WHY STUDY INSURANCE?

The reasons for studying insurance are varied. For some, the study is undertaken in preparation for a career in the field. Others study to improve their knowledge of the subject in order to become more knowledgeable consumers. The average individual will spend a significant percentage of his or her disposable income on insurance over a lifetime, and one of the logical reasons for studying insurance is to learn how it can be used in personal financial planning. Still others study insurance as a part of the discipline of risk management, the managerial function that aims at preserving the operating effectiveness of the organization.

Although each of these reasons is adequate justification for the study of insurance, whether that study should be considered essential for business students depends on the approach and the specifics of what is studied. Some have argued that the study of insurance per se is a narrow specialty, yet the broader discipline of risk management—of which insurance buying is only a part—is clearly a function that all future managers should understand. A proper understanding of the methods of dealing with exposures to loss is essential for organizational leaders. Although insurance is only one of the techniques that can be used to deal with pure risks, risk management decisions presuppose a thorough understanding of the nature and functions of insurance.

We believe that insurance and risk management is a subject that needs to be taught in colleges and universities. Far from being the narrow specialty it is sometimes characterized as, the study of insurance has a breadth that few disciplines equal. As you progress through the book, you will encounter applications from economics, statistics, finance, accounting, law, decision theory, and ethics.

Because the study of risk management and insurance draws on these different disciplines, it is sometimes considered a subset of one of them. Thus, in many colleges and universities, insurance and risk management are a part of the finance curriculum, reflecting the financial nature of the risk management function. In other schools, it is considered a part of economics, while in still others it is located in another department. This organizational ambiguity reflects the confusion concerning what the study of risk management and insurance entails.

In fact, risk management and insurance is a separate and distinct discipline, which draws on and integrates the knowledge from a variety of other business fields. In a micro sense, it is a discipline in which a variety of methodologies are brought to bear on a significant problem.

Viewed from a macro perspective, the study of insurance addresses a variety of important issues facing society today: the high cost of medical care, crime, the tort system, pollution and the environment, climate change, and the broad subject of ethics. Indeed, it is not an exaggeration to say that the debates in the insurance arena address questions of what kind of society we will have and who will pay for what. Debates over the cost of insurance and the way in which insurance prices should be determined have intensified over the past two decades. Increasingly, the debates over insurance availability and affordability have come to center stage as the challenges of the cost of automobile insurance, access to health care, responsibility for pollution, damage from hurricanes, product liability, and medical malpractice have become crises. As consumers, we are all affected by the way in which insurance operates.

Finally, the study of risk management and insurance is a fertile field for considering the subject of PREFACE xi ethics in business and in society. Indeed, the ubiquitous presence of ethical problems in the field of insurance transactions raises an important question: is ethics something to be studied and learned, or is it something innate in the individual?