Global Global edition edition For these Global Editions, the editorial team at Pearson has collaborated with educators across the world to address a wide Principles of Risk Management range of subjects and requirements, equipping students with the best possible learning tools. This Global Edition preserves the cutting-edge approach and pedagogy of the original, but also features alterations, and Insurance customization, and adaptation from the North American version. Principles of Risk Management tHiRteentH and Insurance edition tHiRteentH edition Rejda • McNamara George E. McNamara This is a special edition of an established title widely used by colleges and universities throughout the world.
Pearson published this exclusive edition for the benefit of students outside the United States and Canada. If you edition GLOBal purchased this book within the United States or Canada, you should be aware that it has been imported without the approval of the Publisher or Author. Pearson Global Edition Download more at Learnclax.com Rejda_13_129215103X_Final.indd 1 12/09/16 7:12 AM Principles of Risk Management and Insurance Download more at Learnclax.com A01_REJD1038_13_GE_FM.indd 1 9/20/16 2:35 PM The Pearson Series in Finance Berk/DeMarzo Keown Corporate Finance†* Personal Finance: Turning Money into Wealth* Corporate Finance: The Core†* Keown/Martin/Petty Berk/DeMarzo/Harford Foundations of Finance: The Logic and Practice of Fundamentals of Corporate Finance†* Financial Management†* Brooks Madura Financial Management: Core Concepts†* Personal Finance* Copeland/Weston/Shastri Marthinsen Financial Theory and Corporate Policy Risk Takers: Uses and Abuses of Financial Derivatives Dorfman/Cather McDonald Introduction to Risk Management and Insurance Derivatives Markets Fundamentals of Derivatives Markets Eakins/McNally Mishkin/Eakins Corporate Finance Online* Financial Markets and Institutions† Eiteman/Stonehill/Moffett Moffett/Stonehill/Eiteman Multinational Business Finance†* Fundamentals of Multinational Finance† Fabozzi Nofsinger Bond Markets: Analysis and Strategies Psychology of Investing Foerster Pennacchi Financial Management: Concepts and Applications†* Theory of Asset Pricing Frasca Rejda/McNamara Personal Finance Principles of Risk Management and Insurance† Gitman/Zutter Smart/Gitman/Joehnk Principles of Managerial Finance†* Fundamentals of Investing†* Principles of Managerial Finance—Brief Edition†* Solnik/McLeavey Haugen Global Investments The Inefficient Stock Market: What Pays Off and Why Titman/Keown/Martin Modern Investment Theory Financial Management: Principles and Applications* Holden Titman/Martin Excel Modeling in Corporate Finance Valuation: The Art and Science of Corporate Investment Excel Modeling in Investments Decisions Hughes/MacDonald Weston/Mitchell/Mulherin International Banking: Text and Cases Takeovers, Restructuring, and Corporate Governance Hull Fundamentals of Futures and Options Markets† Options, Futures, and Other Derivatives† * Denotes titles with MyFinanceLab. Log onto www.com to learn more.
† Denotes availability of Global Edition. Download more at Learnclax.com A01_REJD1038_13_GE_FM.indd 2 9/20/16 2:35 PM Principles of Risk Management and Insurance George E. McNamara Thirteenth Edition Global Edition Download more at Learnclax.com A01_REJD1038_13_GE_FM.indd 3 9/20/16 2:35 PM Vice President, Business Publishing: Donna Battista Project Manager, Global Edition: Nitin Shankar Editor-in-Chief: Adrienne D’Ambrosio Senior Manufacturing Controller, Global Edition: Senior Sponsoring Editor: Neeraj Bhalla Trudy Kimber Associate Acquisitions Editor, Global Edition: Ananya Operations Specialist: Carol Melville Srivastava Creative Director: Blair Brown Associate Project Editor, Global Edition: Art Director: Jon Boylan Paromita Banerjee Vice President, Director of Digital Strategy and Vice President, Product Marketing: Maggie Moylan Assessment: Paul Gentile Director of Marketing, Digital Services and Products: Manager of Learning Applications: Paul DeLuca Jeanette Koskinas Media Production Manager, Global Edition: Senior Product Marketing Manager: Alison Haskins Vikram Kumar Executive Field Marketing Manager: Adam Goldstein Full-Service Project Management and Composition: Product Marketing Assistant: Jessica Quazza SPi Global Team Lead, Program Management: Ashley Santora Cover Designer: Lumina Datamatics, Inc. Team Lead, Project Management: Jeff Holcomb Cover Art: ©Bill Mack / Shutterstock Project Manager: Karen Carter Acknowledgments of third-party content appear on the appropriate page within the text.
