personal line sct 1

Comprehensive Overview of Insurance Concepts and Principles

Introduction to Insurance

Key Concepts

• Definition of Insurance: A contractual arrangement that indemnifies (repays) someone against loss, damage, or liability. This involves transferring the risk of a loss to an insurer who, in turn, provides compensation for the loss or damage under specified terms.

• Benefit to Society: Insurance distributes the financial risks faced by individuals or entities across many policyholders, thus preventing significant financial distress for any single individual or entity.

Elements of an Insurance Policy

1. Information about the involved parties

2. Description of the insured property or life

3. Insured's insurable interest

4. Coverage details

5. Policy period

6. Premium rates

Types of Insurance Policies

Property Insurance

• Protects against losses from:

  • Fire

  • Lightening

  • Windstorm

  • Earthquakes

• Covers:

  • Property

  • Accounts and documents

  • Money

Marine Insurance

• Protects vessels, aircraft, cars, goods, freights, accounts, documents, and money from any kind of loss.

Surety Insurance

• Guarantees the performance and behavior of hired contracts.

Other Insurance Types

• Disability Insurance: Provides financial assistance when an insured is disabled or killed due to an accident or sickness.

• Plate Glass Insurance: Covers the breaking of valuable glass.

• Liability Insurance: Helps insured parties pay for third-party bodily injuries or property damages that they are responsible for.

• Workmen’s Compensation: Protects employees injured on the job and reimburses employers legally liable for injuries.

• Boiler and Machinery Insurance: Insures against losses from bodily injuries or property damage caused by explosions or accidents involving mechanical equipment.

• Burglary Insurance: Covers losses from burglary and theft.

• Credit Insurance: Protects insureds if the business or individual extending credit cannot meet their financial obligations.

• Sprinkler Insurance: Protects against losses from water damage due to a sprinkler or pump malfunction.

• Automobile Insurance: Covers anyone who owns, uses, or sells automobiles.

Insurance Concepts

Indemnity

• Purpose: To restore an individual to the approximate financial position they were in before a loss.

• Principle: The insured cannot collect more than the actual loss and cannot claim compensation for the same loss more than once.

Risk

• Definition: The chance of loss for any insured property or item.

• Types of Risk:

  • Pure Risk: Uncertainty if a loss will occur; no predictability.

  • Speculative Risk: More predictable, involving possible loss or gain (ex: gambling, business ventures).

Hazard

• Types of Hazards:

  • Physical Hazard: Created by the condition, occupancy, or use of the property.

  • Moral Hazard: Insured’s fraudulent actions, such as staging accidents.

  • Morale Hazard: Carelessness or indifference towards preventing loss.

  • Legal Hazard: Decision or actions by courts that increase the chance of a claim.

Occurrence vs. Accident

• Occurrence: Gradual or accumulative damage not tied to a specific event (e.g., wear and tear).

• Accident: Sudden, unforeseen, and unintentional event identifiable in time and place.

Insurable Interest

• A condition where loss or destruction causes financial loss to the insured.

• Must exist at the time of loss for the insured to claim compensation.

Managing Risks

1. Avoidance: Choosing not to engage in activities that pose risks.

2. Retention: Bearing the risk and paying out-of-pocket for losses.

3. Sharing: Distributing risks among multiple parties.

4. Reduction: Taking measures to reduce the frequency or severity of losses.

5. Transfer: Shifting the financial burden of potential losses to another party, typically through insurance.

Criteria for Ideally Insurable Risks

• The loss must be measurable, accidental, predictable, comply with the law of large numbers, create financial hardship, be affordable and practical, and not be catastrophic.

Types of Private Insurance Companies

• Mutual Insurance Companies: Owned by policyholders who share the profits and losses.

• Stock Insurance Companies: Owned by shareholders who may not necessarily be policyholders.

• Reciprocal Insurance Exchanges: Subscribers exchange policies through an Attorney-in-Fact to share risks (examples include USAA and Farmers Insurance Group).

• Fraternal Organizations: Benefit societies serving members based on ethnicity, religion, profession, or other ties, offering insurance on a non-profit basis.

By understanding the fundamental principles, types of insurance, risk management strategies, and the operational mechanics of different private insurance companies, individuals can make informed decisions regarding their insurance needs and risk protections. This comprehensive knowledge also assists agents in providing accurate information and advisory to clients, ensuring tailored coverage that meets specific risk exposures and financial objectives.

Remember to refer to the documents you provided for any further specific details or clarifications regarding these broad concepts. For instance, the comprehensive explanation of various types of insurance policies and management strategies was derived from the provided material to ensure accuracy and depth in understanding.