Documente Academic
Documente Profesional
Documente Cultură
Chapter 1
Loss exposure: any condition/ situation > possibility of loss> regardless of actual loss
occurs
Insurance: system of both transferring (through an insurance policy)and sharing cost of
losses.
Roles of insurance: risk management technique, transfer system, contract, business
Risk Management: process> making and implementing decisions> minimize adverse
effects of accidental losses (mitigate financial consequences of loss exposures)
Loss prevention: Risk control technique that reduces the frequency (no. of losses occurred
in a specified period) of a particular loss. Eg. Use of safety goggles by construction workers
Loss reduction: Risk control technique that reduces the severity (typically measured
monetarily) of a particular loss. Eg, placement of fire extinguisher in house/workplace
Law of large numbers: mathematical principle> enable insurers to make predictions about
losses. As no of similar but independent exposure unit (to the extent that they are not
generally subject to same loss-causing event) increases, relative accuracy of predictions
about future outcome (losses) also increases.
Exposure Unit: measure of loss exposure assumed by the insurer.
Property-Casualty Insurance: Covers for financial consequences of damage to ones own
property or legal liability to others. Eg, homeowner, auto, CGL.
Life-Health Insurance: covers for financial consequences of death, injury or sickness.
State Insurance Regulators: review insurance rates, policy form, underwriting & claim
practices, and financial performance; can revoke licenses of insurers who fail to comply with
state regulations.
Insurers Financial soundness: Insurers revenue = or > amount it pays for claims & other
admin exp
Revenue Sources: premiums and investment income
Insurance policy characteristics: Contract of; utmost good faith, indemnity, adhesion,
conditional, non transferable, fortuitous events and exchange of unequal amounts.
Utmost good faith: act with complete honesty and disclose all relevant facts.
Adhesion: one party must either accept or reject the agreement as it.
Indemnity: insurer agrees to pay for covered losses, an amount directly related to the
amount of loss.
Insurance Structure: Modular- several documents (eg CPP) or Self contained- single
document policy (eg. PAP).
Personal Insurance: cover individuals and families against personal loss exposure.
Common types are:
Property Insurance: indemnifies insured (by paying or replacing) suffering loss from
property been stolen, lost, damaged, or destroyed. Net income lost and other related
expenses also count.
Liability Insurance: covers for the insureds liability to others. Cost to defend insured
also counts.
Life Insurance: replaces income- earning potential lost through death. Related
expenses of deceased insured also count. Main categories, term life and permanent life
insurance.
Term Life Insurance: coverage for specified period with no cash value.
(effective risk management strategy)
Permanent Life Insurance: coverage till death; accrues a cash value.
Annuities: written by life insurers, provides periodic income (for a fixed period
or for life) an individual cannot outlive; with an exchange of a specified premium.
Health Insurance: covers for financial losses caused by sickness or accidents, such
as disability insurance (disability insurance is primarily income replacement
insurance).
Long-Term care insurance: coverage for extended medical care or custodial care
received in nursing home, hospital or home.
Homeowners Policy: covers both property & liability insurance; also personal
liability (bodily injury or property damage) coverage (damages and cost of defense
related to claim against insured). PL covers for allegations of negligence.
PAP: liability losses due to bodily injury or property damage of others arising from
use, maintenance and ownership of automobile such as auto accident, collision.
Comprehensive Coverage: coverage for direct and accidental losses to auto by
any peril other than collision or overturn or peril specifically excluded. Eg, fire, theft,
contact with animal.
Personal Watercraft Policy: covers for loss exposure due to ownership,
maintenance, or use of watercraft that is used for recreational or personal
transportation purposes.
Umbrella Liability Policy: provides excess/additional liability coverage for both
available and not available coverage in the underlying policies, subject to self
insured retention. (A dollar amount specified in a liability insurance policy that must
be paid by the insured before the insurance policy will respond to a loss)
Commercial Insurance: Loss exposures arising from business (profit and not for profit)
operations. Common types are:
CPP: Policy that covers two or more lines of business by combining ISOs commercial lines
coverage parts.
Commercial Auto Insurance: covers a business for exposures arising out of ownership,
maintenance or use of automobile. Defense costs also included.
BOP: combines most of the property and liability coverage needed by small and mid size
businesses.
Auto Physical damage coverage: Covers for damage to or theft (loss of use) of covered
auto, includes both collision coverage and other than collision (comprehensive) coverage.
