Introduction to Insurance

Risk

The uncertainty or chance of loss

How many methods of handling risk are there?

5

STARR

Sharing, Transfer, Avoidance, Retention, Reduction

Sharing

Spread the risk across a group, so not party bears it all

Retention

Keep the risk and pay losses yourself (deductibles, self-insurance)

Reduction

Lower the frequency or severity of a loss - smoke alarms, seatbelts

Transfer

Shift the financial burden to another party - insurance is the main transfer tool

Pure Risk

Chance of loss or no loss only - insurable

Speculative Risk

Chance of loss or gain (gambling, investing) - not insurable

What is the basis of setting rates?

Law of Large Numbers

Law of Large Numbers

The more similar exposure units insured, the more predictable losses become

Adverse Selection

The tendency of higher-than-average risks to seek insurance more than average risks

How do insurers control advserse slection?

Underwriting

What is the difference between a peril and a hazard?

A peril is the cause of loss, hazard is a condition that increases the chance or severity of a loss

What are the 3 types of hazards?

Physical, Moral, Morale

Treaty Reinsurance

Automatic for a whole class of business

Facultative Reinsurance

Negotiated case-by-case for one risk

Stock Insurer

Owned by stockholders (nonparticipating), may pay taxable dividends

Mutual Insurer

Owned by policyholders (participating) and may pay nontaxable dividends

Admitted Insurer

Holds a Certificate of Authority from the state

Nonadmitted Insurer

Unlicensed in the state and writes surplus lines only

What are the three types of agent authority?

Express (written in contract), Implied (needed to carry out express duties), apparent (what the public reasonably believes)

Who does an agent represent?

Insurer

Who does a broker represent?

Insured

Indemnity

Restore the insured to their pre-loss financial position - no betterment

CANHAM

Calculable, Affordable, Non-Catastrophic, Homogeneous, Accidental, Measurable

Measurable

Time, place, cause, and dollar amount

Non-Catastrophic

Can’t bankrupt the insurer - why war and flood are often excluded or specially pooled

Ceding Company

The insurer seeking to transfer the risk

Retention vs Cession

Retention is what the primary insurer keeps, cession is what it passes along

Why do insurers reinsure?

To stabilize results, add capacity to write more business, protect against catastrophes, and free up surplus

Reciprocal Exchange

An unincorporated group of subscribers insuring each other, run by an attorney-in-fact

LLoyd’s Association

A marketplace where syndicates of underwriters assume risk

What type of risks does Lloyd’s cover?

Cargo ships, offshore oil rigs, casinos, amusement parks (all have poor loss histories)

Fraternal Benefit Society

A membership/social organization providing mainly life and health coverage to its members