Insurance

What is risk?

Risk is the chance of loss. Insurance companies may also use the term “risk” to refer to the insured person, property, or activity.

What kind of risks are insurable?

Pure Risks not speculative risks like gambling are insurable

What is a peril?

A peril is the cause of a loss

What is a hazard?

A hazard is a condition that increases the chance of a peril occurring.

What is insurance?

A way to manage risk via transfer

What makes a risk insurable?

It must be definable, measurable, beyond the insured’s control, common to a large group of people, not catastrophic

What is Adverse Selection?

When someone who is high risk tries to buy or maintain insurance - underwriters seek to avoid

What is the purpose of insurance?

The fundamental purpose for insurance is to indemnify policyholders against covered losses, that is, to restore them to the same financial position they were in before the loss. This is achieved when the insurer pays a claim for a covered loss as defined in the policyowner’s insurance policy.

All insurance is based on what 4 factors?

Risk, Loss, Exposure, Peril, Hazard

What is a loss?

An unwelcomed and unplanned reduction in economic value

What are the two types of losses?

• A direct loss is the immediate result of an event caused by a covered peril.

• An indirect loss is a more remote ramification than a direct loss, but is still a result of loss from a covered peril.

What is exposure?

The state of being subject to a possible loss. Also efers to the total extent of risk an insurer faces with an insured. For example, an insurance company that sells workers compensation insurance faces increased exposure as an insured business’s workforce increases.

How do insurers measure exposure?

They assign exposure units to the person, property or event for which insurance is being sought. Units are influenced by the insured item’s market value and risk factors facing it. The more exposure units assigned to an insured item, the greater its premium.

What is an Occurrence?

“Occurrence” is an accident that results, during the policy period, in bodily injury or property damage. An occurrence can include losses from continuous or repeated exposure to a harmful condition

What is an Accident?

a sudden, unplanned and unexpected event.

What is a Peril?

A peril is the destructive event that insurance guards against. Examples include: fire

• explosion

• windstorm

• flood

• theft

• collision

An insurance policy provides financial protection against losses caused by specified perils. Because the insurance policy "covers" them, these are commonly called covered perils.

What is a hazard?

a condition that increases the likely occurrence of a peril or the likely severity of a loss

What are the 3 types of hazards?

• Moral hazards are the tendencies or traits of an individual that increase the chance of a loss. Alcoholism, smoking, and bad credit are examples of moral hazards.

• Morale hazards are also individual tendencies, but they arise from a state of mind, attitude, or indifference to loss. Not locking one’s car or driving recklessly are examples of morale hazards.

• Physical hazards are physical conditions that increase the chance of loss. For instance, dangerous conditions or activities are physical hazards that increase the chance of injury or death. Diseases are physical hazards because they increase chance of death.

What are legal hazards?

Some insurers also recognize legal hazards, which are legal or regulatory environment characteristics that affect an insurer’s ability to provide insurance at a premium that fairly reflects its loss exposures.

What is risk management?

How risks are dealt with

What are the 5 risk management techniques?

• avoiding the risk

• controlling (reducing) the risk

• sharing the risk

• retaining the risk

• transferring the risk

What is risk retention?

risk retention is simply accepting a risk and dealing with a loss using personal funds. If the potential financial loss is small, risk retention makes sense. However, if the potential loss is great, risk retention may lead to financial disaster. deductibles are a risk retention device. Deductibles shift small losses to the policyowner, leaving the insurance to cover more serious losses

What makes a risk an insurable risk?

• A covered loss must be definite as to time, cause, and location. It must be clear that a covered loss has occurred.

• The value of the item to be insured must be measurable. Without this, it would not be possible to determine premium rates and claim amounts.

• The insured event must be accidental or outside the insured's control. Only losses that occur due to chance are insurable.

• In general, losses are not covered if due to catastrophic events such as a war or massive earthquake impacting many policyowners at once.

• The risk must be part of a large group of similar risks that the insurance company can use to predict future losses.

• Only pure risks (e.g., the risk of a house burning) are insurable; speculative risks are not.

What is underwriting?

Underwriting determines whether a particular risk can be insured and at what rate.

What is the law of large numbers?

what is not predictable in a single instance becomes predictable the greater the number of similar instances are being observed.