Pearson Education Limited Edinburgh Gate Harlow Essex CM20 2JE England and Associated Companies throughout the world Visit us on the World Wide Web at: www.com © Pearson Education Limited 2017 The rights of George E. Rejda and Michael J. McNamara to be identified as the authors of this work have been asserted by them in accordance with the Copyright, Designs and Patents Act 1988. Authorized adaptation from the United States edition, entitled Principles of Risk Management and Insurance, 13th Edition, ISBN 978-0-13-408257-8 by George E.
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ISBN 10: 1-292-15103-X ISBN 13: 978-1-292-15103-8 British Library Cataloguing-in-Publication Data A catalogue record for this book is available from the British Library 10 9 8 7 6 5 4 3 2 1 Typeset in Times NRMT Pro by SPi Global Printed and bound by Vivar in Malaysia Download more at Learnclax.com A01_REJD1038_13_GE_FM.indd 4 9/20/16 2:35 PM Contents Preface 15 part one Basic Concepts in Risk Management and Insurance Chapter 1 Risk and Its Treatment 19 Definitions of Risk 20 Chance of Loss 22 Peril and Hazard 22 Classification of Risk 23 Major Personal Risks and Commercial Risks 25 Burden of Risk on Society 31 Techniques for Managing Risk 31 Summary 35 ■ Key Concepts and Terms 36 ■ Review Questions 36 ■ Application Questions 36 ■ Internet Resources 37 ■ Selected References 38 ■ Notes 38 Case Application 34 Insight 1.1: What Are Your Chances of Not Being Able to Earn an Income? Calculate Your personal Disability Quotient 28 Chapter 2 Insurance and Risk 39 Definition of Insurance 40 Basic Characteristics of Insurance 40 Characteristics of an Ideally Insurable Risk 42 Two Applications: The Risks of Fire and Unemployment 44 Adverse Selection and Insurance 46 Insurance and Gambling Compared 46 Insurance and Hedging Compared 46 Types of Insurance 47 Benefits of Insurance to Society 51 Costs of Insurance to Society 52 Summary 56 ■ Key Concepts and Terms 57 ■ Review Questions 57 ■ Application Questions 57 ■ Internet Resources 58 ■ Selected References 58 ■ Notes 59 Case Application 56 Insight 2.1: Examples of Insurance Fraud—Hall of Shame 53 Insight 2.2: Have You Ever Committed Insurance Fraud? Think Again 55 Appendix: Basic Statistics and the Law of Large Numbers 60 Chapter 3 Introduction to Risk Management 64 Meaning of Risk Management 66 Objectives of Risk Management 66 Steps in the Risk Management Process 66 5 Download more at Learnclax.com A01_REJD1038_13_GE_FM.indd 5 9/20/16 2:35 PM 6 CONTENTS Benefits of Risk Management 77 Personal Risk Management 77 Summary 80 ■ Key Concepts and Terms 81 ■ Review Questions 81 ■ Application Questions 81 ■ Internet Resources 82 ■ Selected References 83 ■ Notes 83 Case Application 79 Insight 3.1: Bermuda Leads Global Captive Domiciles 71 Insight 3.2: Advantages of Self-Insurance 72 Chapter 4 Enterprise Risk Management and Related Topics 85 Enterprise Risk Management 86 Insurance Market Dynamics 92 Loss Forecasting 98 Financial Analysis in Risk Management Decision Making 100 Other Risk Management Tools 102 Summary 105 ■ Key Concepts and Terms 105 ■ Review Questions 106 ■ Application Questions 106 ■ Internet Resources 106 ■ Selected References 107 ■ Notes 107 Case Application 104 Insight 4.1: Weather Futures and Options: Financial Tools That Provide a Means of Transferring Risk Associated with Adverse Weather Events 97 part two The Private Insurance Industry Chapter 5 Types of Insurers and Marketing Systems 109 Overview of Private Insurance in the Financial Services Industry 110 Types of Private Insurers 111 Agents and Brokers 116 Types of Marketing Systems 117 Group Insurance Marketing 120 Summary 121 ■ Key Concepts and Terms 121 ■ Review Questions 122 ■ Application Questions 122 ■ Internet Resources 123 ■ Selected References 124 ■ Notes 124 Case Application 121 Insight 5.1: Show Me the Money—How Much Can I Earn as an Insurance Sales Agent? 