insurance 101 the basics - insurance institute of kentucky

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© 2010 Property Casualty Insurers Association of America

Insurance 101The Basics

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What is Insurance?

Methods of addressing uncertain risk• Avoid (don’t purchase)• Keep (don’t insure)• Transfer (purchase insurance)

Insurance is the “transfer” of uncertain financial consequences for a certain financial cost (e.g., premium)

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How does it work?

Policy is a legal “contract of adhesion”

Insurance is for accidental/“fortuitous” events

Insurance rates “shall not be excessive, inadequate, or unfairly discriminatory”

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Why does it work? Risks are shared among a large group

of “similarly” classified insureds

Premiums are “conservatively” invested in “liquid” instruments

“Spread of risk”

Reinsurance

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How does society benefit?

Payment for losses

Reduction of uncertainty

Loss control

Long-term investments

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What are the types of insurers?

Stock

Mutual

Reciprocal exchange

Lloyd’s

Fraternal benefit societies

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How is insurance marketed? Independent agents

Brokers

Exclusive agents

Direct

Direct mail

Internet

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Why regulate insurance? Complex promise for future performance

Solidity

Equity and Fairness

Freedom from governmental restraint

Freedom of access to the market

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Who regulates insurance? States - Currently

• McCarran-Ferguson Act

Federal interest

• Gramm-Leach-Bliley Act

Judicial impact

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How is insurance regulated? System types

• Open competition - “no file”• “File and use” or “Use and file”• “Prior approval”• State mandated/controlled

Why should policyholders care?• Freedom to choose/purchase

• Affordability/Availability• Market responds to competition

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So, what does all this mean? Complex and mature marketplace

• 3,100 insurers writing in the U.S.• 722 insurers writing in Kentucky

Intimate relationship with society• Delicate balance• Complex economic relationships

• Banking• Investments• Real Estate

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What is the process? Company established Selection of market segment Development of product

• Policy• Jurisdiction• Rating/Underwriting

Sale of product Claims Settlement

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How are rates developed? Law of large numbers Probability distributions Review of past losses

• Frequency• Severity

Review of expenses• Loss adjustment expenses• Overhead expenses

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How are rates developed? Predictability of future losses and expenses

• Large number claims over a period of time - 3 to 5 years at least

• Medical costs, legal costs, jury awards

Reasonable degree of certainty

Spread of Risk

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What is underwriting?

Discriminatory classifications

Application of rules/classifications

Risk selection

Pricing

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How does it work? Agent/Company Representative

• Application/completion• Information - DMV report, etc.

Underwriters• Application/classifications• Additional info (financial, loss)• Risk Selection• Pricing


Part II

Countrywide and State Industry Results

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Countrywide HomeownersInsurer Cost & Written Premium Trends

($000)

$0

$10,000,000

$20,000,000

$30,000,000

$40,000,000

$50,000,000

$60,000,000

$70,000,000

Expenses* & Dividends $12,597,611 $13,936,848 $15,801,281 $15,027,150 $15,902,904 $17,043,006Incurred Losses $27,085,092 $33,623,743 $41,766,833 $28,382,907 $32,269,796 $45,508,068Written Premiums $48,824,680 $53,521,999 $57,845,847 $61,221,691 $65,140,204 $64,619,860

2003 2004 2005 2006 2007 2008

Source: NAIC Annual Statement database via Highline Data LLC

*Expenses include loss adjustment expenses; commissions; taxes, license and fees.

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Countrywide Personal AutomobileInsurer Cost & Written Premium Trends

($000)

$0

$20,000,000

$40,000,000

$60,000,000

$80,000,000

$100,000,000

$120,000,000

$140,000,000

$160,000,000

$180,000,000

Expenses* and Dividends $37,566,162 $38,712,944 $39,132,978 $39,053,426 $40,177,049 $38,429,788

Incurred Losses $97,163,981 $94,803,242 $98,221,019 $95,210,949 $101,151,572 $104,667,232

Written Premiums $157,580,075 $163,086,257 $163,882,272 $164,705,553 $164,722,658 $164,289,793

2003 2004 2005 2006 2007 2008



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Property Casualty Industry Combined Ratio

101.6%

105.6%107.7%

110.0%

115.7%

107.5%

100.1%98.4%

100.8%

92.5%

95.7%

103.9%

90.0%

95.0%

100.0%

105.0%

110.0%

115.0%

120.0%

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

Source: PCI based on A.M. Best’s Aggregates & Averages

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P/C Net Income 1999-2008(after taxes in $ millions)

$21,865 $20,223

-$6,970

$2,903

$29,877

$38,722$43,230

$63,695 $61,940

$2,379

-$15,000

-$5,000

$5,000

$15,000

$25,000

$35,000

$45,000

$55,000

$65,000

$75,000

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

2001 was the first year ever with afull year net loss.

Source: ISO Industry Financial Results

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Kentucky HomeownersInsurer Cost & Written Premium Trends

($000)

$0

$200,000

$400,000

$600,000

$800,000

$1,000,000

Expenses* & Dividends $106,590 $114,303 $125,950 $122,957 $125,012 $130,611Incurred Losses $351,430 $320,708 $274,367 $372,044 $434,458 $826,860Written Premiums $546,557 $608,089 $643,306 $668,344 $691,137 $725,705

2003 2004 2005 2006 2007 2008



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Kentucky Personal AutomobileInsurer Cost & Written Premium Trends

($000)

$0

$500,000

$1,000,000

$1,500,000

$2,000,000

$2,500,000

Expenses* & Dividends $299,404 $313,646 $343,410 $306,080 $322,733 $301,197Incurred Losses $1,334,609 $1,299,958 $1,239,864 $1,261,824 $1,311,277 $1,379,073Written Premiums $2,080,805 $2,167,627 $2,172,996 $2,186,383 $2,158,371 $2,122,721

2003 2004 2005 2006 2007 2008



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Kentucky Total Property & Casualty LinesInsurer Cost & Written Premium Trends

($000)

$0

$1,000,000

$2,000,000

$3,000,000

$4,000,000

$5,000,000

$6,000,000

$7,000,000

Expenses* & Dividends $994,275 $1,069,184 $1,120,025 $1,063,556 $1,085,378 $1,039,476Incurred Losses $3,505,062 $3,443,025 $3,437,201 $3,164,718 $3,330,907 $3,919,917Written Premiums $5,413,136 $5,755,282 $5,947,311 $5,805,614 $5,806,948 $5,697,839

2003 2004 2005 2006 2007 2008




Questions?

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insurance 101 the basics - insurance institute of kentucky

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