Government College Women University

Faisalabad

Assignment # 1

Topic: Risk and insurance

Submitted By: Shahida

Submitted To: Mam Nimra

Semester & Section: 7Th (MA)

Course: Risk management

Department: Management Sciences

What Is Insurance?
Insurance is a contract, represented by a policy, in which a policyholder receives financial
protection or reimbursement against losses from an insurance company. The company pools
clients’ risks to make payments more affordable for the insured. Most people have some
insurance: for their car, their house, their healthcare, or their life.

Key Takeways:
Insurance is a contract (policy) in which an insurer indemnifies another against losses from
specific contingencies or perils.

There are many types of insurance policies. Life, health, homeowners, and auto are among the
most common forms of insurance.

The core components that make up most insurance policies are the premium, deductible, and
policy limits.

How Insurance Works:

Many insurance policy types are available, and virtually any individual or business can find an insurance
company willing to insure them—for a price. Common personal insurance policy types are auto, health,
homeowners, and life insurance. Most individuals in the United States have at least one of these types
of insurance, and car insurance is required by state law.

Types of Risk:

Broadly speaking, there are two main categories of risk: systematic and unsystematic. Systematic risk is
the market uncertainty of an investment, meaning that it represents external factors that impact all (or
many) companies in an industry or group. Unsystematic risk represents the asset-specific uncertainties
that can affect the performance of an investment.

Below is a list of the most important types of risk for a financial analyst to consider when evaluating
investment opportunities:
Systematic Risk – The overall impact of the market

Unsystematic Risk – Asset-specific or company-specific uncertainty

Political/Regulatory Risk – The impact of political decisions and changes in regulation

Financial Risk – The capital structure of a company (degree of financial leverage or debt burden)

Interest Rate Risk – The impact of changing interest rates

Country Risk – Uncertainties that are specific to a country

Social Risk – The impact of changes in social norms, movements, and unrest

Environmental Risk – Uncertainty about environmental liabilities or the impact of changes in the
environment

Operational Risk – Uncertainty about a company’s operations, including its supply chain and the delivery
of its products or services

Management Risk – The impact that the decisions of a management team have on a company

Legal Risk – Uncertainty related to lawsuits or the freedom to operate

Competition – The degree of competition in an industry and the impact choices of competitors will have
on a company

Types of Risks - Systematic Risk and Unsystematic Risk

What is Risk:

In finance, risk is the probability that actual results will differ from expected results. In the Capital Asset
Pricing Model (CAPM), risk is defined as the volatility of returns. The concept of “risk and return” is that
riskier assets should have higher expected returns to compensate investors for the higher volatility and
increased risk.

Types of Insurance:

The National Association of Insurance Commissioners (NAIC) compiles an index of complaints about
insurance companies. This information comes from state insurance regulators. The NAIC then compares
the number of complaints to the insurance company's market share.

Health InsuranceInsurance:
Health insurance helps covers routine and emergency medical care costs, often with the option to add
vision and dental services separately. In addition to an annual deductible, you may also pay copays and
coinsurance, which are your fixed payments or percentage of a covered medical benefit after meeting
the deductible. However, many preventive services may be covered for free before these are met.

Home Insurance:

Homeowners insurance (also known as home insurance) protects your home, other property structures,
and personal possessions against natural disasters, unexpected damage, theft, and vandalism.
Homeowner insurance won't cover floods or earthquakes, which you'll have to protect against
separately. Policy providers usually offer riders to increase coverage for specific properties or events and
provisions that can help reduce deductible amounts. These adders will come at an additional premium
amount.

Auto Insurance

Auto insurance can help pay claims if you injure or damage someone else's property in a car accident,
help pay for accident-related repairs on your vehicle, or repair or replace your vehicle if stolen,
vandalized, or damaged by a natural disaster.

Instead of paying out of pocket for auto accidents and damage, people pay annual premiums to an auto
insurance company. The company then pays all or most of the covered costs associated with an auto
accident or other vehicle damage.

Life Insurance

A life insurance policy guarantees that the insurer pays a sum of money to your beneficiaries (such as a
spouse or children) if you die. In exchange, you pay premiums during your lifetime.

There are two main types of life insurance. Term life insurance covers you for a specific period, such as
10 to 20 years. If you die during that period, your beneficiaries receive a payment. Permanent life
insurance covers your whole life as long as you continue paying the premiums.

Risk and insurance have a direct relationship. Insurance is a mechanism for managing and transferring
risk.

Risk:
1. Uncertainty or possibility of loss

2. Potential harm or damage to assets, health, or life

3. Can be financial, operational, or strategic

Insurance:
1. Contractual agreement to transfer risk

2. Insurer assumes risk in exchange for premium payments

3. Provides financial protection against losses

Relationship between Risk and Insurance:

1. Risk identification: Insurance companies identify potential risks and offer coverage.

2. Risk assessment: Insurers evaluate likelihood and potential impact of losses.

3. Risk transfer: Policyholders transfer risk to insurers through premium payments.

4. Risk management: Insurance companies manage and mitigate risks.

Types of Risks Insured:

1. Life risk (life insurance)

2. Health risk (health insurance)

3. Property risk (property insurance)

4. Liability risk (liability insurance)

5. Business risk (business insurance)

Insurance Benefits:
1. Financial protection

2. Risk reduction

3. Peace of mind
4. Compliance with regulations

5. Business continuity

Risk Management Strategies:

1. Avoidance

2. Reduction

3. Transfer (insurance)

4. Retention (self-insurance)

5. Mitigation

Insurance Principles:
1. Utmost good faith

2. Insurable interest

3. Indemnity

4. Subrogation

5. Contribution

Insurance Types:
1. Term life insurance

2. Whole life insurance

3. Health insurance

4. Auto insurance

5. Homeowners insurance

6. Liability insurance

7. Business insurance
8. Reinsurance

Key Players:
1. Insurers

2. Policyholders

3. Brokers

4. Agents

5. Reinsurers

Regulations:
1. Insurance laws

2. Regulatory bodies (e.g., NAIC)

3. Solvency requirements

4. Consumer protection

The relationship between risk and insurance is crucial for individuals and businesses to manage
uncertainty and potential losses.

Would you like more information on risk management or insurance products?