralph H. Introduction to risk and insurance. Washington, D.C: Beard Books, 2011. Print. Page 78 Boggs, Christopher J. Property and casualty insurance concepts simplified : the ultimate 'how to' insurance guide for agents, brokers, underwriters and ddjusters. United States: Wells Publishing, 2010. Print. Page 66 Powers, Michael R. Acts of God and man: ruminations on risk and insurance. New York: Columbia Business School Pub, 2012. Print. Page 67 Reavis, Marshall W. Insurance : concepts & coverage : property, liability, life, health and risk management. Victoria, B.C: Friesen Press, 2012. Print. Page 90 Seog, S H. The economics of risk and insurance. Chichester, West Sussex, U.K. Malden, MA: Wiley-Blackwell, 2010. Print. Page 124 Silver. Risk Management An Introduction: Using Insurance Concepts to Make Your Life Easier and Better. City: Silver Lake, 2012. Print. Page 111 Vaughan, Emmett J., and Therese M. Vaughan. Fundamentals of risk and insurance. Hoboken, New Jersey: John Wiley & Sons, Inc, 2014. Print. Page 25 Read More