Professional Documents
Culture Documents
Introduction to Insurance
An insured is a person, a business, or an organization whose property, life or legal liability is covered by an insurance policy. Covered losses are events for which the insurance pays. Loss exposure is any condition or situation that presents the possibility of a loss.
Insurance is a
1 2 3 Transfer system Business Contract
Law of large numbers is a mathematical principle stating that as the number if similar but independent e!posure units increases, the relative accuracy of predictions about future outcomes based on these e!posure units also increases. "n exposure unit is a measure of loss potential and is used in pricing insurance. Types of Loss exposure #roperty $oss e!posure % property e!posed to loss o Real property % $and, buildings, structures attached to land and embedded in it o Personal property % tangible and intangible property that is not real property $iability $oss e!posure % possibility for a claim for monetary damages because of in&ury to another party or damage to another party's property (uman and personnel $oss e!posure o (uman )personal* loss e!posure + possibility of a financial loss to an individual or a family by such causes as death, sic,ness, in&ury or unemployment. o #ersonnel loss e!posure % possibility of a financial loss to a business because of death, disability, retirement, or resignation of ,ey employees. Net Income is income minus e!penses during a given period.
Ideally Insurable Loss xposures -nsurance companies generally prefer to provide insurance for financial conse.uences of loss e!posures that have the following characteristics 1. $arge number of similar e!posure units 2. $osses that are accidental 3. $osses that are definite and measurable /. $osses that are not catastrophic 0. $osses that are economically feasible to insure
Insurance as a business
Types of insurers 1. #rivate -nsurers a. toc, -nsurance companies b. 1utual -nsurance companies c. 2eciprocal -nsurance e!change 2. 3ederal 4overnment -nsurance programs a. ocial ecurity program b. 5ational 3lood -nsurance program + e!posure to flooding c. 3ederal Crop -nsurance program % damages to crops d. 3ederal 6eposit -nsurance Corporation % insolvency of ban,s e. 5ational Credit 7nion "dministration + insolvency of credit unions 3. tate 4overnment -nsurance programs a. 3"-2 )3air "ccess to -nsurance 2e.uirements* % basic property insurance b. 8or,ers compensation -nsurance #rogram % in some states
Insurance !perations 1. 1ar,eting % identifying customers and selling and delivering a product or service 2. 7nderwriting % decide potential customers and the coverage to be offered 3. Claim (andling + to determine of a covered loss has occurred and , if so, the amount to be paid for the loss
"inancial Performance of Insurers ources of income 1. #remium 2. -nvestment 9!penses 1. $oss payment 2. $oss settlement e!penses % costs in investigation and settling claims 3. 4eneral e!penses % salary, employee benefits /. 5ew business e!penses % advertising costs, producers' commissions 0. Ta!es, $icensing fees -nsurance companies aim at generating enough revenues through premium and investments to pay for covered losses, meet other e!penses and earn a reasonable profit. State Insurance Regulation -nsurance regulators closely monitor the financial condition of insurance companies and ta,e actions to provide insurer insolvency# They regulate insurance rates to protect the consumers from )a* -nade.uate % for insurers to earn enough premium )b* 9!cessive + to protect insureds from unfairly high premiums )c* 7nfairly discriminatory rates % the rate must reflect the group's e!posure to loss otherwise it is unfairly discriminatory They also perform )a* olvency urveillance )b* -nvestigate complaints against insurance companies )-C* and their representatives. )c* 1onitor specific -C practices concerning mar,eting, underwriting and claims )d* "pprove policy language in policy forms -C must be licensed to write insurance policies. 2epresentatives of -C must also be licensed. $enefits of Insurance 1. #ayment for the costs of covered losses
/ 2. 2eduction of the insured's financial uncertainty 3. $oss control activities of insurance companies /. 9fficient use of resources 0. :. ;. <. upport for credit atisfaction of legal re.uirements atisfaction of business re.uirements ource of investment funds
Costs of Insurance 1. #remiums paid by insureds 2. >perating Costs of -nsurers 3. >pportunity costs /. -ncreased losses 0. -ncreased lawsuits
0 e* Inland marine insurance % covers miscellaneous types of property, such a moveable property, goods in domestic transit, and property used in transportation and communication. f* Auto P%ysical damage insurance% covers loss or damage to the specified vehicles owned by the insured and sometimes cover vehicles borrowed or rented by the insured.
