Insurance risk

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The 'insurance risk is defined as follows according to different authors:

  • A.Willet 1901 - the concept of economic risk theory, based on the assumptions of philosophical determinism (negation of the randomness of the processes of the external world). Therefore, the risk is the state of the external world, something objective correlated with uncertainty (objective correlate of subjective uncertainty),
  • F.Knight 1992 - concept of measurable and unmeasurable uncertainty. The risk is measurable uncertainty and uncertainty (sensu stricte) - uncertainty uncertainty,

Committee on US Insurance Terminology 1966-2 definitions, Insurance risk is the uncertainty as to the occurrence of a specific event in the conditions of two or more possibilities, The risk is an insured person or subject of insurance

  • D. Ostrowska 2016 - insurance risk, that is regarding the subject of insurance, this is the risk before which the policyholder is protected

The risk is not homogeneous and therefore one universal definition can not be included, several different approaches to determining the concept of risk should be taken into account. It is something variable, depending on time. The risk should be treated as a process, and the analysis should take into account its dynamics. When testing a risk, factors that affect its substance and size should be taken into account.

Insurance risk factors

Threat (hazard) - a set of conditions and circumstances in which the given danger is realized, which affect its size and size,

Danger (peril) - the cause or source of the loss, it is a potential threat resulting from the occurrence of specific events known in the past that may lead to undesirable situations, adverse events that will generate losses.

In the insurance risk theory, we distinguish three categories of gambling,

  • Physical ("physical gambling") - external conditions (of an outside-subject nature) or physical features that have a direct impact on the severity of the causes of losses,
  • Moral ("moral hazard") - a set of subjective conditions of a given person, expressed in negative characterological tendencies, or personality traits such as dishonesty or a tendency to embezzle,
  • Motivational, spiritual ("morale hazard") - a subjective (individual) insurance reaction, triggered by the awareness of the existence of insurance protection. The effect of spiritual gambling are secondary motivational attitudes caused by the very existence of insurance,

Conditions for risk insurance

The conditions of insurance and risk include:

  • There are sufficient numbers and sizes of objects to calculate the likelihood of damage
  • Possible events must be incidental and not measured from the point of view of the insured
  • Damage must be possible to determine and assess
  • Potential losses are serious and will cause financial difficulties
  • Loss probability can not be too high, as the risk transfer costs will be too high.
  • The loss arose as a result of the risk can not be a disaster

The application of the above-mentioned conditions takes place primarily in non-life insurance. In life insurance, the concept of loss does not apply, but the emergence or increase of financial needs. What is more, personal risk is difficult to measure, but it is possible to determine approximately the value of property needs resulting from certain events. Functioning of life insurance is not based on the principle of compensation for damages but payment of the agreed sum. A characteristic issue of property insurance is the functioning of the principle of compensation. The basic principles of insurance law include:

the principle of full insurance coverage - the purpose of the insurance is full compensation for the damage sustained by the insured, but not exceeding the incurred losses and lost profits Principle of the feasibility of insurance protection - the insured person must be guaranteed that in the event of a specific insurance incident, the losses suffered by him or the financial needs arising will be met by the insurer the principle of insurance protection guarantee - the possibility of using protection, and most importantly as regards the financial condition of an insurance company and the operation of insurance law.

Classification of insurance risk

I.

financial - the implementation of risk is of economic nature, non-financial - the implementation of risk is not of an economic nature; II.

static - occurs regardless of time, even when there are no economic, technological and civilizational changes, dynamic - closely related to economic, technological and civilizational changes, III.

fundamental - impersonal risk, affects a large number of individuals or the whole society, has social, economic or political reasons; 2.particular - they create threats (they cause losses) on the scale of individual interests, IV.

clean - if there is a risk, then the entity will definitely bring a loss: unrealized does not bring any benefits, speculative - if the risk occurs, the entity may incur a loss or make a profit; failure to realize this risk means no loss or gain; V.

personal - the subject of the insurance contract is health, life or the ability to perform work; property - threatening property interests, VI.

probabilistic - calculable using mathematical methods (a priori risk) or only on the basis of statistical data (statistical risk), estimate - possible to calculate using statistical methods, a priori probability;

Insurance risk management

  • Risk analysis - identifying and assessing risk and determining the hierarchy of risks,
  1. Active approach to risk - eliminating, limiting, segmenting, dividing, controlling and moving risk,
  2. Risk financing - insight into the possibilities of self-insurance or insurance in the business insurance system (risk transfer),
  3. Risk administration; the form of action in which the adopted action program is systematically estimated, its course is assessed and it adapts to the risk management process;

Managing insurance risk

  • Avoiding risk - a negative method of risk manipulation. It occurs when I individually and consciously refuse to accept the occurrence of risk (even in a short period of time), it causes accumulation of risk in the long run and results in paralysis of the state's actions,
  • Risk retention - the most common method of risk manipulation,
  1. Active - is the result of deliberately made decisions, the entity is aware of the risk, decides to accept this risk - all or part of it (transferring the risk to another entity),
  2. Passive - unconscious, unconscious taking risks on their own responsibility, may result from ignorance, ignorance, laziness or arrogance,
  • Transfer of risk (transfer) - a positive method of manipulation, involves the transfer of risk to another entity, risk transfer may be done by transferring the activity or transferring responsibility to another entity.

