Insurance and risk management
Link between Financial Performance and Risk Management. .. techniques of the insurance firms can be used to analyze, predict and determine insurance. In this section, we discuss two broad areas: managing insurable risks (such as Buy an insurance policy, with a deductible amount that is the amount of risk you. TJ Woods explains the relation between risk and insurance, and how it affects the What is most likely to occur, and how often it can occur.
Public liability insurance - to cover claims brought by third parties for general legal liability; e.
Insurance and Risk Management: Understanding the Connection
Volunteer insurance - to cover volunteers for personal injury and public liability while carrying out work. Building insurance - to cover the owner of the physical premises against events such as fire, storm and vandalism. Legal expenses - to cover the cost of defending legal rights in relation to disputes.
Fidelity guarantee - to cover against misappropriation of funds by employees or committee members. Commercial vehicles - to cover commercial vehicles for theft, fire, accident. Compulsory insurance Some insurance cover is compulsory under applicable laws and an incorporated association should consult a qualified adviser such as an insurance broker or lawyer to determine its compulsory insurance obligations.
For example, it is compulsory for an incorporated association that employs staff to have workers' compensation insurance. In addition, in some cases, a financial institution providing financial assistance to an incorporated association will insist that the association has certain minimum levels of insurance cover, such as public liability cover and professional indemnity cover.
Public liability insurance Public liability insurance generally covers claims brought by third parties against an incorporated association in respect of personal injury or property damage that may arise out of the activities of the association. This is particularly important for associations that interact with the public eg at premises open to the public or at public events, such as sporting activities.
Deciding on insurance Insurance may become an increasingly large component of an incorporated association's expenses. Although it may be tempting for an incorporated association to decide that certain non-compulsory insurance is unnecessary, therefore reducing insurance expenditure, some non-compulsory insurance may be essential to the future viability of the association.
An incorporated association should consider the cost of non-compulsory insurance against the risks covered by that insurance in the context of the activities carried out by the association. An incorporated association may wish to engage a qualified insurance broker to assist it to put in place an insurance programme that suits its requirements. Whether using a broker, obtaining insurance directly or obtaining insurance by any other means, it is important for an incorporated association to discharge its duty of disclosure to the insurer prior to obtaining insurance.
This is the same duty of disclosure that is required by any person arranging his or her home or motor vehicle insurance.
- Insurance and risk management
- What is the relationship between risk and insurance?
A failure by an incorporated association to discharge its duty of disclosure to an insurer could enable the insurer to reduce the amount paid in respect of a claim or even decline to pay the claim altogether. As a word of caution, an incorporated association should note that an insurance policy might not entirely cover the risk that is being insured for.
Often, a policy will be subject to exclusions eg for fraudbe limited to a maximum aggregate claim amount or a maximum amount per claim, and will often require excess payments to be made on claims.
Risk Management & Insurance
An incorporated association should conduct, on a regular basis, a thorough review of its activities and risks in order to assess whether its existing insurance program provides appropriate cover.
Exclusions Exclusions in insurance policies are those events, occurrences or types of damage or loss not covered by a policy.
Exclusions can vary from one insurance policy to another. An incorporated association should pay special attention to any exclusions when considering the type and extent of cover. Some examples of common exclusions are: Buying insurance is one part, but not the only part, of a risk management programme. Indeed, some risk management strategies may result in reduced insurance costs by reducing the likelihood of claims. Basic risk management steps There are a number of basic steps involved in the process of managing an incorporated association's risks.
It is essentially a process of identifying each risk, evaluating each risk, deciding what actions need to be taken to address or reduce each risk and constantly monitoring and reviewing the process. This requires a thorough analysis of the association's operations, activities and business. Proceeds from life insurance are exempt from income tax, so cash value insurance can be a useful part of estate planning.
The gurus generally recommend that you use term insurance to cover your life insurance needs and use other vehicles for your investments.
Insurance and Risk Management: Understanding the Connection
Life insurance products often have significant fees, and the tax-deferment feature is inferior to k and Roth IRA plans you put after-tax dollars into the life insurance policy and the earnings are taxed — at ordinary rates — when you withdraw the funds. Credit Life Insurance is life insurance that is linked to a mortgage or other debt — in the event that the borrower dies, the insurance pays the balance of the debt. The premiums for the insurance packaged as part of the regular monthly payment, a convenient feature.
In the early years of the loan when the outstanding balance is high, the probability of the borrower dying is actuarially relatively low. In contrast, when the borrower is older and the probability of dying has increased, the outstanding balance has been reduced.
More generally, we recommend that you view your life insurance needs in total, and use term life insurance to cover those needs. Higher returns go with higher levels of risk, and most of us simply must invest in risky assets to have realistic chances of reaching our financial goals.
So the question becomes one of determining how much risk to take. For determining the appropriate level of risk for you to take, we recommend a framework suggested by Larry Swedroe. The framework comprises a series of 3 gates, each of which must be satisfied in order to take the level of risk you are considering.
Are you in a position to take the risk? This question has two separate aspects.
First, do you have a long enough time-horizon to reduce the risk to an acceptable level? For stocks, we like at least 5 years and, even better, 10 years or more. Second, is the combination of your job security and your holdings of liquid assets secure enough to permit taking the risk?
Psychologically, are you willing to take the risk? Do you need to take the risk? We now turn to some aspects of risk management relating to stocks and bonds. Managing the Risk of Stock Investments Diversification You are probably already familiar with the concept of diversification to reduce risk. Life insurance companies rely upon this principle — they spread their risk by insuring many, many people.
When you invest in the stock market, you can invest in a broad portfolio of stocks, or you can invest in a small number of individual stocks. Because it has diversification, the broad portfolio will have less risk less variability in the returns than will the investment in just a few stocks.
After all, I will have higher risk and that should give me a higher expected return. Interestingly and quite useful as wellthe answer is no.
Indeed, one of the axioms of finance is that higher risk goes with higher expected returns. However, another theorem of finance states that the market will NOT pay you additional returns for taking additional risk that you could diversify away. As a consequence, investing in just a few stocks exposes you to additional risk for which you will NOT receive additional compensation. So, even after completely diversifying your investment in stocks investing in a total market index fund, for exampleyou may have more risk than you wish to bear.
You can extend the diversification application by diversifying across other asset classes. A common practice is to include bonds and some cash as well as stocks in your investment portfolio. Because bond returns, cash, and stock returns are not perfectly correlated, a mix of bonds, cash and stocks will have less risk than a portfolio entirely of stocks.
There is, however, a disadvantage: The expected returns for real estate are more in line with the expected returns for stocks, so there will be less impact on the expected return of the total portfolio.
Another way to reduce the risk of stock investments is by using the time dimension. The variance in one-year returns for the stock market is huge: But, looking at longer holding periods, we find that the variation in the average annual return declines.
This decline is shown in the table below: