The Fall in the Share Prices - Term Paper Example

Insurance and Risk Planning Name Date Course Part A Section 1 Property losses Property loss involves the losses that can cause partial or total loss to property (Dorfman & Cather, 2012). The couple owns a number of properties and is therefore exposed to property losses. Act of God such as natural calamities can lead to damage and destruction of the house leading to a loss of $ 580,000 which is its value as of 2003. The couple may also suffer losses due to the destruction of house content by fire leading to a total loss of $ 100,000.Theft of the house contents may also result to partial property losses for the couple. Road accident or theft may see the couple losing their two cars. This may result to a loss of up to $ 100,000.The property losses can mainly be attributed to risks and uncertainties. The business has invested in shares in other companies. The fall in the share prices may have a long term loss to the couples. Personal losses Personal losses are associated with the risks that may affect the health or safety of an individual (Zou & Cadenillas, 2014). Mary has indicated that if Michael is not around she may be forced to close shop as she is not capable of running it herself. Physical injuries may affect either the couples or their children. This may be in the course of doing business or other activities such as driving. The personal losses have the ability of bringing down the whole business. The medical expenses may also increase as a result of the personal losses and hence affecting the savings of the individuals. Michael may also be forced to spend more on the care of the care children incase Mary suffers any injuries. This is because Mary is fully involved in the care of the children. In case of fatal injuries leading to the death of Michael, the business may collapse and hence making it difficult for Mary to pay for all the expenses as it is. Total superannuation fund = $ 300,000 In case of death of Michael who runs the business, the calculation of the losses will be as follows: Living expenses per annum = (2,000 +49,000 +7,000 +3,000 +15,500 +10,000 +3,000) = $ 89, 500 The cost living expenses will go down by 25% in case of an early death = x 89,500 = $ 67,125 Michael is expected to work for 25 years before retiring In case of early death, the loss will be as follows Where c = total expenses = 67,125, r = 7.5% and n = 25 years School fees for the children and their allowance Cost of primary schooling = 10,000 pa for 6 years Cost of secondary school = 20,000 pa for 6 years Allowance = 10, 000 pa from 18-25 years The couple has two children The calculation for Frank who is currently 5 years is as follows 5 years old Frank Primary school fees currently: Where fv = 46938.46, r = 7.5% and n =1 since Frank is 5 years and is supposed to start schooling at 6 years (6-5=1) Secondary school fees currently: Where fv = 93876.93, r = 7.5% and n = 13 Since Frank is currently 5 years and is expected to complete secondary school at 18 (18-5 =13) Allowance from 18 to 25 years old Total requirement for Frank = 3 years old James Primary school fees Where fv = 46938.46, r = 7.5% and n =3 since James is 3 years and is supposed to start schooling at 6 years (6-3=3) Secondary school fees Where fv = 93876.93, r = 7.5% and n = 15 Since James is currently 3 years and is expected to complete secondary school at 18 (18-3 =15) Allowance from 18 to 25 years old Total requirement for James = The funeral cost and medical cost for an early death is $ 15,000 House mortgage + credit card = Total sum for an early death = 318,000 + 15,000 + 936,665. 229 =$ 1,269,665.229 Liability losses Liability losses involves the risks associated with being found liable to another dues to acts of negligence or willful acts of that cause losses to another person or their properties (Beard, 2013). In the course of running their businesses, their actions may lead to injuries to other people and may be forced to compensate them. This may result to compensations and hence resulting to liability losses. The products of the business may unintentionally cause harm to the customers and the businesses may be required to compensate them and hence resulting to liability losses. Any acts of negligence including during the activities not related to the business such as driving may also contribute to liability losses. Section 2 PV for Michael’s Maintenance PV of living expenses, unlike the early death, the living expenses will not go down and will remain $ 89,500 Children school fees and allowance will remain constant at: $188426.4884 Mortgage and credit card will remain constant at: $318000 Total sum required for Michael being disabled: If Michael was to be disabled rather than dead, for the next 25 years, it will cost $ 20,000 per annum for maintaining him. This means the couple will have to incur more expenses in terms of medical expenses. Although the injuries will result to personal losses and an increase in the expenses, Michael will still continue carrying out the business activities. The increase in the medical expenses will impact negatively on the overall expenses of the couples. The personal loss due to the injury to Michael means that the savings of the couples will have to reduce (Dorfman & Cather, 2012). Cost cutting measures may also be put in place as a result of the loss. This may involve reducing the expenses incurred in other items and activities. The personal injuries may also affect the ability of the individuals to carry out their activities as it was in the past. The reduced efficiency in carrying out the activities may result to further losses. The death of the couple would have resulted to a decrease of costs by 25%. However, the personal injury to Michael resulting to a cost of $ 20,000 means that the expenses will increase for the couple. In case of such losses, the individuals may be forced to cut the costs on non-essential items such as entertainment and holiday. The personal losses are however common and it affects a high number of individuals every year. Section 3 Risk avoidance This is a technique that is commonly used to avoid the losses before they take place. Risk avoidance is useful when dealing with the property, personal and liability losses. It involves the elimination of hazards and exposures that can lead to the risk (Zou & Cadenillas, 2014). This strategy is ensures