Liability Insurance a* Auto Liability + covers an insured's liability for bodily -n&ury )B-* to others and damage to property of others resulting from auto accidents b* Commercial general Liability % covers businesses for their liability for B- and property damage )#6* a. #remises b. Business operations c. #roducts d. Completed operations c* Personal Liability % provides liability coverage to individuals and families for Band #6 arising from the insured's personal premises or activities. d* Professional Liability % protects physicians, accountants, engineers, attorneys, insurance agents and bro,ers, and other professionals against liability arising out of their professional acts or omissions
Life Insurance a* &%ole life insurance % lifetime protection % level premium % accrues cash value b* Term insurance % temporary protection % no cash value % ma!imum amount of life insurance protection available at the lowest cost. c* 'niversal life insurance % combines life insurance protection with savings % 3le!ible+premium policy that separates the protection, savings and e!pense components Cas% value is a savings fund that accumulates in a whole life insurance policy and that policyholder can access in several ways including borrowing, purchasing paid+up life insurance, and surrendering the policy in e!change for the cash value.
: (ealt% Insurance )edical insurance % covers the cost of medical care, including doctors' bills, hospital charges, laboratory charges and related e!penses *isability income insurance is a form of health insurance that replaces an insured's income if the insured is unable to wor, because of illness or in&ury.
1utual -nsurer
Board of directors, elected by stoc,holders appoints officers to manage the company To provide Corporation #olicyholders Board of insurance for directors, its elected by policyholders policyholders appoints officers to manage the company To provide 7nincorporated ubscribers ubscribers reciprocity association )members* choose an for its attorney+in+ subscribers fact to )to cover operate the each other reciprocal losses* To earn profit for its individual )?5ame@* and corporate investors 7nincorporated -nvestors association
$loyd's of $ondon
3armers insurance e!change, 7 "" )7nited tates "utomobile "ssociation* The $loyd's of committee of $ondon and $loyd's is the "merican governing $loyds body and must approve all investors for
; membership
*emutuali+ation is the process by which a mutual insurer, which is owned by its policyholders, becomes a stoc, company, which is then owned by its stoc,holders. Lloyds of London -ndividual % apply for insurance % syndicate underwriter accepts % application ta,en to other syndicates % insurance written. -ndividual + liable only for amount written. Corporate + limited liability $loyds of $ondon % individual member % 5ame + liable for amount written. "merican $loyd % individual member % 7nderwriter % limited liability Captive Insurance Company is an insurer that is formed as a subsidiary of its parent company, organization, or group, for the purpose of writing all or part of the insurance on the parent company or companies.
Reinsurance company , is a type of insurance in which one insurer transfers some or all of the loss e!posures from policies written for its insureds to another insurer. -n reinsurance, the primary insurer is the insurance company that transfers its loss e!posures to another insurer in contractual arrangement. " reinsurer is the insurance company that accepts the loss e!posures of the primary insurer.
'nderwriting
'nderwriting is the process of selecting insureds, pricing coverage, determining insurance policy terms and conditions, and then monitoring the underwriting decisions made. "n 'nderwriter is an insurance company employee who evaluates applicants for insurance, selects those that are acceptable to the insurer, prices coverage, and determines the policy terms and conditions.