117 Chapter 6 Insurance Company Operations 125 Insurance Company Operations 126 Rating and Rate Making 126 Underwriting 127 Production 130 Claims Settlement 131 Reinsurance 133 Investments 138 Other Insurance Company Functions 140 Summary 142 ■ Key Concepts and Terms 142 ■ Review Questions 143 ■ Application Questions 143 ■ Internet Resources 143 ■ Selected References 144 ■ Notes 145 Download more at Learnclax.com A01_REJD1038_13_GE_FM.indd 6 9/20/16 2:35 PM CONTENTS 7 Case Application 141 Insight 6.1: Home Owner’s Failure to Cooperate Yields Denied Claim 133 Insight 6.2: Be a Smart Consumer—Check the Claims Record of Insurers before You Buy 134 Chapter 7 Financial Operations of Insurers 146 Property and Casualty Insurers 147 Life Insurance Companies 152 Rate Making in Property and Casualty Insurance 154 Rate Making in Life Insurance 158 Summary 159 ■ Key Concepts and Terms 160 ■ Review Questions 160 ■ Application Questions 161 ■ Internet Resources 162 ■ Selected References 162 ■ Notes 162 Case Application 159 Insight 7.1: How Profitable Is the Property and Casualty Insurance Industry? 153 Chapter 8 Government Regulation of Insurance 164 Reasons for Insurance Regulation 165 Historical Development of Insurance Regulation 166 Methods for Regulating Insurers 168 What Areas Are Regulated? 168 State versus Federal Regulation 174 Current Issues in Insurance Regulation 177 Modernizing Insurance Regulation 177 Insolvency of Insurers 180 Market Conduct Regulation 181 Summary 184 ■ Key Concepts and Terms 185 ■ Review Questions 185 ■ Application Questions 185 ■ Internet Resources 186 ■ Selected References 186 ■ Notes 187 Case Application 183 Insight 8.1: The Pros and Cons of Credit-Based Insurance Scores 182 part three Legal Principles in Risk and Insurance Chapter 9 Fundamental Legal Principles 188 Principle of Indemnity 189 Principle of Insurable Interest 192 Principle of Subrogation 193 Principle of Utmost Good Faith 194 Requirements of an Insurance Contract 197 Distinct Legal Characteristics of Insurance Contracts 198 Law and the Insurance Agent 199 Summary 202 ■ Key Concepts and Terms 203 ■ Review Questions 203 ■ Application Questions 203 ■ Internet Resources 204 ■ Selected References 204 ■ Notes 204 Case Application 201 Insight 9.1: Corporation Lacking Insurable Interest at Time of Death Can Receive Life Insurance Proceeds 194 Download more at Learnclax.com A01_REJD1038_13_GE_FM.indd 7 9/20/16 2:35 PM 8 CONTENTS Insight 9.2: Auto Insurer Denies Coverage Because of Material Misrepresentation 195 Insight 9.3: Insurer Voids Coverage Because of Misrepresentations in Proof of Loss 196 Chapter 10 Analysis of Insurance Contracts 206 Basic Parts of an Insurance Contract 207 Definition of “Insured” 209 Endorsements and Riders 211 Deductibles 211 Coinsurance 213 Coinsurance in Health Insurance 214 Other-Insurance Provisions 214 Summary 217 ■ Key Concepts and Terms 217 ■ Review Questions 218 ■ Application Questions 218 ■ Internet Resources 219 ■ Selected References 219 ■ Notes 219 Case Application 216 Insight 10.1: Will Your Auto Insurance Cover You When You Drive another Person’s Car? 210 part four Life and Health Risks Chapter 11 Life Insurance 220 Premature Death 221 Financial Impact of Premature Death on Different Types of Families 222 Amount of Life Insurance to Own 223 Types of Life Insurance 228 Variations of Whole Life Insurance 234 Other Types of Life Insurance 242 Summary 246 ■ Key Concepts and Terms 247 ■ Review Questions 248 ■ Application Questions 248 ■ Internet Resources 249 ■ Selected References 250 ■ Notes 251 Case Application 245 Insight 11.1: Cash-Value Life Insurance as an Investment—Don’t Ignore Two Points 233 Insight 11.2: Be a Savvy Consumer—Four Life Insurance Policies to Avoid 244 Chapter 12 Life Insurance Contractual Provisions 252 Life Insurance Contractual Provisions 253 Dividend Options 259 Nonforfeiture Options 261 Settlement Options 263 Additional Life Insurance Benefits 267 Summary 272 ■ Key Concepts and Terms 273 ■ Review Questions 274 ■ Application Questions 274 ■ Internet Resources 275 ■ Selected References 276 ■ Notes 276 Case Application 272 Insight 12.1: Is This Death A Suicide? 255 Insight 12.2: Selection of the Best Dividend Option in a Participating Whole Life Policy 260 Insight 12.3: Accelerated Death Benefits—A Real-Life Example 270 Insight 12.