Managing

Financial Risk
FTX2000S

D R FA E E Z A H P E E R B H A I
 Learning Outcomes
To understand the major categories of risk faced by individuals in the personal
financial planning process.

To learn the concept of risk management and the possible methods of dealing
with major types of risks.

To understand the principle of insurance and how it can be employed to manage
and mitigate the impact of major types of risks.

To understand the purposes and provisions of the following types of insurance
contracts:
Homeowners insurance.
Car insurance.
Death and disability cover.
Medical cover.

To understand the way in which modern technology has enhanced the way the
insurance sector works
Speculative/Investment Risk Versus
Pure Risk.
Speculative or Investment Risk: Pure Risk:

Has the possibility of earning a gain or The only possibility is a loss.

incurring a loss. Hence, unlike speculative risk, pure risk has no
upside benefit and is always undesirable.
You may be happy to carry this risk (Speculative risk may be justified by the possibility
because of a potential return of earning a gain.)
(commensurate with the risk assumed).
The management of risk depends on the need to:
There is no insurance for speculative risk. Establish the probability or likelihood that the risk
will occur.
Quantify the magnitude of the loss expected if
the event occurs.
 Possible Methods of Dealing with Risk.
Risk Acceptance:
• The likelihood of loss attached to the risk is low or the magnitude of the potential loss is
negligible.
• Hence its cheaper to ignore or just accept the risk.
Risk Reduction:
• Taking any action that may reduce either the: (a) likelihood of a loss occurring; or (b) magnitude or size of
the loss.
Risk Avoidance:
• The possibility of loss is eliminated by taking appropriate steps or making significant changes in behaviour.
Risk Transfer:
• The risk of loss is transferred to another party, in exchange for a fee (the premium). This is the practice of
insurance.
Self-Insurance: Nature, Merits and Demerits.
Self insurance is the practice of investing money in order to cover
potential loss from specified risks (emergency fund). Ideal when:
– One is unable to afford commercial insurance.
– Started early in life so that the savings or investment grow sufficiently to cover
potential future losses.
Disadvantages:
Advantages: • Any loss occurring is covered only to the
Significantly cheaper than commercial extent of the current value of your
insurance. savings/investment.
The savings made remain your money, • Current value is eroded by inflation, and all
available to you, while premiums on interest/gains are taxed.
commercial insurance are lost whether you • Some replacements are very costly (e.g. if
subsequently claim or not. your house burns down)
 Insurance is the practice of pooling of the risk of

Insurance
individuals or entities and enables the premiums paid to
cover losses of the group.

Indemnity Insurance:
Provides cover against loss in a specified amount.
Seeks to restore the insured to the financial position before the event. Hence will never pay-out more
than the actual value of the loss suffered.
Examples include the following: motor vehicle insurance, household insurance and other short-term
insurance contracts.

Non-Indemnity Insurance:
Provides cover related to the occurrence of a specific event whose timing is uncertain.
Provides cover for a pre-specified amount that is not necessarily related to the loss suffered.
Insurance Contract
The contract typically comprises of the person being insured, the risk event covered, the period
covered, the amount of compensation payable if event occurs & the premiums payable.
The insured must have an insurable interest in the property or person insured – potential for suffering a
loss if event occurs.
The insured party is not always the beneficiary of the contract. This is the case with a life insurance
contract.
The insurance contract is a contract of ‘good faith’ between the insurer and insured. This means that the
insured is obligated to disclose all the material facts to the insurer.
The insurer has the right to cancel the contract or may refuse to pay any benefits if the insured has
made:
 Misrepresentations by omission (i.e., negative misrepresentation).
 Misrepresentation by providing incorrect or false information (i.e., positive misrepresentation).
 Insurance Contract – Some General Points.
Types of Insurance Contracts:
• The most relevant types of insurance Be careful of underinsurance!
contracts (from a personal finance view-
– This occurs when the insured
point) are:
takes out a cover for less than the
– Insurance against damage to or loss value at risk.
of property arising from fire or
flooding. – In such a case, the ‘principle of
– Death and disability cover (for death or averages’ is used to calculate the
injury to the insured). amount of compensation.
– Medical insurance contract – provides
cover for hospital and other medical
expenses.
Types of insurance
Home Owner’s Insurance. Contents Insurance:
Consists of two types: Comprise of two types:
Contents insurance: Provides cover for losses due Named perils insurance: Provides cover against
to theft of, or damage to, personal possessions losses from events named or specified in the
within your home. contract.
Available to both tenants and owners of the All-risk insurance: Provides cover against all
building. losses or damage to insured items, except for
specified exclusions.
Building insurance: Provides cover for losses
arising from damage to the structure of the home
itself.
Available only to owners of buildings – insurable
interest.
 Types of Insurance: Contents insurance
continued
• Portable items (e.g. laptops and cell-phones) are:
– Only covered by contents insurance or the named perils insurance while in the home specified in the contract.
– Covered by the all-risk insurance contract or the portable possessions insurance contract when both inside or outside
the home.
• The insurable value of your household contents must be based on replacement values (to be re-assessed at least
annually).
• Contents insurance extends to your guests or relatives living with you (provided the insurable value includes their
items).
• Most contents insurance policies include an excess clause.
– This refers to a minimum loss threshold over which the insurer will pay- out your claim.
– The excess clause aims to reduce: (1) the number of small claims made by the insured; and (2) the liability of, or cost
to, the insurer.
• The premiums depend on the property’s location and security
.
 Types of Insurance – Building Insurance
• Provides cover against loss due to the damage to the structure of your home.
• It is a form of named perils insurance – covering acts of nature, fire and water damage.
• The insurable value should be based on replacement value and not the value of your bond (to be
re-assessed continuously).