<
Underwriting Activities
1. electing insureds 2. #ricing Coverage 3. 6etermining policy terms and conditions /. 1onitoring 7nderwriting decisions
Selecting Insureds Two basic reasons why insurers cannot accept all applications
1. To avoid adverse selection 2. $imited capacity to write new policies Adverse Selection- " situation that occurs because people with the greatest probability of loss are the ones most li,ely to purchase insurance. "dverse selection normally occurs if the premium is low relative to the loss e!posure. Capacity refers to the amount of business the insurer is able to write, usually based on a comparison of the insurer's written premium and policyholder's surplus. )"dmitted assets % liabilities*. -nsurers attempt to protect their available capacity in 3 primary waysB 1. 1aintaining a spread of ris, 2. >ptimum utilization of resources 3. "rranging for reinsurance
Pricing Coverage
The main ob&ective is to charge a premium that is commensurate wit% t%e exposure i.e. there is an appropriate relationship e!isting between the size of premium and the e!posure assumed by the insurer. Rate is the price of insurance charged per e!posure unit. xposure unit is a measure of loss potential used in rating insurance. Type of rates 1. Class Rates .manual rates/- rates that apply to all insureds in the same rating category, or rating class. -nsureds with similar loss e!posures are grouped into rating classes.
= a. )erit Rating plans- 2ating plans that modify class rates to reflect the loss characteristics of a particular insured 2. Individual Rates .specific rates/- are used to assign a specific insurance rate that reflects the uni.ue characteristics of an insured or the insured's property. a. 0udgement Rate- a type of individual rate, that is used to develop a premium for a uni.ue e!posure for which there is no established rate. -n this rating, the underwriter relies heavily on his or her e!perience.
$oo1 of business .portfolio/ is a group of policies with a common characteristic, such as a territory or type of coverage. " boo, of business can also refer to all policies written by a particular insurer or agency.
Underwriting Management
2esponsibilities of underwriting managementB 1. #articipating in the overall management of the insurance company 2. "rranging reinsurance 3. 6elegating underwriting authority /. 1a,ing and enforcing underwriting guidelines 0. 1onitoring the results of underwriting guidelines Treaty Reinsurance- is an arrangement whereby a reinsurer agrees to reinsure automatically a portion of all eligible insurance of the primary insurer. "acultative Reinsurance- involves a separate transaction for each reinsured policy. That is, the reinsurer evaluates individually each policy it is as,ed to reinsure.
1A 'nderwriting aut%ority is the limit on decisions that an underwriter can ma,e without receiving approval from someone at a higher level. ?"ront2line underwriters@ are agents representing the insurance company who have some underwriting authority delegated to them. They have authority to accept applications and bind coverage if the applicant clearly meets the guidelines and if the limit of insurance is within the predetermined amount.
11 0. -nspection reports :. 3ield mar,eting personnel ;. Claim files <. #roduction records =. #remium "udit reports 1A. "pplicant's or insured's records )a1ing 'nderwriting *ecision (a+ards are conditions that increase the chance of a loss occurring. To arrive at a decisionB 1. "nalyze the hazards 2. 9valuate the underwriting options 3. Choose the best option
Categories of %a+ards1. P%ysical (a+ardB tangible characteristics of property, persons, or operations that tend to increase the probable fre.uency or severity. 2. )oral (a+ardB are dishonest tendencies in the character of the insured )or applicant* that increase the probability of a loss occurring 3. )orale .attitudinal/ (a+ardB involve carelessness about, or indifference to, potential loss on the part of an insured or applicant /. Legal (a+ardB characteristics of the legal or regulatory environment that affect an insurer's ability to collect a premium commensurate with the e!posure to loss. 9!amples, courts mandating coverage broader than the insurer intended and regulatory restricting insurer's ability to cancel or renew policies.
12 2estrictions on cancellation and nonrenewal Redlining is prohibited practice of refusing to issue, cancel or renew coverage for an applicant or insured solely on the basis of geographic location. 'nfair discrimination involves applying different standards or methods of treatment to insureds who have the same characteristics and loss potential. -nsurer+supported organizations li,e - > )-nsurance ervices >rganization* and "")"merican "ssociation of -nsurance ervices* were initially ,nown as ?Rating $ureaus4# They collected premium and loss statistics and calculate and file rates. 5ow they form the Insurance Advisory !rgani+ation, they calculate and file loss costs. $oss costs forms a part of the rate that covers pro&ected claim payments and claim handling e!penses. -nsurers generally develop their rates by adding e!pense loadings )to cover other predicted losses* to the loss costs calculated by the advisory organization.
