INTRODUCTION TO
INSURANCE
INSURANCE MARKETS AND OPERATIONS 7FNCE018W |
DR SIMONE KRUMMAKER
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SEMESTER 1 2016/2017
What is Insurance
Types of Insurance
Definition of Insurance
Insurance vs Gambling
AGENDA
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WHAT IS INSURANCE?
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INSURANCE MARKET: RISK SHARING
Retrocession
Reinsurers
Cession
Primary insurers
Insurance
Insured persons
and companies
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TYPES OF INSURANCE
Types of Insurance
Life Insurance
Non-Life Insurance
(also Property & Casualty)
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INSURANCE | AN ATTEMPT OF A DEFINITION 1
The classical definitions
Insurance is the exchange of an uncertain loss of unknown magnitude
for a small and known loss. (Hax, 1964)
Insurance is the exchange of money now for money payable
contingent on the occurrence of certain events. (Arrow, 1965)
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INSURANCE | AN ATTEMPT OF A DEFINITION 2
At the broadest view
Insurance is a means or procedure that reduces uncertainty with respect
to the future. (Zweifel and Eisen, 2012, p. 44)
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INSURANCE | AN ATTEMPT OF A DEFINITION 3
International Risk Management Institute (IRMI)
A contractual relationship that exists when one party (the insurer)
for a consideration (the premium) agrees to reimburse another party
(the insured) for loss to a specified subject (the risk) caused by
designated contingencies (hazards or perils)
American Risk and Insurance Association (ARIA)
Insurance is the pooling of fortuitous losses by transfer of such risks
to insurers, who agree to indemnify insureds for such losses, to provide
other pecuniary benefits on their occurrence, or to render services
connected with the risk
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GROUP EXERCISE
Please go together in groups of 2 or 3 students
Task
Analysing the various definitions of insurance, which elements do they
have in common? Can you label these with general category names?
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INSURANCE | AN ATTEMPT OF A DEFINITION 4
Key Elements of Insurance
Risk transfer arrangement
The insured transfers the risk to the insurance company
Risk financing arrangement
The insurer promise to give contingent capital that the insured secures for the future. The insured is subject
to less cash flow volatility. (Borch 1984)
Information transfer
The insured is obliged by the insurance contract to provide certain information to the insurer
(Schulenburg 2005)
Capital transfer
Capital is transferred over time as well as from a state of no loss to a state of loss
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WHAT IS INSURANCE?
GAMBLING VS. INSURANCE
Y(t)
Y(t)
Wealth with gambling
and winning
Wealth without risk
Wealth with insurance
(loss and no loss)
Wealth without gambling
Wealth with gambling
and losing
Wealth with loss and
without insurance
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WHAT IS INSURANCE?
GAMBLING VS. INSURANCE
Both
Swap a fixed amount against a contingent claim
(quid pro quo/ the return of the service only after particular ex ante defined event)
q Gambling
Creates uncertainty
q Insurance
Lessens and spreads an already existing uncertainty
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READING AND BIBLIOGRAPHY
Core Reading
Rejda, G. and McNamara, M. (2014). Principles of Risk Management and Insurance, 12th Edition,
Pearson, Chapter 2
Further Literature
International Risk Management Institute. Glossary of Insurance and Risk Management Terms,
[Link]
Borch, K. (1985). A Theory of Insurance Premiums, Geneva Papers on Risk and insurance,Vol. 10, pp. 192-208
Hax, K. (1964). Grundlagen des Versicherungswesens, Gabler Wiesbaden
Arrow, K. (1965). Aspects of the Theory of Risk Bearing, Helsinki
Schulenburg, J. M. Graf von der (2005).Versicherungskonomik,VVW Karlsruhe
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