Risk Assessment
Insurance Operations
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Risk and Insurance
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Risk is the possibility of loss resulting from
an event.
Insurance provides a method of managing
risk by spreading the risk among a large
group of people, which reduces the
payments people make to help alleviate
risk.
These payments are called premiums.
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Types of Risk
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There are many types of risk that can be
categorized in many different ways, but
they generally include
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Economic: may be out of your control / can affect
your job, savings, and income
Personal: includes risk to your person / possibly
due to injury, accident, or illness
Property- includes risk to “real property,” such as
your home or car due to theft, fire, or natural
disasters
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Risk Strategies
Identify possible types of risks.
Assess potential value of loss due to risk.
Reduce the risk.
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Degrees of Risk Strategizing
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Once risks have been identified, you have
options on how to handle the risks.
If the risk is in your
control, reduce it
by changing your
actions
If the risk is in your
control but is too
great a risk, avoid
the actions
altogether
Risk
Reduction
Risk
avoidance
Whether or not the
risk is in your
control, you can
assume the risk
and obtain
insurance as
protection
Risk
shifting
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Identifying Possible Risks
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Examine your daily routine
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Assess your health
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Any medical concerns, illnesses, etc.
Analyze your income and expenses
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The drive to work or school
Savings, emergency fund
Look at your lifestyle
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Adventurous, sports, hobbies
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Risk Tolerance
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Rutgers University has a risk tolerance quiz
at
http://njaes.rutgers.edu/money/riskquiz/.
Take the quiz to determine your attitude
toward risk, which can translate to your
attitude toward your financial life, too.
Can show your need for insurance based
upon your attitudes toward risk in the
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survey
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See how you answer any of
the questions on the next
four slides; you may need
insurance to provide
protection in the event of a
loss.

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Assessing Value of RisksRoutine
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$ of car payments?
Age and conditions of automobile(s)?
Would you be able to rent or replace a car
in the event of an accident?
Look at Kelly Blue Book or Edmunds to
determine current value.
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Assessing Value of RisksHealth
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Any existing health conditions?
What if you fell ill and had to go to a doctor
or emergency room?
What if you were to have surgery?
Research costs and calculate costs if any of
these events have occurred.
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Assessing Value of RisksIncome and Expenses
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Calculate income and expenses per month.
Do you have money in savings?
Do you have an emergency fund to cover
three to six months of expenses?
Would you be able to cut expenses or find
additional income if you lost a job?
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Assessing Value of RisksLifestyle
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Do you have hobbies that are expensive or
that require expensive equipment?
Are you adventurous or do you play sports?
What if you broke a bone doing any
activities?
What if equipment was stolen?
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Assessment Methods
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Generally based on prior occurrence of similar
events—comparison of similar losses
Risk is shared by a group of people with similar
experiences even if not all of them have been
directly affected (as in the case of tornado or hail
damage, which can raise rates)
Credit-based scoring system- higher credit score,
possibly lower insurance rates
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Assessment Methods
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National Vital Statistics Reports from the
Centers for Disease Control and United
States Life Tables show data used by
actuaries
U. S. Census Bureau- health, income, and
asset statistics (such as car and home
ownership)
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Statistical Methods
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Poisson distribution- measures the number
of events that occur during a specific time
period
Stochastic models- uses past experiences
to predict an estimate of value (of say, an
insurance policy, assuming random
variables) and keeps updating its estimates
based on random events
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Statistical Methods (cont.)
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Frequency distribution- usually a graphical
distribution of data (for example, the
number and severity of claims in a given
period)
Expected Value concept- knowing that
there will be claims on an insurance policy,
it places a value on the gain it will make on
policies in the future
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What is an Actuary?
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Actuary- uses data and statistics to assess
insurance risks and determine premiums
An actuary
– Determines how reliable past experiences are
as a predictor of actual performance
– Develops statistical models
– Looks for variables that may affect actual
statistics
– Considers inflation relative to future claims
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– Attempts to establish premiums
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What are State Risk Pools?
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State Risk Pools are designed to provide
– insurance to individuals who may find it difficult to
acquire insurance unless it is very expensive
– insurance that may be difficult to obtain because
of certain pre-existing conditions or other health
conditions
– insurance if any other eligibility requirements
apply
Covers medical and prescription expenses
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New Risks in the Insurance IndustryE-Risks
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Hacking- breaking into a computer network to
alter it or access information
Identity theft- unlawfully accessing and using
someone else’s identity for financial profit
Possible monetary damages- loss of wages,
phone calls, postage, attorney fees, bank
accounts
Damages may partially be covered under
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homeowner’s insurance policy
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Independent Practice
Assignments
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Risk Identification Document Assignment #1
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Students are to create a document of their choice that will focus on at least
three different risks that they either encounter now or will in the future.
They will not only identify the risk, but assess their risk tolerance and explain
their risk strategy for reducing the risk (at least two strategies for each
identified risk). This document should show creativity.
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Actuary Career Research Assignment #2
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Students will conduct research on careers related to Actuarial Science. A
good resource is bls.gov. Click on Publications then on Occupational Outlook
Handbook. They will create a two-column table of the data. The left column
will have headings similar to earnings, education and training, what they do,
job outlook, and related jobs. The right column will contain the details
explaining the topics on the left. Other information may also be included.
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Independent Practice
Assignments (continued)
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Student Survey Assignment #3
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Students are to create a survey to give to students and parents. This survey
should include at least 10 questions of the students’ choosing. Questions can
include topics such as: do they drive, have they had any tickets/how many,
have they been in any car accidents, have they broken bones playing sports
or doing hobbies, have they had any illnesses like the flu, and any other
questions they would like to ask. They need to record the ages and gender
for each person who participates. The students will then tally the results of
their findings for each age group. It is okay if they only have the age group of
high school students. They will report their findings on a poster or flipchart
paper. They can also use charts or graphs to record their responses. The
survey results should be easy to understand and creative in appearance.
Then students should also include a risk assessment based on their survey
findings. For example, if there are people who participate in risky sports or if
there are people who have had speeding tickets or accidents.
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