Claims
Claims is a demand by a person or business see,ing to recover from an insurance company for a loss that might be covered by an insurance policy. " Claimant is anyone who submits a claim to an insurance company.
Reservation of rig%ts letter is a notice sent by the insurer to an insured advising that the insurer is proceeding with investigation of a claim but that the insurer retains its right to deny coverage later.
13
Independent ad5usters
Independent ad5usters are independent claim representatives who offer claim handling services to insurance companies for a fee. They can be self+employed or wor, for an independent ad&usting firm.
Agents
-n an independent or e!clusive agency, the agency receives the first notification of a claim. -n some cases, the agency &ust communicates the claim to insurer. ometimes, the agent creates a claim file and collects information concerning the loss. *raft aut%ority is authority e!pressly given to an agent by an insurer to settle and pay certain types of claims by writing a claim draft up to a specified limit.
Public ad5usters
Public ad5uster is a person hired by an insured to represent the insured in handling a claim.
1/ Self2insurance plan is an arrangement in which an organization pays for its losses with its own resources rather than purchasing insurance. (owever, the organization might choose to purchase insurance for losses that e!ceed a certain limit. >rganizations having self+insurance plan, handle claims either by having an internal claim department or hire a third+party administrator. Internal Claim departmentB the organization decides to use its own personnel to investigate and settle claims. T%ird2party administrators are business firms that contract to provide administrative services to other businesses. They handle claimsC offer claim record ,eeping and statistical analysis.
10
Insurance Contracts
" policy is a complete written contract of insurance.
"lements of a Contract
1. -t must represent an agreement between the two parties 2. 9ach party must be legally competent to ma,e the agreement 3. The purpose of the agreement should be legal /. 9ach party must give some form of consideration to the other party
1; 0. 6efinitions :. -nsuring agreements ;. 9!clusions <. Conditions =. 1iscellaneous provisions The declaration page of an insurance policy is an information page that provides specific details about the insured and the sub&ect of insurance, such asB a. 5ame and location of the insurer b. 5ame and address of the insured c. #olicy 5umber d. #olicy period )-nception date and e!piration date* e. 6escription of the covered property and locations f. chedule of coverages and limits g. #remium)s* h. 6eductibles i. #olicy forms &. "gent 5ame ,. $ist of endorsements, if any
"n insuring agreement in an insurance policy is a statement that the insurer will, under certain circumstances, ma,e a payment or provide a service. xclusions are policy provisions that eliminate coverage for specified e!posures. They are present for reasons li,eB To avoid covering ?uninsurable@ losses To avoid insuring losses that could be prevented To eliminate duplicate coverage To eliminate coverage that most insureds do not need To eliminate coverage for e!posures that re.uire special handling To ,eep premium reasonable
" manuscript policy is an insurance policy that is specifically drafted according to terms negotiated between a specific insured )or group of insureds* and an insurer. Standard form is an insurance form that contain standardized policy wording. -nsurance advisory organizations develop standard forms that many insurers use in their insurance policies. ome insurers develop their own standard forms that they use in policies for their insureds.
