introduction to insurance basics insurance concepts

HISTORY OF HISTORY OF INSURANCEINSURANCE England in the 1600s Ships and cargoes Owners and merchants Lloyds of London Common Law

MARINE INSURANCEMARINE INSURANCE

OCEAN - cargo over water INLAND - cargo over land

SHIPS AND CARGOESSHIPS AND CARGOES

INSURANCE IN THE USAINSURANCE IN THE USA FIRE INSURANCE

– Other perils added gradually– Each company wrote own

contracts– Contracts were long, complex,

varied

INSURANCE IN THE USAINSURANCE IN THE USA STANDARDIZED POLICIES

– Massachusetts first - 1880s– NY standard fire policy - adopted

by all states 1943– More policies being standardized

every year

INSURANCE IN THE USAINSURANCE IN THE USA

CURRENT– All states but 4 have same basic

standard fire policy. Texas is one.– Many states have similar auto

policies. Most use same rates (ISO). Texas is different.

– Texas Dept. of Ins. sets rates, forms and rules for personal auto and property insurance. But many types of policies not regulated by State.

TYPES OF INSURANCE TYPES OF INSURANCE COMPANIESCOMPANIES

STANDARD (ADMITTED) CARRIERS

GOVERNMENT INSURERS NON-STANDARD (NON-

ADMITTED) CARRIERS REINSURERS

Standard (Admitted) Standard (Admitted) CarriersCarriers– Stock Companies - Owned by

stockholders/investors. Managed by Board of Directors. Purpose to make a profit. Examples: Aetna, Travelers.

– Mutuals -cooperatives - operate like stock companies but owned by members. Can pay dividends (Ex: USAA) or can use profits to give lower rates ( Ex: State Farm).

– Exchanges - groups of individuals (subscribers) who insure each other (reciprocal). Managed by Attorney in Fact. Example: Farmers

Government InsurersGovernment Insurers

FEDERAL - NFIP, Crop Insurance, FDIC

STATE - Texas auto & windstorm pools, now MAP

Non-Standard (Non-Non-Standard (Non-Admitted) Carriers Admitted) Carriers

ALSO KNOWN AS THE EXCESS & SURPLUS MARKET

NO MARKETS AVAILABLE THRU STANDARD INSURERS– Must be declined by standard

markets– Example: Jet Skis, Hot Air

Balloons

ReinsurersReinsurers FORM OF INSURANCE BETWEEN

INSURERS. HELPS INSURERS EXPAND THEIR

CAPACITY (Example: $2,000,000 home) TAKES SOME “HEAT” OFF PRIMARY

INSURERS.– Primary - the first insurer who pays on a

loss– Excess - the second company that pays on a

loss after insurance limits of first company are used up.

BASIC INSURANCE BASIC INSURANCE DEFINITIONSDEFINITIONS RISK - Uncertainty regarding

(financial) outcome (loss). INSURANCE - A social device

for dealing with risk POLICY - a contract of

insurance which promises to provide protection in the event of a covered loss.

DEALING WITH RISKDEALING WITH RISK INDIVIDUALS

– RETAIN RISK»Can’t do anything about it (airplane falls on

house)»Choose to ignore risk (don’t buy flood

insurance)

– AVOID RISK»Don’t buy in earthquake area»Move away from flood areas

– REDUCE RISK - good roof or alarm system– TRANSFER RISK - buy insurance

DEALING WITH RISKDEALING WITH RISK

INSURANCE COMPANIES– SPREAD RISK

»Geographical - different. areas»Financial - different $ ranges

– REDUCE RISK»Underwriting guidelines»Discounts (alarms, non-smokers,

defensive driving)

LAW OF LARGE LAW OF LARGE NUMBERSNUMBERS The larger the number of separate-

but-similar risks in a group, the more predictable future losses become.

Insurance companies must predict losses on a group basis in order to arrive at fair premiums for individuals within groups.

MORE INSURANCE MORE INSURANCE DEFINITIONSDEFINITIONS PERIL - the immediate, specific

cause of a loss.– Named Perils - such as fire, lightning.

Burden of proof of loss is on insured. Must be able to prove loss occurred from a covered peril.

– All Risk - everything covered except what’s excluded. Burden of proof is on company. Must prove the loss was excluded or pay.