The Claims Process:

• Keep documents (invoices or photographs) away from the home, showing: proof of ownership,
original purchase price and date of purchase.
• Immediately following the loss, notify your insurer and provide: a police report, case number and
photographs of loss or damage.
• The insurer sends an assessor to investigate the extent of your loss or damage. You can challenge any
settlement offer.
Building insurance: tips
Considerations When Obtaining Home-Owner’s Insurance:
• Shop around for the deal that best suits your requirements.
• Establish whether the insurer offer discounts for multiple policies (e.g. combining home-
owner’s insurance and car insurance).
• Establish whether taking additional steps reduce your premiums (e.g. upgrading home
security with burglar bars or alarms).
• Consider accepting a higher excess in exchange for a reduction in premiums.
• Maintain a good credit history.
• Avoid under-insurance by continuously re-assessing your replacement values.
 Car insurance
What are some of the costs of being involved in a car accident?
 Personal injury and related medical costs.
 Injury of passengers and related medical costs.
 Injury to third parties and related medical costs. This could be significant.
 Damage/loss of the car and the inconvenience of being without transport.

Without an insurance policy the car-owner bears these costs.

Most insurers in South Africa provide for either a comprehensive car insurance policy or a limited car insurance policy.

A comprehensive car insurance provides cover against: theft, hijacking, damage due to accidents, fire or natural disasters
(floods or hail) and 3rd party liability arising from an accident.

A limited car insurance policy or “third party, fire and theft” insurance, provides cover against theft and hijacking, damage from
fire and 3rd party liabilities, but not damage from accidents. – Lower premiums relative to comprehensive policies.
 70% of vehicles on the

Car insurance road today are not insured.

• In SA, 3rd party insurance is not compulsory for vehicle owners (it was compulsory until 1997).
• Vehicle owners in SA are protected by the Road Accident Fund (RAF) from any 3rd party liabilities or
claims arising from injury or death caused by road accidents.
• The RAF accepts 3rd party liabilities for damages to the people (and not the property) involved in
road accidents.
– Hence, vehicle owners are liable for any damage to the property of 3rd parties resulting from road accidents.
– Without 3rd party insurance, the vehicle owner is personally liable for damage to the property of 3rd parties
arising from road accidents.
• Its important to indicate to the insurer whether the vehicle if for business or personal use.
– If used for business, premiums are higher given higher risk for theft or damage due to accidents.
– Incorrect specification of vehicle usage may result in your claim being refused.
 Car insurance
• The level of motor vehicle premiums is determined by:
– The make and nature of the car.
– Your risk profile.
– The risk profile of the environment in which vehicle is used or kept.
– The extend of the cover in the policy.
The insurable value of your vehicle may be based on:
• The retail value – the average price a dealer would sell the car for in the market, given its age,
condition and mileage.
– This gives you the highest insurable value, with higher premiums.
• The trade-in or book value – the average price you will receive for your vehicle from a dealer.
• The market value – the average of the retail and trade-in values.
– It is lower than the retail value and carries lower premiums.
 Car insurance
• Car insurance premiums tend to increase over time due to
inflation and the number of claims made.
– However, some insurers now offer incentives such as cash-back rewards for clients with limited or claim-free histories.
The Vehicle Accident Claim Process:
• Your claim is only valid for licensed vehicles that are road-worthy.
• At the accident scene:
– Contact the police.
– Exchange information with the other party: Name, address, license plate, insurance number.
– Do not admit guilt or blame for the accident (insurer will deal with this).
– Do not agree to have your vehicle be towed away without the consent of

