Property and Liability Insurance

Principles

Understanding insurance

Objectives
To understand the
The role of insurance as
Risk Management Technique
Transfer system
Business
Contract

Different types of Personal & Commercial Insurance

Characteristics of Ideally insurable exposure
Benefits of Insurance
Costs of Insurance

Risk
management technique
What is Loss exposure: Any condition or situation that presents a possibility of
loss whether or not an actual loss occurs.

Every one face loss exposure. Impact of exposure could be relatively minor or
could create financial ruin. Examples:

A person driving an automobile can cause accident

A business is exposed to damages to premise, injury to workers, harm to customers from

defective products/workmanship.

Risk Management:

is a tool to mitigate the financial consequences of loss exposures

It is the process of making & implementing the decisions that will minimize the adverse
effects of accidental losses of an organization

Risk management techniques used to control Loss exposures

Loss prevention :Technique that reduces the Frequency of a particular loss

Loss reduction :Technique that reduces the Severity of a particular loss

Transfer
system
Insurance as transfer system:
It is system that enables a person ,family or an organization to transfer the costs of losses to
an insurer. The insurer in turn pays for covered losses and in effect distributes /shares the costs
of losses among all the insureds

Transferring the cost of losses: The insured exchange the possibility of a large loss for
certainty of a much smaller payment. This is effected through insurance policies/contract.

Sharing the costs of losses: Insurers pools premium paid by insureds & insureds who incur
loss are paid from such pool. Thus cost of losses are shared by all insureds.

Law of large numbers: is a mathematical principle that enables insurers to make predictions
about losses. As the number of similar but independent exposure units increases the relative
accuracy of predictions about future losses also increase

Exposure units: A fundamental measure of loss exposure assumed by insurer. They are
independent to the extent that they are not subject to same loss causing event.
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Insurance
as Business
Insurance as Business:
A business, which includes various operations that must be conducted in a way that generates
sufficient income to pay claims and provide a reasonable profit for its owners. Insurers revenue
must exceed the amount it pays for claims & expense. Premium & Investments are their primary
source of revenue.

Types of insurers

Private Insurers

Federal & State Government Insurance Programs

Business operations of insurance organization

Marketing

Underwriting

Claim handling

Ratemaking

Financial performance of insurers & Insurance regulation

Like any other business this is also regulated & monitored for their financial performance
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Insurance
as Contract
Insurance as contract:
A Insurance is a contract entered into between two parties wherein one party viz., the insurer
promises to pay the other viz., insured for a loss which is indemnifiable as per the policy terms
conditions and exceptions for a return of a consideration viz., premium.

Validity of the contract depends upon

Agreement (Offer and Acceptance):One party must make a legitimate offer and another party must accept the offer

Competent Parties:

Legal Purpose:

Consideration: something of value given by each party to a contract.

Each party must have legal capacity to make agreement binding

Contract to be illegal if its purpose is against the law or against public policy.

Special Characteristics of Insurance Contracts

A personal contract

A conditional contract

A contract involving the exchange of unequal amounts

A contract of utmost good faith

A contract of adhesion

A contract of indemnity
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Different types of Insurance

Personal Insurance

Commercial Insurance

Commercial package

Business owners

Commercial auto

Commercial property

Life insurance

Inland & Ocean Marine

Health Insurance

Commercial general Liability

Professional Liability

Commercial Umbrella

Workmen compensation

Home owners

Personal Auto

Personal watercraft

Personal Umbrella

Personal Insurance policies:

It cover individuals & families against their personal/nonbusiness loss exposure.

Commercial insurance policies:

It covers for profit & not for profit organizations
against their commercial loss exposure

Risks that areInsurable

Pure and not speculative
:
Ideally
Loss
exposures

Pure risk means a chance of Loss or no loss but no chance for gain, where as speculative risks present possibility of
loss or no loss or gain. Insurance cannot finance speculative risks

Fortuitous Losses:

In order to have an exposure insurable the losses need to be accidental from the standpoint of the Insured. If an
exposure is certain to result in loss or damage then insurance companies are sure to pay the claim. In such a case, the
core principle of insurance is defeated in total

Definite & Measurable:

Three Components of loss exposure need to be definite: Time ,Cause, Location

Frequency and severity should be measurable

Large no. of .similar exposure units

An ideally insurable loss exposure must be common enough that the insurer can pool a large number of homogeneous,
or similar, exposure units

Independent & Catastrophic

Loss suffered by one insured does not affect any other insured or group of insureds. If exposure units are not
independent, a single catastrophe could cause losses to sizable proportions of Insureds at the same time

Affordable

Insurance companies seek to cover only loss exposures that are economically feasible to insure. Writing insurance to
cover small losses does not make sense when the expense of providing the insurance probably exceeds the amount of
potential losses
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Benefits & Cost of Insurance

Benefits

Paying for losses

Managing cash flow uncertainty

Meeting Legal requirements

Promoting Risk control

Efficient use of resource

Supporting for insured's credit

Source of investment funds

Reducing social burdens

Cost

Premiums paid by insureds

Operating costs of insured

Opportunity costs

Increased losses