1<
%tructure of olicies
1. Self2contained policyB is a single document that contains all the agreements between the insured and the insurer and that forms a complete policy by itself. )9.g.* personal auto policy 2. )odular policyB consists of several different documents, none of which by itself forms a complete contract. )9.g.* commercial pac,age policy )C##* "n endorsement is a document that amends an insurance policy in some way. 9ndorsements might add or delete coverage, include state+specific changes, show a change in the insured's e!posures, or otherwise modify the policy. Conditions common to Property and liability insurance policies 1. CancellationB termination of a policy, by either the insured or the insurer, during the policy period 2. ChangesB 3. 6uties of an insured after a loss /. "ssignment 0. ubrogation
Pro rata refund- is the unused premium )based on the pro rata portion of the premium for the number of days remaining in the policy* returned to the insured when a policy is canceled. S%ort rate refundB is the refunded premium when a policy is cancelled and it is less than pro rata refund. -t includes a penalty for the insured's cancellation of the policy before the end of the policy period. Liberali+ation clause is a policy condition that provides that if a policy form is broadened at no additional premium, the broadened coverage automatically applies to all e!isting policies of the same type. Assignment is the transfer of rights or interest in a policy to another party by the insured. 1ost policies cannot be assigned without the written permission of the insurer. Subrogation is the insurer's right to recover payment from a negligent third party for losses the insurer has paid to an insured. 8hen an insurer pays an insured for a loss, the insurer ta,es over the insured's right to collect damages from a third party responsible for the loss. 1ost subrogation provisions re.uire that the insured do nothing after a loss to impair the insurer's subrogation right. (owever, some insurance policies permit an insured to waive rights of recovery before a loss.
1=
Types of property The property at a high level is classified into #ersonal property 2eal property -nsurance practitioners use categories that relate to the insurance treatment of property, such asB 1. Buildings 2. #ersonal property )?contents@* contained in buildings 3. 1oney and securities /. 1otor vehicles and trailers 0. #roperty in transit :. hips and their cargo ;. Boilers and machinery
Personal property contained in buildings include 3urniture and fi!tures 1achinery and e.uipment toc, ecurities % e!ample bonds and stoc,s T%ree broad ve%icle categories are "utos and other highway vehicles % car, truc,s, trailers, buses, fire engines, ambulances, motorcycles, camping trailers
2A 1obile e.uipments % usually used off public roads % bulldozers, farm machinery, for,lifts 2ecreational vehicles % used in a variety of sports and recreational activities % dune buggies, dirt bi,es, all+terrain vehicles, most of the snowmobiles
Potential "inancial conse7uences of property loss 2eduction in the value of property $ost income -ncreased e!penditure "CD F 2eplacement cost % depreciation Parties affected by property loss 1. The property owner 2. ecured lenders of money to the property owner 3. 7sers of the property
21 /. >ther holders of the property 1ortgagee + ecured lender 1ortgagor % Borrower Bailee % holders of property entrusted to them by others
"loaters are policies that are designed to cover property that ?3loats@, or moves from one location to another. xclusion % eliminates all coverage for e!cluded property or cause of loss. Limitation % places a specific dollar limit on specific property that is covered. 6welling personal property % covered anywhere in the world. Business personal property % covers property within usual 1AA+feet limits or specified policy territory. 1oney and securities % covered in crime insurance policies Business personal property in transit covered by transportation policies. #ersonal and Commercial property insurance policies on buildings and personal property are available with three different degrees of coverage 1. $asic form coverage % the lowest+cost version that provides coverage for appro!. a dozen named perils. 2. $road form coverage % a higher+cost version of coverage that adds several perils to those covered by basic coverage 3. Special form coverage % the version that covers all causes of loss that are not specifically e!cluded. (omeowner policies are mostly broad or special.
22 <. mo,e
=. Dandalism 1A. prin,ler lea,age 11. in,hole collapse and mine subsidence 12. Dolcanic action "riendly fire % fire that stays in its intended place (ostile fire % fire that leaves its intended place Proximate cause of a loss % is that event that set in motion an uninterrupted chain of events contributing to the loss 6e%icle damage is damage done by motor vehicle to some other property 6andalism is willful and malicious damage to or destruction of property Sin1%ole collapse is a cause of loss involving damage by sudden sin,ing or collapse of land into underground empty spaces created by action of water on limestone or dolomite. )ine subsidence is a cause of loss sin,ing of ground surface when underground open spaces, resulting from e!traction of coal or other minerals, are gradually filled in by roc, and earth from above.