that compromising events that may lead to the risks are avoided. The main benefit of this method is the ability to deflect many threats that may be costly and may have disruptive consequences. It also ensures that the vulnerabilities posing a threat are minimized. However, this method may require a lot of resources. When using this method, the risk is not eliminated. Risk retention Risk retention involves accepting the risk and consciously retaining it (Beard, 2013). This is important when dealing with the personal losses. The personal losses including the injuries to the individuals can be retained. The risks that are likely to be retained in most cases are difficult to avoid. This method is beneficial in enabling the businesses and individuals to make a plan of coping with it. However, the individuals or businesses are still exposed to the negative consequences of the risks. Insurance Insurance is one of the most effective techniques that are available for the couples. Insurance is a mechanism of transferring and reducing pure risk (Beard, 2013). This is achieved through transferring the risk to a third party which the insurance companies which will be responsible for bearing it. The individuals and business usually pay a certain amount on a monthly or annual basis to the insurance company. In case of the risk, the insurance company will pay the in order to ensure that the business or individual is able to be in the same situation as before the risk (Dorfman & Cather, 2012). The insurance has the ability to covering the personal, property and liability risk. The main advantage of the insurance is its ability to cover for different types of risks. The insurance policy has the ability of ensuring that the holder does not suffer losses in case of risks. This is especially common when it comes to the property losses. The insurance policy also has the ability of paying for the medical expenses as well as a certain amount of money in case of in eventualities such as death. However, the main disadvantage of insurance is the huge sums of money that has to be paid annually. The business or individual may never benefit from the insurance cover in case they do not suffer from the risks they have insured against. The insurance is the most commonly used technique of dealing with risks and it is mandatory in some instances. Premium Premium is an option that is available for the couples in the management of the losses. This is mainly for the purposes of dealing with the investments that the couples have made. A risk premium is the return in excess of risk free rate of return that an investment is expected to yield (Beard, 2013). It acts as a form of compensation for the investors who tolerate the extra risk. This technique is however limited to the financial investments as opposed to the other types of risks. The individuals or businesses are still exposed to the risks ad they may not fully recover the losses that they have made. One of the disadvantages associated with this type of risk is the costs involved. When dealing with the investments that are not prosperous, a risk premium can end up being too costly (Beard, 2013). The high cost may further impact negatively on the ability to manage the risks. Section 4 Automobile insurance The couples have two cars which exposes them to personal, property and liability risk in case of an accident. The automobile insurance combines the liability and property insurance coverage which is mainly required by the car owners and drivers. The automobile insurance plays an important role in combining the coverage into a single package policy. This will therefore ensure that the insurances bear the risk in case of accidents that leads to the damage of the car or incidences such as theft (Zou & Cadenillas, 2014). The insurance also covers for the bodily injuries as well as the losses suffered by the drivers and the passengers of the insured car. This is regardless of whose fault it is in relation to the accident. The automobile insurance will ensure that the couples are able to obtain a new car or have their cars repaired at a cost that will be paid by the insurance provider. They will also receive treatment which will be paid by the insurance in case they suffer injuries during the accident. Depending on the insurance package, compensations may also be paid in case of death during the accident. Whole life insurance This type of insurance is also necessary for the couples given that each has a certain responsibility that requires financial resources. The whole life insurance mainly covers the policy holder over his life. The validity of this type of insurance is not defined and the individual therefore enjoys the life cover throughout their lives (Dorfman & Cather, 2012). The policyholder has to pay regular premiums until their death. Upon the death of the policy holder, the corpus is paid out to the family. This is there essential to the couple in terms of dealing with the personal risks. It will be useful to the family in case of the death of either of the couple. The whole life insurance plays an essential role cautioning the families against financial risk in case of the death of their bread winner. Health insurance The couple requires health insurance to caution them and their family from personal losses resulting from poor health. The health insurance policies usually cover the covers the cost of treatment (Beard, 2013). The couple has an option of obtaining their own health insurance from a private provider or utilizes that provided by the government. The health insurance is vital in financing the health needs even in the event of serious illnesses that may lead to the high costs. The insurance should cover the couple as well as the children. Casualty insurance This type of insurance policy is useful in dealing with losses that arise from accidents that is not necessarily tied to any specific property. This may cover the business against crime which may result to loss of property (Zou & Cadenillas, 2014). Acts of terrorism has also been on the rise globally and it has affected a high number of businesses. The casualty insurance can caution the business as well as the properties of the couple. Home insurance The couples are currently serving a mortgage for their home meaning that they will soon be home owners. Home insurance provides the coverage for destruction or damage to the home