Types of Insurance risk

Insurance risk can be broadly classified into two types: actuarial risk and claim settlement risk.

  • Actuarial Risk: This type of risk is related to predicting the future losses of an insurer. It involves predicting the probability of losses, their expected frequency, and their possible severity. An insurer must accurately assess and anticipate the risk of a given policy in order to set proper premiums. Examples of actuarial risk include mortality risk (the risk of a policyholder dying before the policy matures), morbidity risk (the risk of a policyholder becoming ill or disabled before the policy matures), and investment risk (the risk of the insurer’s investment portfolio not performing as expected).
  • Claim Settlement Risk: This type of risk is related to the probability that an insurance claim will not be paid or will be paid less than the amount requested. Examples of claim settlement risk include the risk of policyholders filing fraudulent claims or of insurers denying valid claims. Other examples include the risk of policyholders not providing enough information to support their claims and the risk of insurers not having the proper documentation to support their decisions.

Advantages of Insurance risk

The Advantages of Insurance Risk include:

  • Financial security: Insurance helps to protect individuals and businesses from financial losses due to unexpected events, like natural disasters, medical bills, and legal costs.
  • Peace of mind: Knowing that an insurance policy is in place provides peace of mind, allowing individuals and businesses to focus on their day-to-day activities without worrying about unexpected events.
  • Tax benefits: Insurance policies may provide tax deductions to policy holders.
  • Cost savings: Insurance can help save money by providing coverage for medical costs, legal fees, and other expenses that would otherwise be paid out-of-pocket.
  • Investment opportunities: Insurance policies can provide an investment opportunity for policy holders, as insurance companies offer policies with cash value that can be used as an investment.
  • Risk sharing: Insurance provides a way for individuals and businesses to share risk with other policy holders and the insurance company, which allows for a more secure financial future.

Limitations of Insurance risk

Introduction: The following are some of the common limitations of insurance risk:

  • Insurable risk: Not all risks can be insured against because some are too large, too catastrophic, or too unpredictable to be economically feasible.
  • Premiums: Insurers must charge high premiums to cover the risk of potential losses, which may not be affordable for some consumers.
  • Deductibles: Deductibles are the amount of money that must be paid out of pocket by the policyholder before an insurer will pay a claim. This can be a significant financial burden for some policyholders.
  • Exclusions: Insurance policies often exclude certain types of risks, such as floods or earthquakes, which leaves policyholders vulnerable if they are affected by such a disaster.
  • Limitations: Insurance policies often have limits on the amount of coverage they provide, which can leave policyholders exposed to large losses if their claims exceed the limits.
  • Timing: Insurance policies often have certain time limits for filing a claim, which can be difficult to meet if the policyholder does not realize they have a claim until after the deadline has passed.

Other approaches related to Insurance risk

Insurance risk is a concept used to describe various types of risks associated with providing insurance coverage, such as losses due to policyholders' claims and the financial stability of the insurer. Various approaches to risk assessment have been developed to help insurers assess and manage their exposure to risk. These include:

  • Actuarial Risk: This approach involves the use of mathematical and statistical techniques to evaluate the probability of claims being made against an insurer. Actuarial risk assessment helps insurers to better predict and manage their risk exposure.
  • Financial Risk: Financial risk assessment evaluates the financial stability of an insurer and its ability to pay out claims. This includes assessing the insurer's capital structure, asset allocation, liquidity, and other financial metrics.
  • Legal Risk: This approach involves assessing the potential legal liabilities of an insurer, such as the potential for civil or criminal penalties, or regulatory action.
  • Operational Risk: This approach involves assessing the risks associated with the operations of an insurer, such as the security of its systems, the accuracy of its data, and the performance of its personnel.
  • Market Risk: This approach evaluates the risks associated with changes in the market, such as changes in interest rates, exchange rates, and the price of commodities.

Insurance risk is a concept used to describe various types of risks associated with providing insurance coverage. Different approaches to risk assessment have been developed to help insurers assess and manage their exposure to risk, including actuarial, financial, legal, operational, and market risk. These approaches help insurers to better predict and manage their risk exposure.


Insurance risk — recommended articles
Cost risk — Total risk — Tax environment — Risks and uncertainties — Risk transfer — Residual risk — Pure risk — Technical risk — Uncertainty and risk

References

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