Commercial Property Insurance: covers building and their contents against various
property loss exposures. Coverage is limited to property physically located on or near the
insureds premises.
Ocean (wet) marine insurance: oldest form of insurance; covers ships and their cargoes
against perils of the sea (vessel related liability exposures).
Inland (dry) marine insurance: covers different classes of property; involves element of
transportation (by land). Covers property in transit worldwide, equipments used on job sites,
backhoes & other mobile equipments.
Commercial Crime insurance: covers money and securities, and property other than
money and securities against crime perils and other numerous perils. Eg., extortion, theft or
burglary by outsiders or employees.
CGL insurance: provides protection and peace of mind to the business owner; Protection
against liability loss exposures faced by organization, including premises, operations and
products. Eg. Retail store has a wet floor and customer falls getting injured, side effects of a
product. Excludes pollution related claims.
Professional Liability Insurance: covers professionals for harm resulting from errors or
omissions from their professional practices; liability arising from rendering or failing to render
professional services.
Environmental Liability Insurance: protection to business owners against environmental
damage resulting from business operations. Eg. Leaking fuel tank
Commercial Umbrella Liability coverage: provides additional limits; protects insured in
the event of large liability losses.
Workers Compensation insurance: pays for medical care, lost wages, other state
mandated benefits to employees; its a no-fault coverage, provides coverage for benefit an
employer is obligated to pay under workers comp laws.
Ideally Insurable loss exposures: six characteristics,
1. Pure Risk( chance of loss, no loss but no gain) , not speculative (chances of loss, no
loss or gain)
2. Fortuitous losses(occurring by chance- no control by insured) by insured stand point
Moral Hazard: Incentive to cause a loss.eg arson committed by insured.
3. Definite(time, cause and location)and Measurable(frequency & severity)
4. Large number of similar exposure units
5. Independent and non catastrophic
6. Affordable
8 Benefits of insurance: (achieving risk financing goals when used as a risk financing
technique)
1.
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8.
Costs of Insurance:
Premiums paid by insured
Operating costs of insurers(salary, producers commission,
advertising, bldg expenses, equipment, taxes, licensing fee, etc)
Opportunity costs
Incurred losses claim buildup: intentional exaggeration of a loss in
an otherwise legitimate claim. Nuksan ka barha charha k batana
Fraudulent claims: (increase costs for both insured- in terms of high premium and
insurers- in terms for paying for claims and investigation costs)
Losses incurred due to carelessness on part of insured such as leaving car keys in the
car.
Chapter#2
Pvt. Insurer: A nongovernment insurance provider.
Types of Pvt. Insurers: (CSLMRR)
Stock Insurers, Lloyds (both r proprietary insurers- profit to their owners)
Mutual Insurers, Reciprocal Insurance Exchange (both r cooperative insurersinsurance at minimum cost)
Captive Insurers, Reinsurance Co.,
Stock Insurers: owned by stockholderscorporation purpose is to earn profit for its
stockholders elect BOD who create & oversee corporate goals & objectives and appoint
CEO to carry out insurers operations.
Mutual Insurers: owned by the policyholders corporationpurpose is to provide
insurance to its policyholders. Demutualization: process through which mutual insurers
convert to stock insurers.
Assessment Mutual insurance co:
insurers charge insured addl. premium or assessment incase insurer has endured series of
losses from catastrophic event such as a hurricane. (theyre less common now)
Similarities b/w stock and mutual insurers:
Underwriting
Process of selecting insured, pricing coverage, determining insurance policy
terms and conditions, monitoring underwriting decisions made.
Underwriters follow underwriting process that involves gathering info, making
and implementing of decision.
Claims
Claim handling process has six activities: (to achieve fair & equitable settlement)
Acknowledge claim & assign to claim rep
Identifying the policy
Contacting insured or insureds rep
Investigating & documenting the claim
Determining cause of loss & loss amount
Concluding the claim
Risk control
A conscious act or decision not to actmakes losses more predictable reduces
frequency or severity of losses
Premium audit
Methodical examination of policyholders operations, records and books of account
to determine actual exposure units and premium for insurance coverage already
provided. Conducted year end
o Purposes:
Fulfill unmet needs of pvt. insurance mkt (eg. Terrorism Risk Insurance Program)
Facilitate compulsory insurance purchases (eg. Workers Comp, personal auto liab
insurance)
Provide efficiency in mkt and convenience to insureds
NFIP (National Flood Insurance Program)- Fed Gov act as primary insurer
TRIP (Terrorism Risk Insurance Program)- Pvt insurers are primary and Fed Gov is
temp reinsurer
Federal Crop Insurance- Fed Gov subsidizes & reinsures pvt insurers.
