COMPONENTS OF RISK

Components of Risk

·        As a general principle, insurance is only available for risks that are uncertain

·        It is the uncertainly about the timing of death that makes death insurable

·        Level of risk is determined by 2 criteria:

v The probability of certain event happening

v The extent of the event (severity), if it happens

·        The probability of certain event happening: the probability that a certain person will die within one  year is calculated by actuary from the past data collected and is made available as mortality table.

·        The mortality rate is a chance of dying at a specified age based on the proportion of deaths among a specific number of a sample population.

·        The probability of risk to life for individuals will differ on the basis their age, medical well being, family medical history, life style, job profile etc.

·        Life insurance companies determine the level of risk based on past data (claims experience).

·        If the past data indicates that the individual with certain age group are more prone to risk will be considered to be higher for the age group

Risk and Premium

                                                         A class of professional experts in finance and probability, called actuaries, work for insurance companies to attempt to predict the probability and severity of risk. They also take lapse rates and interest rates or other expected rates of return on investment assets into account, with the goal of setting acceptable premiums. The premium is the cost of pooling one's own risk with that of others via an insurance company and includes the insured's share of expected claims costs, administrative expenses, sales and marketing expenses, and a profit for the insurer. If a premium payer is affected by a covered risk, the insurance company, and not the insured, takes the hit. If claims are higher than expected, however, the insurance company may have to raise rates on policy holders across the board.