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AN SNAPSHOT OF INSURANCE CLASSES, INDUSTRY AND CAREERS Insurance Education Foundation Workshop, June 2012

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Outline Classroom philosophy and approach Insurance Industry Overview - Size and Performance Definition Insurance and Risk Risk Management and Insurance Types of Insurance Property Insurance Liability Insurance Life Insurance Health Financial Planning Disability and Retirement funding General Insurance Concepts Careers in Insurance Hot Topics Conclusions IEI Workshop June 2012

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What We Do NOT Teach? Confusing Insurance Policy Language, such as The reference to that particular part is important. No coverage applies to that particular part of real property damaged while work is being performed on it. But, by inference, coverage does apply for damage to any other part of the property besides that particular part, as long as it is not otherwise excluded. Noted in text books published by the American Institute for Chartered Property Casualty Underwriters (the very books that CPCUs 1 all over the country learn from) make this abundantly clear. Exclusion J(5). IEI Workshop June 2012

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What do MTSU Insurance Students Learn? The study of insurance involves much more than policy analysis; Students find a diverse practical application to the information and insight provided in the insurance classes. IEI Workshop June 2012

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Insurance Industry Overview The Insurance Industry employed over 2.282 million people in 2011 The Impact of the Insurance Industry http://www.bls.gov/oco/cg/cgs028.htm World insurance premiums were more than$4.3 trillion in 2010 In 2010 there were: 2,689 U.S. property/casualty insurance companies with $1.3 trillion in assets 1,061 U.S. life/health insurance companies with $3 trillion in assets The insurance industries employed over 2.3 million people in 2008 Forty banks have failed since the financial crisis began, yet no insurance claim has gone unpaid because of the crisis. IEI Workshop June 2012

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Most Costly Catastrophes in the U.S. in millions IEI Workshop June 2012 Insured property losses RankDatePeril Dollars when Occurred In 2010 dollars Aug. 2005Hurricane Katrina$41,100$45,481 2Sep. 2001 Fire, Explosion: World Trade Center, Pentagon terrorist attacks 18,77922,924 3Aug.1992Hurricane Andrew15,50022,412 4Jan. 1994 Northridge, CA earthquake 12,50017,318 5Sep. 2008Hurricane Ike12,50012,735 6Oct. 2005Hurricane Wilma10,30011,398 7Aug. 2004Hurricane Charley7,4758,548 8Sep. 2004Hurricane Ivan7,1108,130 9Sep. 1989Hurricane Hugo4,1956,678 10Sep. 2005Hurricane Rita5,6276,227 Source: The Property Claim Services (PCS) unit of ISO, a Verisk Analytics company.

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Size and Contribution of the Insurance Industry The Property/Casualty and the Life/Health industries paid $15.8 billion in premium tax in 2010. This is approximately $51 for every person living in the U.S. IEI Workshop June 2012

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Insurance not just transfer of risk; a device for transferring, sharing, and reducing risk by combining a sufficient number of exposure units to make individual losses collectively predictable. IEI Workshop June 2012

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Key Terms Risk - not just uncertainty of financial loss; - possibility of deviation between actual and expected outcomes - measured in units called exposures IEI Workshop June 2012

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How Insurance Reduces Risk Probability# Exposures Exp. Loss Actual Loss Deviation 1/1001? 1001 2100% 1,00010 1110% 10,000100 1011% 100,0001,000 1,001.1% IEI Workshop June 2012

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Risk Management The process of identifying and analyzing all possible loss exposures, selecting a method of handling the exposure, and monitoring the method and exposure regularly. Everyone is exposed to risk management! IEI Workshop June 2012

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How Insurance Relates to Risk Management Risk Management techniques: risk avoidance risk control hazard or loss reduction risk retention risk transfer Hedging and sub-contracting Insurance IEI Workshop June 2012

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Property Insurance Property insurance a type of insurance designed to pay for damage or loss to property caused by direct perils Automobile vs. Homeowners Personal vs. Commercial Lines Commercial Property IEI Workshop June 2012

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Liability Insurance Coverage for ones responsibility to third parties Students are often most interested in automobile claims: You let your roommate drive your car and she causes an accident; who is responsible for ensuing damages? You are stopped at a red-light and someone hits you, causing the tire tool in the back of your pickup truck to fly out and hit a pedestrian. Could you be held responsible? You let your friend leave your apartment after a party you gave in which alcohol was served. If your friend has an accident, who is responsible? IEI Workshop June 2012

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Life Insurance Significance of the Life Insurance Industry Life insurers have nearly $4 trillion invested in the U.S. To create an estate To replace funds that the insured would have been able to accumulate had he/she lived Purpose of life insurance? Preservation of familys economic security Moral obligation to provide protection Financial needs Key person indemnification Credit enhancement Business continuation Employee benefit plans Term vs. Whole Life? IEI Workshop June 2012

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Uses of Life Insurance Uses of Term Temporary need for protection Lack of finances for permanent insurance Danger of relying solely on group term insurance Uses of Whole Life A way to provide death benefit protection for the entire span of life Enables insured to build retirement fund Allows permanent protection Accounts for the great bulk of total assets of life insurers and the economy IEI Workshop June 2012