To protect consumers (reviewing insurance policy, protect against fraud & unethical
behavior, ensure insurance is readily available. E.g. PAP restrict the right of insurers
to cancel or refuse to renew policy)
To maintain insurer solvency (ability of insurer to meet its financial obligations as
they become due, even for the future claims)
To prevent destructive competition (adequate insurance rates are maintained)
Insurer Licensing:
-Foreign Insurer: An insurer licensed to operate in a state but incorporated (domiciled) in
another state. License must be renewed annually.
- Domestic Insurer: Insurer operating in the state where domiciled. License generally has no
expiration date.
-Alien Insurer: Insurer domiciled in the country other than U.S. License must be renewed
annually.
-Mutual Insurer
Admitted Insurer:
Insurers that are licensed to do business regardless of what they are licensed as (i.e.
domestic, foreign or alien insurer.
Nonadmitted Insurer:
Insurers that are not authorized by the state to do business within that state. They are
frequently referred to as surplus lines insurers.
Surplus lines insurers are permitted to sell only insurance that is not readily available
from admitted insurers due to specialty, risk or several other factors. They can
transact business only through licensed surplus lines producers.
Surplus Lines Law: A state law that permits licensed surplus lines producer to procure
insurance from eligible surplus lines insurer/nonadmitted insurer if applicant cannot
obtain desired type of insurance in the admitted market.
Insurance Rates and Form Regulation:
Rates are regulated to strike balance b/w insurer profits and reasonable prices for
consumers.
Forms are regulated to ensure that they are readable, understandable and fair.
3 Criteria used by a state insurance commissioner to approve or disapprove
insurers request for rate:
Adequate
- Non excessive
Rating Laws:
Mandatory rate law: strictest control of insurers rate > rates set by state agency
or rating bureau > insurers are reqd. to use those rates.
Prior Approval law: Rates and supporting rules must be filed and approved before
they can be used.
File-and-use law: Insurers must file rates and supporting rules with the state
insurance, but can be used while the approval is pending.
Use-and-File law: provides more flexibility to insurers in setting rates > rates must
be filed with state insurance within a specified time period once they are put into
use.
Flex rating law: prior approval reqd. only when new rate exceed a certain %age
above and below the rates previously files > increase amount of flexibility for insure
in their rate determination.
Open Competition: known as no-file law > insurers develop and use rates without
approval or filing rates with state insurance.
Unfair trade practices laws (specify certain prohibited business practices) involve 3
areas of insurance co. operations:
-Sales
-underwriting
-claims handling
Investment problems, alleged fraud, and catastrophe losses are less frequent causes.
Establish financial requirements to measure solvency> varies by state> eg. capital &
surplus requirement for admitted insurer to obtain and keep license
Conduct on-site field examinations to ensure regulatory compliance> once every
3to5yrs
Review annual financial statements> NAIC (coordinates with various state insurance
dept) prescribed format of primary annual F/S called NAIC Annual Statement,
Requires detail info on premiums, exp, inv, losses, reserves & other financial info.
Reserve: amount the insurer estimates and sets aside to pay on existing claim that
has not been settled.
Administer IRIS (Insurance regulatory Info System)> its an early warning system,
established and operated by NAIC, enables regulators to rehabilitate insurer or
minimize losses from liquidation.
Guaranty Fund: state-established fund> used to pay unpaid claims of insolvent
insurer> funded by assessments collected from all licensed insurer in a particular
state.
Standard business: insurers who offer insurance coverage at rates designed for customers
with average and better-than-average loss exposures.
Surplus Lines Insurance: insurance obtained from nonadmitted insurers when protection
is not available from admitted insurers.
5 Classes of Surplus Lines Business:
Surplus Lines Insurer: A non admitted insurer that is eligible to accept business from a
state, i.e. eligible to insure risks that have been exported by a surplus lines licensee
(licensed surplus lines broker) in accordance with surplus lines law. (after diligent search for
coverage in the std mkt has been performed.
