Introduction to Risk Management and Insurance

Author: Mark S. Dorfman
Publisher:
Publishing Date: 1998-10-01
Features: Preface
To adapt to the construction and development of China's socialist market economy, and to meet the needs of domestic readers in understanding, learning, and drawing lessons from advanced foreign management experiences and grasping the cutting-edge dynamics of economic theory, Tsinghua University Press has cooperated with Prentice Hall International Publishing Company to reprint and publish a series of English-language economic management books. The books we have selected are essentially well-received, widely adopted, and revised multiple times abroad, with most being authoritative classics in the field. During the selection process, we received strong support, assistance, and encouragement from many experts and scholars, for which we express our sincere gratitude! This book has been reviewed by Ms. Liu Yuan of the School of International Economics and Trade at the University of International Business and Economics, and we extend our thanks to her as well! Due to differences in political, economic, and cultural contexts between the author's home country and China, readers are kindly requested to analyze and discern the viewpoints presented in the book during their reading. We hope that the publication of this reprinted series will contribute to the development of China's economic sciences and promote teaching in the field of economic management. We welcome readers to provide valuable suggestions and opinions, and we also welcome professionals to recommend outstanding foreign books they have encountered.
Tsinghua University Press, Third Editorial Office, October 1998
Introduction to Risk and Insurance (Sixth Edition)
This book provides a comprehensive introduction to risk management and insurance. The author has taught the course for 28 years. The book is divided into six parts, covering the fundamentals of risk management and insurance, the insurance industry, relevant knowledge of insurance contracts, the private insurance system, life insurance, personal accident insurance, annuity insurance, and public insurance. The book features:
1. Rigorous logic and strong systematicity. The book thoroughly elaborates on the definition and management of risk, as well as the principles and practices of insurance, presenting the connotations and extensions of related categories in an accessible manner, demonstrating strong logical coherence.
2. Practical relevance and high operability. The book is supplemented with numerous examples, highlighting its practicality.
3. Incorporation of many recent research findings in the field, ensuring up-to-date content.
4. Emphasis on key points, with some discussions being highly readable.
This book can serve as a textbook for undergraduate and graduate students in economics and management schools taking insurance courses, as well as a valuable guide for those engaged in insurance research and practice.
Excerpt:
FIGURE 1-1 Insurance redistributes the costs of losses to alleviate the uncertainty about a loss and to be compensated if the loss occurs. Thus, even if no loss occurs during a year, as will be the case for most insureds, value still has been received in the form of reduced or eliminated unpleasant mental state—the anxiety about a loss.
Legal Definition
Insurance is a contractual arrangement wherein one party agrees to compensate another party for losses. We call the party agreeing to pay for the loss the insurer. We call the party whose loss causes the insurer to make a claim payment the insured. We call the payment the insurer receives a premium. We call the insurance contract a policy. We call the insured's possibility of loss the insured's exposure to loss. We say the insured transfers the exposure to loss to the insurer by purchasing an insurance policy. Insurance is a branch of contract law. The insurance policy, like all contracts, is an arrangement creating rights and corresponding duties for those who are parties to it. For instance, the insurance contract creates the insured's right to collect payment from the insurer if a covered loss occurs. The insurer has a corresponding duty to pay for such losses. The insurance contract also creates other rights and duties. The insurer has the right to collect premiums, and those wanting their coverage to continue have the corresponding duty to pay them. The insurer has the right to specify the rules and conditions for participating in the insurance pool, and insureds have the corresponding duty to comply with them if they expect to collect for losses. When analyzing an insurance contract, you should remember that a right created for one party represents a duty for the other party. Perhaps the word "duty" is too strong a term to describe the obligations of an insured to an insurer. Generally, an insurer legally cannot force an insured to pay premiums or follow its procedures, but it may cancel the insurance or deny claims if premiums are unpaid. Likewise, an insurer generally cannot force an insured to meet the conditions set forth in the contract, but if the insured does not meet the conditions, losses will not be paid. Thus, it seems fair to note that an insurance contract creates rights and corresponding obligations for the insurer and insured.
LOSS, CHANCE OF LOSS, PERIL, HAZARD, AND PROXIMATE CAUSE
The subject of insurance is more easily understood if we apply precise meanings to the words used in the discipline. Terms such as loss, chance of loss, peril, hazard, and risk are often used in everyday conversation, but these words take on a particular meaning when used to describe insurance.
Loss
The word "loss," as commonly used, means being without something previously possessed. We speak of "loss of memory" and "loss of time." However, when the word is used in insurance, it takes on a more limited meaning. A typical insurable loss is an undesired, unplanned reduction of economic value arising from chance. Losses not resulting from chance, such as depreciation and expenses, are not insurable. Insurable losses are categorized as direct or indirect losses. This distinction is important. Direct losses are the immediate or first result of an insured peril. Indirect losses, also known as consequential losses or loss of use, are a secondary result of an insured peril. For example, if fire destroys a home, the loss of the home is the direct loss. The expense of living in a hotel while the home is being rebuilt is an example of an indirect loss. If a flood destroys a restaurant, the property damage is the direct loss; the loss of income during the period when the business is being reestablished is the indirect loss. There must be a direct loss before there can be an indirect loss. Property insurance policies are specific when providing coverage for direct or indirect losses, or for both.