Financial Risk Management For Dummies

Chapter 17

Insuring Risk

In This Chapter

Understanding risks in buying, selling, and providing insurance

Insuring insurance companies

Working with actuaries

Like other financial institutions, insurance companies accept money from individuals and businesses, invest it and return proceeds to their customers. Unlike a bank, which returns the amount deposited plus a fixed amount of interest, or a mutual fund, which returns whatever the investments are worth, an insurance company return variable amounts based on whether the customer had an automobile accident, or a house fire or some other event specified in the policy.

The special risk management issues of an insurance company derive from the fact that insurers cannot control their liabilities. If their customers have bad luck, the insurance company must pay out a large amount of money – potentially much larger than the amount it took in as premiums.

Understanding Insurance

The oldest and simplest form of insurance is risk sharing, in which bands of individuals share resources such as food so that they can survive runs of bad luck. Primitive societies systematised this practice in various ways such as temple granaries, cooperative societies ...