23 Specified causes of loss is a less e!pensive alternative to comprehensive coverage in commercial auto policies. This coverage is named perils coverage that covers loss to a covered auto caused by fire, lightning, theft, windstorm, hail, earth.ua,e, flood, vandalism and other specifically listed perils. Causes of loss often excluded Catastrophe perils )war, nuclear reaction, sometimes earth.ua,e, flood* 1aintenance perils o 8ear and tear o 1arring and scratching o 2ust o 4radual seepage of water o 6amage by insects, rodents or other animals Covered "inancial conse7uences 6ecrease in value of property )direct losses*B results directly and often immediately from damage to that property Time 9lement loss)indirect loss* B ta,es place over days,months or even years following a direct loss o $ost income B Business income % lost profits and reimbursement e!penses (omeowners % ?fair rental value@ coverage o 9!tra e!penses Business income % xtra expenses are e!penses that reduce the length of a business interruption or enable a business to continue some operations when the property has been damaged by a covered loss Additional living expenses is coverage in homeowners policies that indemnifies the insured for the additional e!penses that are incurred following a covered property loss so that the household can maintain its normal standard of living while the dwelling is inhabitable Personal auto policies , optional rental reimbursement coverage pays up to a certain amount per day towards the cost of renting a substitute vehicle.
Parties covered by Property insurance !wner of building % named insured in property insurance policy Party t%at owns and occupies the building % named insured in building and personal property policy Tenant , named insured in personal property policy Secured lender , listed by name in the declaration as a mortgagee or loss payee
2/ $ailee , named insured on a bailee policy 5amed insured % policy holder whose name)s* appear on the declaration page of the policy The first named insured is the person or organization whose name appears first as the named insured on a commercial insurance policy conditions, might be the one responsible for paying premiums and the one who has the right to receive any return premiums, to cancel the policy, and to receive the notice of cancellation or nonrenewal. The mortgage clause .or mortgage %olders clause/ of a property insurance policy protects the insurable interest of the mortgagee by giving it certain rights, such as the right to be named on claim drafts for losses to insured property and the right to be notified of policy cancellation. $oss payee is a lender, named in an insurance policy, who has loaned money on a personal property. " Loss payable clause provides that the loss will be paid to both the insured and the loss payee as their interests appear and gives the loss payee certain rights, (owever, a loss payable clause does not e!tend as many rights to the lender as does a mortgage clause. " loss payee does not have any right to recover in cases where the insured cannot recover. !t%er parties w%ose property is covered " homeowner's policy provides coverage for property owned by relatives and other persons under the age of 21 who reside in the named insured's household. " homeowner's policy provides coverage for property owned by guests, residence employees and others while it is in the named insured's household. " #"# can provide coverage for collision damage if the named insured borrows a car belonging to somebody else, the car sustains collision damage, and the owner of the borrowed car has no insurance. " commercial property policy providing coverage on the named isured's personal property can also provide limited coverage for o The personal effects of officers, partners, or employees o #ersonal property of others in the care, custody, or control of the insured.
Amounts of Recovery
Policy Limits
-t is the ma!imum amount of money that can be recovered from the insurance company after a loss. The premium charged is directly related to the policy limit. 6aluation Provisions 2eplacement cost "ctual cash value. "greed value
20 Settlement !ptions 1. #aying the value )as determined by the valuation provision* of the lost or damaged property 2. #aying the cost to repair or replace the property 3. 2epairing, replacing, or replacing the property with other property of li,e ,ind and .uality
*eductibles -t is a portion of a covered loss that is not paid by the insurer. The deductible is subtracted from the amount the insurer would otherwise be obligated to pay to the insured. Insurance2 to2value provision They are provisions in property insurance policies that encourage insureds to purchase an amount of insurance that us e.ual to, or close to, the value of the covered property. Coinsurance is an insurance+ to+value provision in any property insurance policies. -f the property is underinsured, the coinsurance provision reduces the amount that the insurer will pay for a covered loss. 8!t%er Insurance4 Provisions -n some case, the same property might be covered by more than one insurance policy. 1ost policies contain ?>ther insurance@ provision to determine which insurer should provide compensation.