insurer.
– If possible, take photos of the accident scene and the vehicles.
Car insurance
The Vehicle Accident Claim Process:
• Submit reports of the accident scene to the police and insurer.
• Provide the assessor (appointed by the insurer) with all the information
required (including the photos taken at the scene).
– The assessor’s report will help the insurer to decide whether to repair the vehicle or
replace it (i.e. write it off).
• After the assessment, the insurer will require three quotations from either 3
panel beaters (in the case of repair) or 3 car dealers (in the case of write-off).
– The quotations are submitted to the insurer who will then decide on the service
provider.
Car insurance Tips
Considerations when choosing a car insurance policy:
• Shop around for a deal that best suit your requirements.
• Consider increasing your excess so as to reduce your premiums.
• Take steps to reduce you risk exposure (e.g., by installing security
devices).
• Match your risks with appropriate cover. The more expensive comprehensive policy
may not always be necessary.
• Where premiums are linked to mileage, consider carpooling.
• Ensure that your policy is frequently updated to cover additional accessories (e.g. mag
wheels).
 Death and Disability policies
• In a life insurance policy, the insurer agrees to pay a sum of money either:
– To the nominated beneficiary upon the death of the insured; or
– To the insured in the case of disability due to injury or illness.
• Life insurance policy may be either without profit or with profit.
• With profit policies provide for a saving element as part of the policy – “universal life policies” are the only SA
examples.
• Without profit policies offer pure life insurance and provide for a lump-sum payment when the terms of the contract
are fulfilled.
• There are three forms of without profit life insurance policies:
– Term life insurance.
– Credit life insurance.
– Whole life insurance.
• The popularity of without profit life policies has diminished as insurers move towards with profit insurance policies.
Death and Disability Policies:
Without Profit Policies.
Term Life Insurance:
Provides life cover for a specified number of
years after which a new contract would have to
Credit Life Insurance:
be signed if needed.This form of life insurance Is a term insurance that provides life
has decreased in popularity in favour of whole cover for one or more outstanding
life and universal life insurance policies. debts of the insured. The premiums you
pay decreases over-time in line with the
diminishing amount of the debt.

Whole Life Insurance:

This is a permanent life insurance that provides cover over the
full life of the insured. Premiums are higher than for the term life
insurance policies.
Death and Disability policies
Universal Life Insurance Policies: Disability Cover:
This is a permanent life cover that has Is packaged with life insurance and provides cover against loss
two components, namely: of work or income due to disability arising from injury or illness.
• A life cover element (that may
include disability & dreaded disease This cover distinguishes between impairment (diminished
cover). capacity to work or earn income) and disability (inability to work).
• A savings element, which earns
monthly interest at a rate SA insurers provide for three forms of disability cover: Own
determined by the insurer. The occupational disability, occupational disability & total disability.
savings element reduces the
amount of premiums. Own Occupational Disability: Pays benefits if you are unable to
work in your current profession or similar/related occupation: as a
lump-sum or monthly until retirement.
Death and Disability policies
Dreaded Disease Cover:
• This is also known as “critical illness cover”.
• Provides cover against any major illness (heart attacks, stroke or cancer) which may
result in financial difficulties or diminished quality of life.
• This cover is a form of “named perils insurance”.
• Benefits are paid (as a lump-sum) on diagnosis of any of the diseases named in
the contract.
• Premiums are higher than for death and disability cover and may increase further if
there is evidence of:
– High-risk lifestyle (e.g. smoking, drinking etc.).
– History of critical illness in the family.
Death and Disability cover
Considerations When Taking Out a Death and Disability Cover:
• Shop around for a deal that best suit your requirements.
• Is there a discount for purchasing multiple insurance policies from the same insurer?
• Change your lifestyle – quit smoking and/or join a gym.
• Do not fail to take a life cover because it is expensive – the terms are very flexible (some
cover is better than no cover).
• Your family history is a good indicator of the need for a dreaded
disease cover.
• Given a waiting period before benefits are paid, it is important to establish the length of this
waiting period.
Medical cover
• Medical costs are typically covered by medical schemes which receive premiums in
exchange for the provision of health care services to the principal member and
his/her dependents.
• Medical schemes may either be:
– Open scheme: obliged to admit any individual who apply for membership.
– Restricted Scheme: Where membership is restricted to specified individuals.