How is property and casualty insurance provided? What type of companies?

Commercial insurance companies - Stock companies & Mutual companies (owned by policyholders), county mutuals operate over a limited geographic area

Reciprocal insurers - groups of members that prefund coverage of future losses. unincorporated members exchange contracts of indemnity

Captive Insurance - A captive insurance company is an insurance company designed to cover the risks of the "parent" organization(s) that own it: 

• Single-owner captives (or single-parent captives) are owned by a single company for which they provide insurance.

• Association captives (also known as group-owned captives) are owned by and cover the risks of a group of organizations.

Fraternal Insurers - affiliated with fraternal benefit societies. are a common ethnic, religious, or vocational affiliation.

Llyod’s Associations - groups of members that write fire insurance and auto physical damage insurance. Lloyd's Associations in the United States are not related to Lloyd's of London. They are groups of insurers that mainly write fire insurance and auto physical damage insurance. A member can be either a person or a company, and each member's liability is limited. Lloyd's Associations play a relatively small role in the U.S. insurance market, and most of them are based in Texas. Lloyd’s of London is a forum where brokers may find individuals who are willing to help underwrite complex, unique, and large risks

Self-insurers are financially strong businesses that self-fund certain risks.

Risk retention groups (RRGs) provide members with coverage for liability risks except workers compensation. Created through the federal Risk Retention Act of 1981 (amended in 1986)

Purchasing Groups - The federal Risk Retention Act also authorizes the formation of purchasing groups. As with RRGs, members of a purchasing group must have similar businesses or activities, and one purpose of the group must be the purchase of liability insurance on a group basis. Purchasing groups purchase insurance from an insurer that issues the policies and serves as the risk bearer.

Reinsurance companies share other insurers’ large risks. The insurer seeking to transfer some of its risk is known as the ceding company (or cedent). The insurer accepting some of the risk being transferred is known as the reinsuring company. The ceding company pays a premium to the reinsurer for its share of coverage.

What are alternative ways to classify insurance providers?

1. Domicile (domestic, foreign, or alien)

2. Distribution system (exclusive agency or independent agency)

3. Financial rating (A+ superior to D insolvent)

4. commercial versus government insurers

5. admitted versus non-admitted insurers

Federal government insurance programs include:

• Social Security Insurance (formally known as Old-Age, Survivors and Disability Insurance, or OASDI)

• Medicare (formally known as Supplemental Medical Insurance, or SMI)

• the National Flood Insurance Program (NFIP)

• crop insurance

• the Federal Deposit Insurance Corporation (FDIC)

State government insurance programs include:

• workers compensation

• unemployment insurance

• state-run automobile insurance plans (for high-risk drivers unable to obtain insurance from commercial insurers)

admitted insurer

a company licensed to do business in the state or country in which it writes applications.

nonadmitted insurer

not licensed to do business in a certain state but is authorized to sell surplus lines insurance there.

Unauthorized Insurers

any organization that presents its products as “insurance” although neither it nor its products have been approved by any department of insurance in the jurisdiction(s) where it operates. In short, unauthorized insurance is fake insurance. A producer who sells coverage from an unauthorized entity may be liable for unpaid claims, subject to regulatory penalties, and even imprisoned for committing a felony.

Domestic, Foreign, and Alien Insurers

Insurers are classified as domestic, foreign, or alien companies depending on where they are headquartered in relation to where their business is being transacted:

• An insurer is a domestic company in the state where it is domiciled (i.e., headquartered).

• An insurer is a foreign company in every state outside of its state of domicile.

• A company that is domiciled outside the United States is an alien company in every U.S. state where it is admitted.

How are insurance grades assigned?

• capital

• liquidity

• management

• competitive advantages

• ability to raise capital to finance strategic plans

What are the insurance company distribution systems?

• the independent agency system - agents represent insurance companies

• the exclusive agency system

• direct marketing (also called direct response)

• insurance brokers -  brokers are independent contractors who represent the insurance applicant or policyholder

What is a surplus lines broker?

A special type of broker, known as a surplus lines broker, places excess and surplus lines insurance coverage with nonadmitted insurers. Surplus lines brokers usually deal with the applicant's broker or agent and do not deal directly with the insurance buyer. Surplus lines brokers provide insurance coverages that otherwise would not be available in a customer’s state.

