Security
A family unit and being able to provide a financially to maintain a certain standard of living or lifestyle.
With a security comes a certain degree of peace of mind and a freedom of doubt, fear, worry, or apprehension.
Risk
Uncontrollable potential occurrences that are common to everyone including death, disability, sickness, accident property damage, or Loss, and financial difficulty that result from retirement.
Pools
Individuals paying to minimize possible financial devastation loss in an event of an unforeseen tragedy occurring.
Payment to an individual would be made from this fund in the event of a loss, thus transferring the potential financial hardship from the in
Lloyd's of London
13th century ship owners who wanted to insure their ships and cargo against loss at sea that would procure an early form of insurance from wealthy individuals who would transact business in the coffee house on England.
Mutual Life Insurance Company
1842 first mutual life insurance company
Insurance Policy
A contract or social device for transferring risk from a person business or organization to an insurance company.
The insurance company agrees that in exchange for a premium, the insurer will pay for losses through an accumulation of premiums and investme
Types of Insurance
Four broad categories, or lines of insurance: property, casualty, disability, and life insurance.
Property Insurance
Coverage for risk that we will suffer financial loss to something we own that is damaged, destroyed, or stolen.
Property insurance includes fire insurance, inland marine, and ocean marine insurance.
Casualty Insurance
Variety of unrelated insurance products.
Causality is often associated with liability insurance.
Liability Insurance covers our actions towards others and any legally imposed responsibilities if those actions causes another person a loss such as bodily in
Disability Insurance
Designed to handle the risk of medical bills and loss of income resulting from injury and sickness
California; includes medical (health Insurance)
disability Income, Accidental death and dismemberment, medicare supplements, and long term care insurance.
Life Insurance
Covers the Risk of premature death, when someone dies leaving debt, dependents, and the responsibility of financial obligations to heirs.
Life Insurance companies often also offer annuity product, which protect against the risk of outliving your financial
Risk
Uncertainty of loss.
Risk is not the loss itself, but the uncertainty of an event occurring that causes a loss.
Two types of risk
1. Pure risk
2. Speculative Risk
Pure Risk
The chance of loss only, with no chance of gain or profit.
Insurance can only be used to cover pure risk.
IE: the risk of being sick and needing costly Medicare.
Speculative Risk
Where there exists both the chance of gain and the possibilities of loss
IE: purchasing a lottery ticket.
Speculative risks are not Insurable.
5 different methods of managing risk
(STARR)
Sharing
Transfer
Avoid
Retain
Reduce
Sharing
Insurance Companies manage risk of paying claims by sharing.
Occurs when an insurer accumulates and manages premiums to cover claims.
Insurers use combine premiums from all policy holders to pay claims.
Transfer
When insurance is purchased to cover risks, this is known as risk transfer.
The client will experience loss, but transfers to the insurer for payment of the loss.
What method of risk management is used when somebody buys insurance?
Transfer
Avoid
Certain risk may be managed by avoidance
Retain
Retaining risk includes self insuring that is not purchasing insurance and being out of pocket for the entire loss.
Self insuring occurs when businesses has the cash to pay for the loss and can forego buying Insurance.
Responsible for only part of the los
Reduce
Any steps taking by the insured to lessen the chance that a loss will occur is considered to be reducing the risk.
Installing a burglar alarm or smoke detectors in a home will reduce the chance of a loss.
Loss
Reduction in value occurring as a result of a covering peril, in identifying loss exposures.
Loss Exposures
Situations involving risk, insurance agents, and brokers potentially evaluate the risk management methods for dealing with them.
Retaining the Risk
Only recommended if the value of the loss is minor or the insured has adequate resources to cover the loss.
Hazard
Anything that increases the chance of loss or severity of loss due to a peril.
4 types of Hazards
1. Physical Hazard
2. Moral Hazard
3. Morale Hazard
4. Legal Hazard
Physical Hazard
(Next To) Individual tangible characteristics, that increase the chance of a loss because of the occurrence of a peril.
They include: Physical, material, structural, or operational features of a risk situation.
Unsafe brakes on a car, a persons physical c
Moral Hazard
(Liar)
Deals with mental attitudes,behaviors, and habits that individuals have which are relative to a particular risk.
They involve evaluating the character and reputation of the proposed Insured.
Alcoholism, drug abuse, smoking, or dishonest or exaggera
Morale Hazard
(Moron)
Individual Tendencies, but are distinguished by the fact that they arise from a state of mind, causing indifference or apathy towards loss.
Can result in extreme carelessness such as individual who instead of taking responsible care of property, s
Legal Hazard
Derived from court actions that increase the likelihood or size of loss.
IE: Filing Law suits and claims enormous sums of money for alleged damages
Legal Hazards are associated with the field of liability insurance.