Late Joiner Penalties:

These penalties are charged on new members who join a scheme when they are old (35
years or older). These penalties increase the premiums you pay.
The penalties are designed to protect existing scheme members from individuals who join a
scheme when they are old and in need of medical cover.
Medical cover: Waiting periods
• Because some schemes impose waiting periods, it is important to establish whether a
waiting period applies.
• This is meant to protect the scheme against the practice of anti- selection – where an
individual joins a scheme after realizing that he/she wants to enjoy the benefits
immediately (to the disadvantage of existing members).
• A scheme may impose a general 3-month waiting period (before claiming benefits) or
a 12-month condition-specific waiting period.
• Where the employer changes or terminates a scheme used by the company, a
waiting period cannot be imposed on the employees.
Medical cover
Benefits Covered: Settling Claims:
• Medical schemes provide a wide • Schemes only pay claims for
range of benefits, from services provided by a registered
comprehensive to limited forms of provider and for benefits a member
cover (e.g. hospital plans). is entitled to receive.
• Comprehensive plans provide unlimited • Members may claim for accounts still
hospital cover and comprehensive day- outstanding or for accounts paid
to-day benefits (may have an annual (reimbursement). Claims must be
limit). received within four months of receiving
• Hospital plans cover major medical the service – hence must be submitted
and hospital costs but not day-to- timeously
day medical expenses.
Medical cover
Considerations When Choosing a Medical Scheme:
• Bigger schemes are often better – given better cross- subsidization of premiums,
economies of scale, and lower premiums.
• Ensure that the scheme maintains its solvency above the required threshold.
• Determine your needs based on your medical history.
• Match your needs to the benefits offered by your shortlist of medical schemes.
Implications of National Health
Insurance Act (NHI)?
What is NHI? Implications of NHI On medical aid:
• Individuals will be free to continue their
NHI is a health financing system that is medical scheme membership, but they will
designed to pool funds together to provide
not be able to opt out from making
access to quality and affordable personal
contributions to the NHI Fund.
health services to all South Africans based
• Public Medical Aid will no longer exist but
on their health needs, irrespective of their
socio-economic status. It is a fund that will members will be accommodated within NHI.
pay for health care for all South Africans, • The government will no longer provide tax
there will be no fees charged at the health subsidies for medical scheme contributions.
facility because the NHI fund will cover the Fewer people will continue with medical
costs of your care. It is exactly what scheme contributions, as it would be
medical aids schemes are doing; however unnecessary to belong to both NHI and
this is available to everyone, regardless of medical aid unless they intend to have
socio-economic and employment status. cosmetic and/or non-essential surgeries.
Insurance in the
digital age
INSURTECH = INSURANCE TECHNOLOGY
 Digital Insurance Platforms: Insurtech companies have been developing digital
platforms that offer a seamless and user-friendly experience for insurance customers.
These platforms enable customers to compare, purchase, and manage insurance policies
online, simplifying the entire insurance process.

Example: With Naked insurance, customers get a quote in 90 seconds, all online, and
sign up instantly without ever having to speak to a call centre agent. It is a fully digital
insurance experience from sign-up to claims.

Pineapple allows you to insure your stuff and your car in the snap of a picture. They aim
to maximise value, affinity, and simplicity in the insurance market by rearranging the way
insurance is conducted. You can get an insurance in 90 seconds, with getting claims in
30 seconds. Through Pineapple, you can earn points and get rewards. If you have
unused premiums, they give it back to you.
Internet of Things (IoT) - IoT, or Internet of Things, refers to the collective network of connected
devices and the technology that facilitates communication between devices and the cloud, as
well as between the devices themselves.

Insurtech companies have been leveraging IoT devices and sensors to to enable behavioural
pricing for auto insurance where, for example, safer drivers pay less. Claim assessments can
also be automated, thus making it easier to assess, settle and pay claims following an injury.
Data can also be collected in real time (e.g. alerting the authorities if you are in an accident)
 Artificial Intelligence (AI) and Machine Learning: AI and machine learning
have been integrated into various aspects of the insurance industry. These
technologies are used for risk assessment, fraud detection, customer service
chatbots, claims processing automation, and personalized insurance offerings
based on customer data.

Artificial intelligence is also being leveraged by insurers to aid the discovery process, which is the
process of collecting information about consumers and specific situations, and to provide a
seamless and automated buying experience. The advanced data analytic tools which are powered
by AI, are used by insurtech firms to process vast amounts of data quickly and efficiently. This helps
in risk assessment, predicting customer behavior, identifying trends, and improving underwriting
processes. The ability to collect and analyse huge amounts of data will allow insurers to shift from
reactionary models, to more sophisticated prevention models. InsurTech companies can also utilize
Intelligent assistants and chatbots to ensure better, timely interaction, with more efficiency.

For example, a US-based AI-powered InsurTech company (Lemonade) reported that a theft claim
was processed and settled within 3 seconds, without the need for any paperwork from the
customer.
https://www.lemonade.com/blog/lemonade-sets-new-world-record/
Peer-to-Peer (P2P) Insurance:

P2P insurance models allow individuals to form

groups and pool their premiums to cover each
other's losses. This model promotes community On-Demand Insurance:
support and transparent risk-sharing among
policyholders. Insurtech companies have introduced on-
demand insurance solutions that allow
customers to purchase coverage for a
specific duration or activity, such as travel
insurance for a single trip or coverage for a
short-term event.