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Present Value Example How much life insurance does it take to provide dependents $40,000 per year for 30 years? Assume 7% interest could be earned during this time. Is the answer $40,000 times 30? [$1,200,000] No! One must consider the Time Value of Money benefit. $496,362 IEI Workshop June 2012

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Health Insurance Basic Health Insurance Disability Insurance Social Security Workers Compensation IEI Workshop June 2012

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Health Insurance Facts Morbidity rates higher than mortality rates At age 40, there is a 50% chance of becoming disabled while working Health care costs average $7,868/year per person in the U.S. (Kaiser Foundation, October 08) The share of the economy (GDP) devoted to health care spending has gone from 7.2% in 1970 to 17.3% in 2009; expected to be 19.3 percent by 2019 Costs have risen over 700% in last 20 years 85% of people in the U.S. have some type of health insurance; the 15% uninsured are typically self-employed or work for someone self- employed The indigent population typically have health insurance through a government-sponsored plan like Medicaid or a state managed plan Medicaid is one of the fastest growing areas of health care costs (8.7% growth vs. 3% growth in private sector) 90% of private health insurance is through a group plan IEI Workshop June 2012

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Health Insurance History Initially health insurance was only short-term disability income coverage became obsolete during depression In 1929, first group formed agreement with hospital (teachers/hospital in Dallas) would pay monthly fee for hospital costs if needed; members only First Blue Cross arrangement Physicians later formed Blue Shield plans IEI Workshop June 2012

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Typical Types of Health Plans PPO providers service members and non-members smaller co-pay/deductible if insured selects provider on list insured may go to provider of choice HMO Cost containment lead to the development of HMOs insurance company actually provides medical services managed care focuses on preventive care and treatment POS Hybrid between HMO and PPO The best of both worlds? IEI Workshop June 2012

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Disability Income Insurance Insure ones income Payment made typically as frequent as paycheck was received Elimination period serves as deductible Static costs therefore more predictable IEI Workshop June 2012

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Social Security Old Age, Survivors, and Disability Insurance Act of 1935 SS Benefits Retirement, survivor, and disability Medicare - health and hospitalization expenses Tax 6.2% (temporarily reduced to 4.2% for employee), up to $110,100 for 2012 1.45% Medicare; no limit Matched by employer 13.3 percent of all income under $110,100 is paid into the social security system IEI Workshop June 2012

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Workers Compensation Benefits prescribed by different laws in each state Typically includes Medical care benefits Disability income Death benefits Rehabilitation benefits Still necessary? IEI Workshop June 2012

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Financial Planning If you were to be unable to work after today, how much money would your family need to replace your income? If you retired today, how much money would you like to have each month to live on for rest of your life? IEI Workshop June 2012

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Basic Insurance Terminology Indemnification Very important to having many insurance products succeed! Policies enforcing indemnity: property, business income and extra expense, and liability Policies not contracts of indemnity: life insurance IEI Workshop June 2012

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Exclusions in Insurance Why do we have or need exclusions? May result in catastrophic loss Should be covered elsewhere Not fortuitous (unexpected and unforeseen) To control moral or morale hazards To eliminate duplicate coverage To eliminate coverage not needed by the average insured IEI Workshop June 2012

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How Indemnity is Enforced Insurable Interest Subrogation ACV Loss Measurement (versus valued/face amount contracts) Other Insurance Clause Pro Rata Clause Other Restrictive Clauses IEI Workshop June 2012

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Insurance Related Laws COBRA - 1985 allows portability/continuation of benefits for specified reasons 18 or 36 months HIPAA (Health Ins. Portability and Accountability Act 1996) requires new group insurer to accept new member even with preexisting IEI Workshop June 2012

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Current Hot Insurance Topics Usage-based car insurance Health Care Reform Financial Crisis and Bankruptcies Social Security Funding Long-Term Care Funding STOLI (Stranger-originated life insurance) and other Senior issues Federal Charters for Insurers Tort Reform Ponzi Schemes IEI Workshop June 2012

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Examples of Careers in Insurance Underwriters Claims Adjusters Actuaries Agents Brokers Risk Managers Reinsurance Insurance Law Financial Services Estate Planners Employee Benefit Managers IEI Workshop June 2012

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A Sample of Placements of MTSU Insurance Students: Risk Manager for Tractor Supply Agents for numerous companies Attorneys in practice and in-house counsels for insurance companies Regulatory positions with the Department of Commerce and Insurance Claims adjusters for numerous companies Brokers for Willis Underwriters for Cigna, CNA, State Farm, etc. Actuaries for numerous companies Regional Directors of Marketing for several large companies IEI Workshop June 2012

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For Further Information Insurance Information Institute http://www.iii.org/ American Council of Life Insurers http://www.acli.com Social Security Administration www.ssa.gov Employee Benefits http://www.bls.gov/news.release/ecec.nr0.htm IEI Workshop June 2012

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Conclusions The purpose of this presentation is to provide a brief overview of the comprehensive nature of the insurance and risk management industries and careers; At MTSU, we seek to prepare students with the knowledge and technical skills to pursue the field that best fits his or her individual interests; Career opportunities in the insurance and risk management fields are endless! IEI Workshop June 2012

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Questions? IEI Workshop June 2012