Presentation on theme: "INTRODUCTION TO INSURANCE BASICS INSURANCE CONCEPTS."— Presentation transcript:
INTRODUCTION TO INSURANCE BASICS INSURANCE CONCEPTS
HISTORY OF INSURANCE l England in the 1600s l Ships and cargoes l Owners and merchants l Lloyds of London l Common Law
MARINE INSURANCE l OCEAN - cargo over water l INLAND - cargo over land
SHIPS AND CARGOES
INSURANCE IN THE USA l FIRE INSURANCE – Other perils added gradually – Each company wrote own contracts – Contracts were long, complex, varied
INSURANCE IN THE USA l STANDARDIZED POLICIES – Massachusetts first s – NY standard fire policy - adopted by all states 1943 – More policies being standardized every year
INSURANCE IN THE USA l CURRENT – All states but 4 have same basic standard fire policy. Texas is one. – Many states have similar auto policies. Most use same rates (ISO). Texas is different. – Texas Dept. of Ins. sets rates, forms and rules for personal auto and property insurance. But many types of policies not regulated by State.
TYPES OF INSURANCE COMPANIES l STANDARD (ADMITTED) CARRIERS l GOVERNMENT INSURERS l NON-STANDARD (NON- ADMITTED) CARRIERS l REINSURERS
Standard (Admitted) Carriers – Stock Companies - Owned by stockholders/investors. Managed by Board of Directors. Purpose to make a profit. Examples: Aetna, Travelers. – Mutuals - cooperatives - operate like stock companies but owned by members. Can pay dividends (Ex: USAA) or can use profits to give lower rates ( Ex: State Farm). – Exchanges - groups of individuals (subscribers) who insure each other (reciprocal). Managed by Attorney in Fact. Example: Farmers
Government Insurers l FEDERAL - NFIP, Crop Insurance, FDIC l STATE - Texas auto & windstorm pools, now MAP
Non-Standard (Non- Admitted) Carriers l ALSO KNOWN AS THE EXCESS & SURPLUS MARKET l NO MARKETS AVAILABLE THRU STANDARD INSURERS – Must be declined by standard markets – Example: Jet Skis, Hot Air Balloons
Reinsurers l FORM OF INSURANCE BETWEEN INSURERS. l HELPS INSURERS EXPAND THEIR CAPACITY (Example: $2,000,000 home) l TAKES SOME HEAT OFF PRIMARY INSURERS. – Primary - the first insurer who pays on a loss – Excess - the second company that pays on a loss after insurance limits of first company are used up.
BASIC INSURANCE DEFINITIONS l RISK - Uncertainty regarding (financial) outcome (loss). l INSURANCE - A social device for dealing with risk l POLICY - a contract of insurance which promises to provide protection in the event of a covered loss.
DEALING WITH RISK l INDIVIDUALS – RETAIN RISK » Cant do anything about it (airplane falls on house) » Choose to ignore risk (dont buy flood insurance) – AVOID RISK » Dont buy in earthquake area » Move away from flood areas – REDUCE RISK - good roof or alarm system – TRANSFER RISK - buy insurance
DEALING WITH RISK l INSURANCE COMPANIES – SPREAD RISK » Geographical - different. areas » Financial - different $ ranges – REDUCE RISK » Underwriting guidelines » Discounts (alarms, non-smokers, defensive driving)
LAW OF LARGE NUMBERS l The larger the number of separate-but- similar risks in a group, the more predictable future losses become. l Insurance companies must predict losses on a group basis in order to arrive at fair premiums for individuals within groups.
MORE INSURANCE DEFINITIONS l PERIL - the immediate, specific cause of a loss. – Named Perils - such as fire, lightning. Burden of proof of loss is on insured. Must be able to prove loss occurred from a covered peril. – All Risk - everything covered except whats excluded. Burden of proof is on company. Must prove the loss was excluded or pay.
MORE INSURANCE DEFINITIONS l PROXIMATE CAUSE - a covered peril is the proximate cause (immediate, specific) of a loss if it initiates an unbroken chain of events leading to a covered loss. Without it no loss would have occurred. – DIRECT PHYSICAL LOSS (lightning strikes building) – INDIRECT/CONSEQUENTIAL LOSS (loss of use)
MORE INS. DEFINITIONS l HAZARD -situation that introduces or increases chance of loss from a peril. – Physical Hazards (mfg. fireworks in garage, child care in home, unfenced pool) – Moral Hazards - dishonest acts of insured which increase chance of loss. Character, living habits, financial responsibility. (Fake claims to get money when out of a job). – Morale Hazards - attitudes of insureds that increase possibility of loss. (Fails to fix roof when needed: let insurer pay after storm).
BASIC INSURANCE PRINCIPLES l INDEMNITY - property insurance is a contract of indemnity - it returns insured to financial position prior to loss. No profit permitted. Life ins. is not indemnity: it pays total sum if loss (death) occurs. l LIABILITY - legal responsibility for a loss to someone else (3rd party). BI or PD. Casualty insurance provides this type of coverage.
INSURANCE PRINCIPLES Contd. l INSURABLE INTEREST must exist in order to have a legally enforceable contract – Life Insurance - not required if insured purchases policy: if other party purchases, must have I.I. at the time of purchase – Property/Casualty Insurance - all parties named must have I.I. at time of loss. Each party with interest is covered only up to that amount.
INSURANCE PRINCIPLES Contd. l COINSURANCE - requirement that property be insured to at least 80% of replacement cost or be penalized in the event of a partial loss. l VALUED POLICY - In Texas full policy amount is paid in the event of a total loss.
INSURANCE PRINCIPLES Contd. l BASIS OF COINSURANCE – Actual Cash Value - what item(s) worth at time of loss (value of used goods). – Replacement Cost - what it would cost to replace item(s) at todays prices
INSURANCE PRINCIPLES Contd. l CALCULATING COINSURANCE – Amount of insurance the client purchased – Divided by amount of insurance client should have purchased – Multiplied by the amount of the loss – Less the deductible – Equals the amount which will be paid on the loss
INSURANCE PRINCIPLES Contd l AMBIGUITY in policy language is interpreted in the insureds favor by the courts. The state and/or insurance company writes the insurance contract and its assumed that they write it in their favor. l IMPORTANCE OF COURTS IN INSURANCE DECISIONS - new policy language and provisions are tested through court system
AGENTS DUTIES AND RESPONSIBILITIES l AGENT - the authorized representative of an insurance company – Has authority to act for insurer by written contract. Contract may be terminated if agent acts improperly – Is paid commission for work done for the company – Has binding authority as granted by the company – Owes primary allegiance to the company
Agents Duties and Responsibilities Contd. l AGENCY - a fiduciary relationship in which one entity (the principal) authorizes another (the agent) to act on its behalf in dealings with 3rd parties l FIDUCIARY - a relationship in which agent takes in/handles money and signs contracts on behalf of the principal and is accountable.
Agents Duties and Responsibilities Contd l AGENTS AUTHORITY – EXPRESS - whatever is agreed to in the contract – IMPLIED - other acts necessary to carry out express authority (Examples: advertising using companys logo; hiring a solicitor) – APPARENT - based on 3rd partys reasonable belief that the agent has the authority. (Example: agent has binders, applications, company logo in office; therefore assumed to represent company
Agents Duties to Company l LOYALTY - to interests of company l OBEDIENCE - to all lawful instructions. (Ex: binding authority suspended during hurricanes) l REASONABLE CARE - to avoid injury to the principal. l ACCOUNTING - for principals property/money. (Ex: premium pmts., computer equipment, manuals) l INFORMATION - disclosure of all known facts about accounts