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WHY STUDY INSURANCE?

CAREER
Preparation for a career in finance industry.
Financial Executive/Finance Manager/Business
Man etc.

CONSUMER
To improve knowledge about insurance to become
more knowledgeable consumers.
To learn how it can be used in personal financial
planning.

INSECURITY IN LIFE
Uncertainty of negative/harmful incidents that may
happen to us in the future.
We can learn how to be secure by buying
insurance.

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IMAGINE THIS
SITUATION

TWO POSSIBLE ENDINGS


WITHOUT INSURANCE

WITH INSURANCE

1. Need RM15,000
for my surgical
operation.
2. Need RM35,000
to repair house.

1. Need RM15,000
for my surgical
operation.
2. Need RM35,000
to repair house.

Where could I find RM50,000


now? Oh no, I only have
RM5,000 in my saving.

Its a relief, my insurance


company will pay all RM50,000
on my behalf.

TOPIC 1.1
THE MEANING OF
RISK

DEFINITION OF RISK
Deviation in outcomes in a given situation
Uncertainty about the loss people may suffer in the future
Negative/harmful incidents that may happen to people
Examples: fire, collision, flood, sickness, premature death, etc
Used to indicate a condition of the real world in which there is a
possibility of loss (Vaughan & Vaughan, 2008).
Used by insurance practitioners to indicate the property insured or the
peril insured against (Vaughan & Vaughan, 2008).

PROBABILITY THEORY
Probability is as a study that measures the chance of
occurrence of a specific event.
There are three (3) probability theory used to determine the
chance of loss:
Priori probability
Empirical probability
Judgmental probability

PROBABILITY THEORIES
Priori Probability

Empirical Probability

Judgmental Probability

Determined when the total

Determined on the basis

Determined based on the

number of possible

of historical data

judgment of the person

events are known

predicting the outcome

Has limited practical

Normally used when

It is used when there is

application because

there are enough past

lack of historical data

known number of possible

data

outcome are very rare

TOPIC 1.2
THE CONCEPT OF LOSS, PERIL
& HAZARD

IMPORTANT CONCEPTS
Hazard

Peril

Loss

A condition that
increases the chance of
loss

A cause of loss

A reduction or
disappearance of
economic value

Example:
Poor brake
Types of hazard: Physical
hazard, moral hazard &
morale hazard

Example:
Motor Accident

Example:
Property damage, loss
of use, loss of income

EXAMPLES
LOSS
Property
damage

PERIL
Motor
Accident
HAZARD
Poor Brake

5 MINUTES GROUP ACTIVITY:


Think of a new example of hazard,
peril and loss. Then, write a story
about your chosen examples.

THREE MAJOR TYPES OF HAZARD


Physical Hazard

Moral Hazard

Morale Hazard

Physical condition that


increases the chanceof
loss

Character defect in an
individual that increases
the chance of loss

Character defect in an
individual that increases
the chance of loss with
the knowledge that the
insurance exists

Examples:
i. A buildings
structural defects
ii. A persons
occupancy

Examples:
i. Insured giving false
information to insurer
ii. Raising a claim with
exaggerated loss.

Examples:
i. Rash driving after
getting auto insurance.
ii. Keeping doors open
after purchasing an
insurance for house.

TOPIC 1.3
THE CLASSIFICATION OF
RISK

BASIC CATEGORIES OF RISK


Differentiate by
effects

Fundamental risk
Particular risk

Differentiate by
outcomes

Pure risk
Speculative risk

BASIC CATEGORIES OF RISK


Category 1

Category 2

Differentiate by effects

Differentiate by outcomes

Fundamental Risk

Particular Risk

Pure Risk

Speculative Risk

Affects an entire
economy or a
group of people
within an economy

Affects an
individual
because it is the
result of individual
action or choice

Exists when there


is possibility of
loss or no loss

Exists when there


is possibility of
profit, loss or no
loss

Example:
Flood, typhoon,
inflation, mass
unemployment,
etc

Example:
Crossing a road,
driving a car, go
swimming, etc

Example:
The car driver
faces the risk of a
potential collision
loss

Example:
Investment in a
capital project
might be profitable,
incur losses or
reach breakeven

THREE TYPES OF PURE RISK


Personal Risk

Property Risk

Liability Risk

Chance of loss involving an Chance of loss or harm to


individuals income &
personal or real property
standard of living

Chance of loss that may


occur when an individuals
mistakes or actions result
in injuries to other people
or damages to their
property

Types/Examples: risk of
premature death, risk of
old age, risk of poor
health & risk of
unemployment

Example:
A person can accidentally
cause injury or damage
to others or their
property by his conduct
while driving.

Example: Home, car or


other properties could be
damaged or destroyed by
fire, theft, wind, rain,
accident and other dangers
Types of loss: direct loss,
indirect loss & extra
expenses

TYPES OF PERSONAL RISK


Risk of premature
death

Risk of old age

Possibility to die in
a sudden or
unexpected death

Possibility of
insufficient
income during
retirement

Outcome:
loss of human
value, funeral
expenses, etc

Outcome:
not enough cash
to buy groceries,
not enough
money to survive
life, etc

Risk of poor
health

Risk of
unemployment

Possibility to suffer Possibility of being


from a disease
dismissed

Outcome:
medical
expenses, loss of
earned income,
etc

Outcome:
loss of earned
income, depletion
of accumulated
financial assets,
etc

TYPES OF LOSS ASSOCIATED WITH DAMAGE OF


PROPERTY
Direct Loss

Indirect Loss

Extra Expenses

Damage to a property by
peril

A loss due to a direct


loss i.e property damage

Additional expenses
incurred as a result of
the loss

Example:
Loss of value of the
building as a result of fire
(Fire is the peril)

Example:
Loss of profit as a result
of business interruption
following damage on the
business premises

Example:
Cost of renovation or refixing of damage property

REVISION
Risk definition
Deviation in
outcome
Uncertainty
Harmful
incidents
Basic types of
risk
Fundamental &
particular
Pure &
speculative

Probability
theory
Priori
Empirical
Judgmental

Pure risk
Personal
Property
Liability

Vital concepts
Hazard
Peril
Loss

Personal risk
Premature
death
Old age
Poor health
Unemployment

Hazard
Physical
Moral
Morale

Loss related to
property
damage
Direct loss
Indirect loss
Extra expenses

GROUP ACTIVITY:
DISCUSS AND ANSWER
Group 1: Explain three (3) major types of loss associated with damage
of property.
Group 2: Describe two (2) main classifications of risk.
Group 3: Explain three (3) types of pure risk.
Group 4: Describe four (4) types of personal risk.
Group 5: Explain three (3) types of hazard.
Group 6: Describe three (3) probability theories.
Group 7: Distinguish between hazard, peril and loss. Give examples.

END OF CHAPTER
1
THANK YOU FOR YOUR ATTENTION