Many of us have had exposure to various forms of insurance throughout our lives. But how do you make the initial decision whether insurance is appropriate for you?

Today, I share with you a framework for considering various risks that you face and various ways to deal with those risks.



Terms from today’s show:

Risk: the possibility of loss.

Peril: a cause of loss.

Hazard: an act or condition that increases the likelihood of occurrence of a loss and/or increases the severity of a loss if a peril does occur.

Categories of hazards: physical hazards, moral hazards, attitudinal hazards

Classifications of risk:
-financial versus nonfinancial risks
-particular versus fundamental risks
-static versus dynamic risks
-pure versus speculative risks (pure risks: personal, property, and liability risks)
-insurable versus uninsurable risks

Risk control methods:
-risk avoidance
-loss prevention
-loss reduction
-noninsurance transfers

Risk transfer methods:
-noninsurance transfers

Expected Frequency Expected Loss Severity
High Low
High Avoidance Retention
Low Insurance Retention

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