Peril
Cause of loss.
IE: Fire, flood, theft, and negligence are common perils that can be covered by an insurance company.
Law of Large Numbers
The larger the grove, the easier it is to predict the losses.
The more examples of or occurrences of an event with multiple outcomes that are used to develop any statistics the more reliable the statistics the more reliable the statistic will be.
By surve
Ideally Insurable Risk
A risk that is financially feasible and reasonable to insure.
Ideally Insurable Risks...
1. The Loss must be definite and measurable. (To help prevent fraud)
2. The loss must be accidental not intentional.
(Life insurance exists even though there deaths are certain)
3. The Insurer can calculate the chance of loss.
(To enable the insurer to ac
Insurable Interest
(Paid "to the extent that would cover the loss")
In property and casualty Insurance you must show insurable interest, before being allowed to purchase insurance.
You must establish that you have ownership of the item that you are insuring.
You also are re
Indemnity
To restore them the same financial condition that existed prior to the loss.
To indemnify the insured also means to cover the loss without paying an amount that would cause the insured to profit from a loss.
Deductible
A portion of the loss the insured must pay before the insurance applies to the claim.
Higher deductible will cause the premium to be lower.
Grace Period
A period of time when the client may pay the premium after the due date.
Reinsurance
Shifting all or part of the risk originally accepted, by the issuing insurer to one or more additional insurers.
Any amount above the original insurers retention limit can be re-insured.
Also the maximum amount of risk an insurer will accept on any one po
Operating Divisions of an insurer
-Marketing and Sales Department
-Actuarial Department
-Underwriting Department
-Claims Department
Marketing and Sales Department
Helps determine the insurers overall marketing and advertising strategy and coordinates the strategy with the companies sales force.
Actuarial Department
(Create the Rates)
Uses computer data, claims history, as well as statistics from rating bureaus and other insurance companies to predict losses.
Actuaries determine the rates to be charged for various types of insurance from this data.
Underwriting Department
(Apply the Rates)
Individual underwriters who make decisions about wether to accept or reject applications and insure particular risks sent in by agents based on company standards and their own judgement.
Claims Department
Oversees the evaluation of losses and payment of claims after an insured event occurs.
Claims adjusters are used to inspect a loss, determine if there is coverage, estimate amount of coverage and in some cases pay immediately for the loss, or instruct the
Underwriting Risks
When the insurance company reviews the application, underwriters review it for its appropriateness and acceptability to the insurer.
Underwriters review the type of risk, what hazards exist, if any, and prior loss history.
Field Underwriting
The evaluation and selection of risks and issuance of policies in a in a way that is profitable to insures and equitable to insureds.
F.U. occurs when the Agent, brokers, or solicitor takes the client application and conducts a primality review to determi
Adverse selection
The tendency for people who "need" insurance to seek it.
Underwriters try to avoid "adverse selection" by adhering to underwriting guidelines used to eliminate too many high risk applications from being offered coverage.
Spread of risk (profitable Distribution of exposures)
A certain degree or range of risk assumed by the insurer is acceptable as it allows the company to pay claims and still operate at a profit.
Loss ratio
allows the success of an insurnace company's underwriting department to be measured and compared. The loss ratio provides the company with a measurement of its relative success in covering current losses out of current premium income.
Loss ratio formula
claims/premiums
750.000/1,000,000 = 75% loss ratio
A loss ratio of 75%, indicates that 75% of every premium dollar is used to cover claims.
Expense Ratio
Allows the insurance company to measure the amount of every premium dollar used to cover the company expenses or overhead.
Expense Ratio Formula
Company Expenses / Premiums
300,000/1,000,000 = 30% expense ratio
Expense ratio of 30%, indicates that 30% of every premium dollar is used to cover expenses.
Combined Ratio
Adding the loss ratio and the expense ratio.
Example of Combined ratio
When the combined ratio is a 100% the insurer breaks even. , as the claims and the company expenses (monies paid by the insurer) are equal to the premiums paid (monies received by the insurer) are equal to premiums paid (monies received by the insurer)
If
Rate Making
Process of an insurance company calculating rates and premiums.
Judgement Rating
( Judgement Underwriting)
The individual risk is considered.
The underwriting determines the premium using their intuition and experience instead of a rating manual.
Merit Rating
(Good Grades...Lower Rates)
A class or manual rate, which is then modified, based on loss experience or other unique characteristics.
Lower premiums are given to those insureds that have few or minimal losses.
Manual Rating
( Pre Printed Rates )
The underwriter simply refers to a rating plan or manual produced by the insurer to determine the premium.
Retrospective Rating
Premium can be credited back or assessed at the end or the policy year.
Premiums are based on losses incurred during the policy period.