of the policy holder (Beard, 2013). The damage covered by this type of insurance policy is however specific. It may not cover some of the risks such as earthquake and floods which may damage the home. Section 5 A lot of people have expressed concerns with regard to paying the insurance premiums and yet there are chances that the risks may never be encountered. This questions the effectiveness and relevance of the insurance premiums. Some of the analysts have also argued that insurance does not reduce risk since its costs the policy holders in terms of the premiums that they have to pay (Dorfman & Cather, 2012). The insurance companies understand they are also at risk as they may end up with losses. However, effective management of the risk is an essential element of the financial strategy. The insurance policy is a guarantee that the policy holders will not have to worry about the risks. This is especially when dealing in activities with a high level of uncertainty. As a financial strategy, the insurance policy will enable the couple to invest more and in activities with high risks. This is considering that high risk activities are likely to pay more in case of success. The revenue that may be generated from the high risk investments is much more. In the event of losses, they are cautioned against it by the insurance premium. However, it is important for the couple to ensure that thy only pay for the insurance premium in activities that are high risk and may lead to massive losses (Dorfman & Cather, 2012). Detailed information about the insurance policy should therefore be obtained the decision is made. Part B Section 1 Patient Protection and Affordable Care Act which is called Obamacare faced a long of opposition. This is because of the requirements for the same rates to be charged regardless of pre-existing condition or sex. This was one of the main reasons for the opposition as the opponents indicated that it will increase the health insurance premiums. The main role of the insurance is to caution against the risks. This mainly involves the events that have not taken place but are likely to do so in future (Zou & Cadenillas, 2014). The pre-existing condition can be considered a risk as it is already known. The expenses associated with the pre-existing conditions in most cases are known. Obamacare requires that everyone should subscribe to the policy. This therefore increases the number of people with pre-existing conditions. As a result of this, the insurance companies will have to spent more on the pre-existing conditions as well as a higher number of people were not initially covered by the policy (Moriya, et al, 2016). The Act requires the people with pre-existing conditions to pay the same rates as those without any pre-existing condition. This means that those without any pre-existing condition will be at a disadvantage. A high amount collected will mainly be used for catering for medical expenses and hence limiting the profits that the insurance companies can make. Spending too much on the medical expenses may also drive the insurance companies out of business (Moriya, et al, 2016). In order to avoid such scenarios, the insurance companies have no other option than to increase the premium rates. The Act is thus likely to affect the whole insurance industry and change how much can be spent on healthcare costs. The points that have been raised by the opponents of the Act is thus valid and this likely to ground most of the insurance companies. In risk management, the pre-existing condition is not considered a risk and can therefore not managed the same way as the conditions that do not exist. A pre-existing condition is not a form of uncertainty and quantifying it may be a challenge. The situation is further worsened by the payment of the same premium rates for those with existing condition and those without. Section 2 Imposition of penalties to those who do not purchase a complying health insurance policy is one of the main components of Obamacare. The government believes that the penalty is vital for the system to work. The penalty is mainly for the purposes of avoiding insurance death spiral. This is a condition in which the costs rapidly increases in the insurance market due to a rapid increase in the population covered (Dickman, et al, 2015). In such a situation, the insurance companies may be forced to increase their rates and hence resulting to the collapse of the industry. This was therefore a measures aimed at ensuring that the industry does not collapse as it would have impacted negatively on the intention of the Act. The people who are healthier or wealth may also flee the group as they do not see the need for paying for he rates which they may end up not using. The remaining people who cannot flee as they are less healthy or financially unstable may end up suffering as a result of such an event. The government anticipated such as situation and the penalty was mainly for the purposes of ensuring that everyone complies. The penalty is aimed at ensuring that the rich as well as the health do not stop complying. An increase in the rates due to the fleeing of the rich and healthy individuals only increases the burden for the unhealthy as well as the poor who cannot afford to pay even for the cheaper rates. The healthy may also delay in the process of insuring themselves until they are healthy and hence the need for the penalty (Dickman, et al, 2015).The insurers are also likely to raise the premium in case of delays. The penalty is thus a measure to caution the less healthy and poor as well as the industry as a whole. Bibliography Dorfman, M. S., & Cather, D. A., 2012, Introduction to risk management and insurance, Pearson High Education, NY. Zou, B. & Cadenillas, A., 2014, Optimal investment and risk control policies for an insurer: Expected utility maximization. Insurance: Mathematics and Economics, 58, pp.57-67. Beard, R., 2013, Risk theory: the stochastic basis of insurance (Vol. 20), Springer Science & Business Media. Moriya, A. S., et al., 2016, Little change seen in part-time employment as a result of the Affordable Care Act. Health Affairs 35(1), pp.119-123. Dickman, S. L., et al., 2015, Health and Financial consequences of 24 states’ decision to opt out of Medicaid expansion. International journal of health services: planning administration, evaluation 45(1), and pp.133-142. Read More