What are the primary insurance regulatory activities?

insurer licensing requirements solvency regulation investment regulation

rate regulation policy form regulation market conduct regulation

What type of insurance producer licenses are there?

• Resident licenses are granted only to applicants who pass a state examination covering insurance fundamentals and state insurance laws. Some states also require resident license candidates to complete a regulator-approved prelicense education program.

• Nonresident licenses typically do not require passing an exam or completing an education program, provided the producer is properly licensed in his or her home state.

What are the two types of insurance producers?

1. captive agents - representing a single insurer, subject to the law of agency, which makes the actions of the agent (the producer) binding on the principal (the insurer).

2. independent brokers - representing multiple insurers

What are the 3 general levels of agent’s authority?

express, implied, and apparent

Actions taken within the scope of these three levels of authority will bind (commit) the insurer. However, the insurer may seek reimbursement from a producer who exceeds his or her authority.

1. Express authority is explicitly stated in the insurer's agency agreement which sets forth the activities the producer is expressly authorized to perform in the course of his or her job. As expressly written in her agent agreement with the insurer, Mary executed the sale of a property insurance policy by meeting with a prospective client, reviewing his coverage needs, recommending a property insurance product, and assisting him in completing and signing an application.

2. Implied authority consists of actions that extend beyond what is explicitly provided in the agency agreement but are necessary to carry out the duties expected of the producer. rior to meeting with the prospective customer, Mary mailed him some insurer-approved promotional material and called him to request and schedule a meeting. Though these actions are not expressly listed in her agreement, the authority to do them is implied as a normal part of a producer’s job.

3. Apparent authority is authority that:

   • the agent’s agreement does not provide

   • the insurer does not intend

   • appears to be granted by the insurer based on the producer’s statements and the actions (or inactions) of the insurer

   Notice that the insurer’s actions or inactions play a role in determining if it is bound by a producer’s actions.

1. Apparent authority is most likely to get a producer and the insurer into trouble.

   1. Six months after the policy was issued, the client misses a premium payment by the end of the premium grace period. Although the insurer has strict rules against it, Mary accepts the late payment and tells him the policy will not lapse. She mails the check to the insurer, who processes it several days later instead of lapsing the policy.

      What happens if the client’s insured property burns down while the insurer is processing the late payment? The insurer must cover the claim. By not lapsing the policy, it supported Mary’s exercise of apparent authority to accept the late premium payment.

What are the producer responsibilities to insurance applicants?

1. act in the customer’s best interests and only recommend suitable products

2. disclose all relevant information in the sales process

3. avoid misrepresentation

4. avoid premium rebating

5. submit applications only to financially sound insurance companies

6. apply for and deliver the policy that the applicant intended

What is the relationship between agent/producer and insurer?

The principal is the party on whose behalf the agent acts.

In the insurance business:

• The insurance company is the principal on whose behalf a producer works.

• The producer is an agent of the insurance company he or she represents.

Producers can be separated into exclusive agents who represent a single insurer and independent agents who represent multiple insurers.

Exclusive agents represent only one insurance company or a group of insurance companies under similar management. Because they represent only one insurer, exclusive agents (which include direct writers) are sometimes called captive agents.

By contrast, independent agents (sometimes called brokers) generally represent multiple insurers.

All insurance producers, whether exclusive (captive) or independent agents, operate under a contractual agency agreement with their insurer(s).

Producers Responsibilities to Applicants and Policyholders

Producers owe important duties to their customers, chief of which is to act in their best interests. This includes:

• disclosing all pertinent information concerning a proposed policy

• not misrepresenting the terms or conditions of a proposed policy

• making suitable recommendations that fit the customer's needs and circumstances

• submitting applications only to financially sound, solvent insurance companies

• applying for and delivering the policy that the applicant intended

  • No insurance product or level of coverage should be recommended before the producer first determines that it suits the consumer’s needs and situation. By keeping a record of the information that was gathered and the processes used in gathering it, a producer should be able to demonstrate that he or she has made a suitable recommendation.

What does E&O Insurance not cover?

E&O coverage does not shield the producer in the case of willful misconduct. It will protect the producer who is sued because a mistake was made but offers no protection to one who willfully engages in an unfair trade practice