What is insurance? The concept of insurance involves paying a price to the insurance company to provide cover a certain risk.

A Individual pays
An individual buys an insurance policy premium to the insurance company

The insurer agrees to pay specified amount of money in case of a loss.

Categories of Insurance

Life insurance=provides an insurance benefit when the person who is insured dies. Health Insurance=covers certain medical expenses. Property Insurance=pays a benefit if the property is damaged.

Liability Insurance= provides protection if a person is found to be at fault and cause damage to someones health or property.
Disability insurance=pays income of a person is unable to work.

Advantages & Disadvantages of Insurance

Allows taking risks that will help an individual to compete in their business market. Reduce tax liability since premiums and payments enjoy considerable tax benefit.

Frees up the funds for investment=an individual will not be required to self-insurance , for which he would have to keep liquid assets.
Reduce the frequency and severity of loss.

Disadvantages of Insurance Administration costs are high. Moral hazard=Less care to prevent losses because of insured. Exclusions-insurance contracts normally have exclusions restricting coverage. High opportunity cost.

Types of Risk
Risk: Uncertainty or lack of predictability, such as to loss that a person or property, covered by insurance, faces. Peril is the cause of a possible loss, such as fire, windstorm, robbery, disease, or death. Hazard increases the likelihood of a loss, such as driving drunk, or defective house wiring. Risk management: Organized, planned strategy to protect your assets and family.

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Coverage and Type of Risk

Pure Risk.
Personal risks, property risks, and liability risks are types of pure risk. Insurable, chance of loss, not gain. Accidental, unintentional. Nature and financial loss of the risk can be predicted.

Speculative Risk.
Chance of loss or gain, such as starting a business. Uninsurable.
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Planning an Insurance Program

To put your risk management plan to work ask yourself
What should be insured? For how much? What kind of insurance? From whom?

Set your insurance goals and prioritize them. Develop a plan to reach your goals. Put plan into action. Review results.
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