Experience Rating
A form of merit rating that modifies the manual premium based on the insureds loss experience.
Loss Revenues
(Claims Reserves/For Open Claims)
Refers to the funds an insurers is required by law to set aside to cover claims.
The amount equal to the losses that are due but not as yet payable, and an estimate of losses incurred, but not yet reported.
Rate Regulation
The insurance department in each state regulates policy rates to ensure that they are fair and reasonable, and not discriminatory.
File and Use System
A company may begin using rates as soon as they are filed.
The state will review the filing and either accept or reject it.
Prior approval system
(Pre Approval)
The insurance company must obtain approval of the rate prior to using the rate to sell policies.
System in use for most property and casualty insurance written in California.
Mandatory system
For some line of insurance the state ir federal government determines the premium that all companies must use.
Rating Bureaus
Gather, pool, and analyze statistics to determine loss costs based on these combined figures and file them with individual states
Loss costs
Key component of insurance rate - how much an insurance company needs to collect to cover expected claims for a given period.
Insurance companies use these loss costs combined with factors covering their own expenses and profit margins to establish the ul
ISO
(Insurance Services Office)
Largest rating bureau for property and casualty insurers that provide statistics and advice regarding most casualty and policy forms.
Advisory organization that develops forms for the standard market.
WCIRB
(Workers Compensation Inspection Rating Bureau)
A consulting firm that provides statistics and advice for workers compensation Insurers.
Surety Association of America
A consulting firm that provides statistics and advice for the surety bond industry.
Self-Insurance/Self-Funded.
Employee medical benefits paid out of employer business revenue, instead of being insured by an insurance policy
US Government as Insurer
Reinsurers insurance companies that insure high-risk perils such as flood insurance.
This allows the premiums to remain reasonable even though the risk is catastrophic.
Types of Loss
Direct loss and Indirect loss,
Direct Loss
Destruction of property (property damage or theft , as the direct result of a peril.
Proximate Cause: Leads to direct loss.
Indirect (Consequential) Loss
(Water from a fireman's hose, putting out fire)
Monetary loss occurring because of direct loss.
Characteristics of Insurance Contract
1. Utmost Good Faith
2. Aleatory
3. Adhesion
4. Unilateral
5. Conditional/Executory
6. Valued, Indemnity, Reimbursement, or service Contracts.
7. Personal Contracts
8. Subrogation
Utmost Good Faith
(Both parties agree to treat each other openly and honestly)
Both parties know all material facts and have disclosed all relevant information with the full intention of carrying out their obligations.
No attempt by either party to misrepresent, conceal, d
Aleatory
Element of change or uncertain outcome for both parties of an insurance contract and the dollar values exchanged may not be equal.
The benefits provided by an insurance policy may or may not exceed the premiums paid dependent on "if" the uncertain event o
Adhesion
(Insurance is almost always a contract of adhesion)
Contracts are prepaid by the insurance company and offered to prospective insureds on a take-it-or-leave-it" basis, meaning that it is not the result of negotiations between the parties.
Unilateral
Most Contracts are bilateral; promise for a promise.
Bilateral Contracts - Contract where there is an exchange of a promise for a promise.
Insurance contracts are unilateral, meaning a "premium-for-a-promise", because only one party of the promise the ins
Conditional/ Executory
Open for inspection at any time. Problem noted...must be addressed immediately.
When a loss occurs certain conditions must be met in order for claims to be paid, and promises described in the contract are to be executed in the future after certain events
Condition Precedent
An act must be performed, or an event must take place before the right is met.
IE: An insured must become disabled before collecting disability benefits, or the insured must die before the death benefit can be paid by the spouse.
Condition Subsequent
An act or event is of such a nature as to cancel a right.
IE: Insured that commits suicide within two years after the contract has been issued.
Valued, Indemnity, Reimbursement, or Service Contracts
Policy that is expressed on its face and agreement that that the thing insured shall be valued at a specific sum.
Valued contracts are written for a specific amount.
They list the value of insured property as agreed to both insured and insurer at the ince
Service Contract.
Pay health care providers, directly after the patient has received medical treatment.
Personal Contracts
Insurance policies are generally agreements between the insured, and the insurer, and they concern an individual, not the insureds property.
The person holding the interest in the property is insured, or indemnified, in the event of a loss.
The contract i
Life Insurance Contracts
The rights of the policy can be assigned freely to another party, who now has an insurable interest, without the companies consent.
Subrogation
The Transfers of the the 3rd Parties Money Rights
Used in Property and casualty field, but often the concepts applies in relation to health insurance, means that an individual gives up the right to collect twice in the event of a loss.
The surrendering of
Assignment
The insureds interest in a policy couldn't be assigned to another individual or entity without the written consent of the insurer.