MORE INSURANCE MORE INSURANCE DEFINITIONSDEFINITIONS PROXIMATE CAUSE - a covered peril

is the proximate cause (immediate, specific) of a loss if it initiates an unbroken chain of events leading to a covered loss. Without it no loss would have occurred. – DIRECT PHYSICAL LOSS (lightning

strikes building)– INDIRECT/CONSEQUENTIAL LOSS (loss

of use)

MORE INS. DEFINITIONSMORE INS. DEFINITIONS HAZARD -situation that introduces or

increases chance of loss from a peril.– Physical Hazards (mfg. fireworks in garage,

child care in home, unfenced pool)– Moral Hazards - dishonest acts of insured

which increase chance of loss. Character, living habits, financial responsibility. (Fake claims to get money when out of a job).

– Morale Hazards - attitudes of insureds that increase possibility of loss. (Fails to fix roof when needed: let insurer pay after storm).

BASIC INSURANCE BASIC INSURANCE PRINCIPLESPRINCIPLES INDEMNITY - property insurance is a

contract of indemnity - it returns insured to financial position prior to loss. No profit permitted. Life ins. is not indemnity: it pays total sum if loss (death) occurs.

LIABILITY - legal responsibility for a loss to someone else (3rd party). BI or PD. Casualty insurance provides this type of coverage.

INSURANCE PRINCIPLES INSURANCE PRINCIPLES Cont’d.Cont’d. INSURABLE INTEREST must exist in

order to have a legally enforceable contract– Life Insurance - not required if insured

purchases policy: if other party purchases, must have I.I. at the time of purchase

– Property/Casualty Insurance - all parties named must have I.I. at time of loss. Each party with interest is covered only up to that amount.

INSURANCE PRINCIPLES INSURANCE PRINCIPLES Cont’d.Cont’d.

COINSURANCE - requirement that property be insured to at least 80% of replacement cost or be penalized in the event of a partial loss.

VALUED POLICY - In Texas full policy amount is paid in the event of a total loss.

INSURANCE PRINCIPLES INSURANCE PRINCIPLES Cont’d.Cont’d. BASIS OF COINSURANCE

– Actual Cash Value - what item(s) worth at time of loss (value of used goods).

– Replacement Cost - what it would cost to replace item(s) at today’s prices

INSURANCE PRINCIPLES INSURANCE PRINCIPLES Cont’d.Cont’d. CALCULATING COINSURANCE

– Amount of insurance the client purchased

– Divided by amount of insurance client should have purchased

– Multiplied by the amount of the loss– Less the deductible– Equals the amount which will be

paid on the loss

INSURANCE PRINCIPLES INSURANCE PRINCIPLES Cont’dCont’d AMBIGUITY in policy language is

interpreted in the insured’s favor by the courts. The state and/or insurance company writes the insurance contract and it’s assumed that they write it in their favor.

IMPORTANCE OF COURTS IN INSURANCE DECISIONS - new policy language and provisions are tested through court system

AGENTS DUTIES AND AGENTS DUTIES AND RESPONSIBILITIESRESPONSIBILITIES

AGENT - the authorized representative of an insurance company– Has authority to act for insurer by

written contract. Contract may be terminated if agent acts improperly

– Is paid commission for work done for the company

– Has binding authority as granted by the company

– Owes primary allegiance to the company

Agent’s Duties and Agent’s Duties and Responsibilities Cont’d.Responsibilities Cont’d.

AGENCY - a fiduciary relationship in which one entity (the principal) authorizes another (the agent) to act on its behalf in dealings with 3rd parties

FIDUCIARY - a relationship in which agent takes in/handles money and signs contracts on behalf of the principal and is accountable.

Agent’s Duties and Agent’s Duties and Responsibilities Cont’dResponsibilities Cont’d AGENTS AUTHORITY

– EXPRESS - whatever is agreed to in the contract

– IMPLIED - other acts necessary to carry out express authority (Examples: advertising using company’s logo; hiring a solicitor)

– APPARENT - based on 3rd party’s reasonable belief that the agent has the authority. (Example: agent has binders, applications, company logo in office; therefore assumed to represent company

Agent’s Duties to Agent’s Duties to CompanyCompany LOYALTY - to interests of company OBEDIENCE - to all lawful instructions. (Ex:

binding authority suspended during hurricanes)

REASONABLE CARE - to avoid injury to the principal.

ACCOUNTING - for principal’s property/money. (Ex: premium pmts., computer equipment, manuals)

INFORMATION - disclosure of all known facts about accounts

THE ENDTHE END