So all the negative situations we have identified in the previous paragraph that may damage your mobile phone or possibility of losing it (if you will not take a proper care) are called risks. You may ask how your brain recognizes risks to your mobile phone. By watching movies, listening to the radio or talking with our friends we are aware that it is a frequent situation when people lose mobile phones and it may happen to you too. Moreover the moment when we realise we have lost or broken our mobile phone is a severe event because this mobile phone is a valuable thing to us. Finally the process when your brain realizes the frequency and severity of bad thing happening to your mobile phone is called a risk evaluation. Is it important? Yes it is! We all want to keep our mobile phone in a good condition and working well because we have paid a lot of money for it!
So we all agreed that risks are part of our life, that they exist, but... What do we not know?! Any ideas?... Right! We do not know when something bad is going to happen to our mobile phone. So how could we deal with this unpredictability of risks. The way of getting some level of certainty is called risk management. Now you may start to think things are getting to complicated. But hey! Risk management is what we do every single day! In other words we normally take care of our mobile phone in two ways: physically and financially. If you intentionally leave your mobile phone at home then this is an example of physical risk management. It means you avoid the possibility of it being damaged or stolen when you carry it with you. Another way of physical risk management is called reduction. You may reduce the risk of your mobile phone being damaged by putting it into case or cover. So as you see people have agreed to use certain words like elimination or reduction when they talk about physical risk management and now you too understand meaning of these terms. So far so good? Fantastic!☺ Let's move on!
As you already know we can manage the risk not only physically but also financially! So if you are a forward looking person and retain some of your pocket-money in your piggy bank (in case something bad happens to you mobile phone so you can buy a new one straight away). That is a one way of financially managing the risk. Another way is when you transfer the financial consequences of the risk occurring. That is where insurance comes in. So people transfer the risk of losing or damaging their mobile phone to insurance companies which are taking that risk. How it works in practice? Imagine you know, that there is always one person in you class who loses the mobile phone in a year. But as we stated previously because of the unpredictability of risks nobody knows who will be unlucky this year. So thirty of you decide to pay £10 each and collect a pool of £300. These money will be paid out to that person who's mobile phone will be lost, damaged or stolen. This key idea where contributions of the many pays for the losses of the few is known as common pool principle. Of course operations of insurance companies are much more complicated. And the things you can insure are not only mobile phones but all the other things you use in your daily life like: laptop, digital camera, ipod, video game consoles (XBox360, PSP2). If you were injured by playing football, riding a bike or skateboard expenses for your medical treatment will be compensated if you have brought an insurance policy before the accident.
Benefits of the insurance
Be aware that when you come back home and share your excitement with your parents they may be a bit sceptical and respond: "...Insurance? Oh! It is a waste of money! If nothing bad happens to your mobile phone you will lose money...". But that is not actually true. All you paying for is a piece of mind. And that is the first benefit of the insurance to an individual. Then by making a contribution or in other words by paying a premium of £10 in a common pool person can spread the costs which is the second benefit. That means person will avoid financial consequences of buying a new mobile phone costing £300. Why? As you already know the risk of mobile phone being damaged, lost or stolen is transferred to insurance company. The idea of insurance being a risk transfer mechanism is closely linked with the third benefit of an insurance which is reducing the severity of the risk occurring. So the money you will pay in insurance premiums is only a small fraction compared with the money you will be paid out from common pool to compensate the financial losses you have faced. This can be said not only about risk presented to your mobile phone but also peoples heath, life or lifestyle. So if you have a high paying job and can afford lots of things like an expensive car, dinner in restaurants, travel abroad and so on, you can insure against the risk of losing that lifestyle (if you are unlucky to lose your job or face health problems).
Insurance has a lot of benefits to businesses too. Fire or any other disasters like flood or a hurricane may damage factory and that will cost a lot of money to rebuild it. Employees may suffer during fire accident and may claim compensation for their health treatment. Business may suffer if other company stops operating but owes a lot of money to that business. On the opposite scenario business itself can get into trouble owing a lot of money to other people. Employees insurance or third parties insurance protects business from actions caused damage to other people by employees or by business' operations. Insurance protects business reputation and brings more certainty about future prices. But do not get confused! In the examples above insurance does not protect from various events (risks) happening. All insurance does is protects against potential financial consequences. In other words by having insurance policy business are entitled to compensation if it suffered the losses.
When businesses know insurance financially protects them against many forms of risk it impels innovation and brings ultimate development to communities. Moreover by creating common pool, security and peace of mind, by reducing the severity of losses, when the vast funds of money are invested for the prosperity of the economy and the country is relieved from financial burden to compensate the victims of loss all that shows how beneficial the insurance is to communities.
Conclusions
To summarize today you became familiar with the definition of a risk, what does it mean and how you deal with it in your daily life. Then we identified and examined there stages of risk management process which are: risk identification or being aware a risk; second stage was risk evaluation and finally actual risk management. We also analysed the ways of managing the risk. Now you are aware that the two ways physically managing the risk are avoidance and reduction. When we manage risk financially we can go with retention of transferring the risk of financial loss. Here is where insurance comes in. The first part of presentation was finished by getting familiar with common pool principal.
Second part of our presentation was dedicated to look at more practical aspects of insurance especially the benefits it provides to individuals, businesses and societies. The bottom line is insurance cannot protect you against something bad happening. However what insurance does is protects against potential financial loss and that is the key message to take.
Thank you very much for your attention and participation!
Do you have any questions?
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References
Consumer Financial Education Body (2010) Insurance made clear [Online]. Available from:
[Accessed: 19th April 2010].
Financial Services Authority (2010) Mobile phone insurance [Online]. Available from:
[Accessed: 13th April 2010]
Ifs School of Finance (2007) Insurance: basic principles.In: Management of Insurance Operations [Online]. Available from :
[ Accessed 16th April 2010]
The Chartered Insurance Institute, (2010) Benefits of insuring [Online]. Available from:
[Accessed: 22th April 2010].
Walker, D. (2010). Insurance Services, MAN2080. [Lecture notes], Function of Insurance. Insurance Services Module. University of Surrey, School of Management, Room TB21, 9th February.