Policy Provisions:
- Statement/phrase/clause communicating the insurers and
insureds coverage agreements
- Describes and clarify insurance coverage, exclusions, limits, and
contractual responsibilities
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Property insurance policy lists the property that is not covered to clarify what property is
covered; they often provide coverage for the property that is owned by someone other than
the insured, eg HOP provide coverage for the personal property of others such as guests or
employees while personal property is at insureds home. Iski misaal esi hai k jese ek banday
ki diamond ki ring mere ghr pe hai toh mera insurer usko cover karega.
Commercial property policies limited coverage deti hai personal effects k jb tk k wo insured
k under care, custody ya control me ho. PAP policy coverage deti hai borrowed auto ki agar
k usk owner k pass physical damage coverage na ho toh.
Covered Locations:
- Some portions of bldg may be removed like the temporary
placing of storm shutter windows in building.
- HOP covers personal property anywhere in the world, PAP covers
auto within US and its territories.
- Commercial property insurance policy is more restrictive,
coverage for insureds business personal property is provided
within the insured building or within 100ft of the building.
-
Falling objects like weight of snow, sleet, & sudden and accidental
leakage of water from plumbing system
Special Form (open perils)- Former name: all risk coverage
Covers all causes of loss unless specifically excluded.
- 3 Types of Auto physical damage coverage
Collision Coverage (direct & accidental loss due to collision or by
overturn)
Other than collision/ Comprehensive coverage (damage to covered
auto except collision or cause of loss specifically excluded)
Specified causes of loss coverage (loss caused due to specified
causes, see pg 9.25)
Valuation Provisions (used to set value on covered propertyReplacement Cost and ACV, third approach involves agreed value)
Settlement Options: (Insurer has 3 options to settle a loss)
1. paying value of lost or damage property (as determined by
valuation provision
2. paying cost to repair or replace if thats possible
3. Repairing, replacing or rebuilding other property like of a kind
instead of money
Deductible: (amount of covered loss thats not paid by the insurer
Insurance-to- value provision: encourages insured to purchase
insurance with amount that is equal to or close to the value of covered
property (encouraged by adding co-insurance provision)
Co-insurance- if covered property is underinsured, amount
that insurer will pay for a covered loss is reduced.
Other Insurance Provision: Loss is divided on a proportionate basis so
insured does not profit from the loss occurred.
Medical Payments
Coverage that pays necessary medical expenses incurred by claimant
regardless of insureds fault or not.
Covered Time Period:
Property Loss Exposures: (Direct Loss) Provide framework for analyzing loss
exposure that may be handled through risk management techniques.
Three important Elements of property loss exposures: lost, damages
or destroyed
Assets exposed to property loss
Basic Property types: Real property and personal property
Other property:
o Buildings- Fixtures: Any personal property affixed to
real property such as it becomes a part of real property.
o Personal Property contained in Buildings: Eg.
Furniture, machinery & equipment, Stock. Term
contents is used to refer contents of personal
property.
o Money and Securities: Highly susceptible to loss by
theft. Money is currency, coins, checks, credit card slips,
money orders held for sale to public. Securities are
written instruments such as stocks and bonds.
o Vehicles and Watercraft:
o Auto a land motor vehicle, trailer or semitrailer
designed for travel on public roads.
o Mobile Equipment Vehicles designed to be used
on off public roads such as bulldozers and cranes.
o Recreational Vehicles Vehicles used for sports
and recreational activities such as dune-buggy, allterrain vehicle, or dirt bike. Both on and off road.
o Property In Transit Damage or loss in transit of
property must be replaced.
Causes of loss (peril): Include fire, lightning, hail, storm and theft.
o Peril: Cause of loss
Statutes:
work ni krta toh risk manager may ask to retain and pay for any
losses by org. operating funds.
- Retention can be intentional or unintentional(eg. Failure to
purchase Liquor liability coverage by restaurant)
- Retention can be partial ($10,000 deductible on commercial
property insurance) or total(husband wife choosing not to
purchase insurance on lakeside home because they believe its
too expensive).
- A deductible is an example of combination of retention and
insurance.
- Retention is usually used in combination with other risk
management techniques.
Transfer:
- Includes noninsurance risk transfer and insurance
- E.g. Hold-harmless agreement signed by tenant and landlord in
case of any liability arising on the landlord for the loss that
resulted due to activities of the tenant. Jese tenant jo jaga own
kar rhay hain waha koi nuksan hoto woi zimedar hongay malik
makan nahi.
- Insurance is another risk transfer technique where financial
consequences of a loss exposure are transferred to the insurer by
the insured.
Selecting, Implementing and Monitoring Risk Management Techniques: