INTRODUCTION TO

INSURANCE
INSURANCE MARKETS AND OPERATIONS 7FNCE018W |

DR SIMONE KRUMMAKER

27. SEPTEMBER 2016

SEMESTER 1 2016/2017

 What is Insurance
Types of Insurance
Definition of Insurance
Insurance vs Gambling

AGENDA
27. SEPTEMBER 2016

WHAT IS INSURANCE?

27. SEPTEMBER 2016

27. SEPTEMBER 2016

INSURANCE MARKET: RISK SHARING

Retrocession

Reinsurers

Cession
Primary insurers

Insurance
Insured persons
and companies

27. SEPTEMBER 2016

TYPES OF INSURANCE
Types of Insurance

Life Insurance

Non-Life Insurance
(also Property & Casualty)

27. SEPTEMBER 2016

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)

27. SEPTEMBER 2016

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)

27. SEPTEMBER 2016

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
27. SEPTEMBER 2016

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?

27. SEPTEMBER 2016

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
27. SEPTEMBER 2016

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

27. SEPTEMBER 2016

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

27. SEPTEMBER 2016

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,
https://www.irmi.com/online/insurance-glossary/default.aspx
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

27. SEPTEMBER 2016