Role of insurance
transfer risk of loss from an individual or business to an insurance company
Industry overview: social aspect
provides employment for thousands involved in transacting contracts and thousands more in servicing and adjusting losses covered by insurance
Industry overview: economic aspect
insurance is 2nd only to commercial banking industry as a source of investment funds
Private insurers
funded by premiums; may offer many lines of insurance formed as stock, mutual, reciprocals, or fraternal insurers; must be authorized by state
Government insurers
provides insurance where private insurer cannot/will not; called social insurance (medicare, social security, federal crop, national flood); funded with taxes, serves national and state social purposes
Admitted
qualified and received certificate of authority from department of insurance to transact insurance in the state
Independent rating services
financial strength based on prior claims experience, investment earnings, level or reserves, management (AM Best, Fitch, Standard & Poor's, Moody's, Weiss)
Independent agency/American agency system
1 independent agent represents several companies, non-exclusive, commissions on personal sales, business renewal with any company
Exclusive agency system/captive agents
1 agent represents 1 company, exclusive, compensation and commissions, appoints subagents
General agency system
general agent-entrepreneur represents 1 company, exclusive, compensation and commissions, appoints subagents
Managerial system
branch manager (supervises agents) salaried, agents can be insurer's employees or independent contractors
Direct response marketing system
no agents, company advertises directly to the consumers (TV, mail, etc.), consumers apply directly to the company
Law of large numbers
the larger the # of similar exposure units considered, the more closely the losses reported will equal the underlying probability of loss
Pure risk
situations that can only result in a loss or no chance, no opportunity for financial gain, only type of insurable risk
Speculative risk
opportunity for either loss or gain (gambling), not insurable
Peril
cause of loss (collision)
Hazard
risky behavior (physical, moral, morale)
Methods of handling risk
avoidance; retention: planned assumption of risk through deductions, co-payments, of self-insurance; sharing; reduction; transfer
Elements of insurable interest
loss must be 1) due to chance 2) definite and measurable 3) statistically predictable 4) not catastrophic 5) not be mandatory