Objective Interpret the nature, theory, and different types of insurance INTRODUCTION TO INSURANCE

Nature of Insurance The concept of insurance involves risk pooling or spreading losses over a greater number of people. An insurance company collects and pools premiums from many individuals or businesses for the payment of future claims.

Risk Management the process of managing ones exposure to risk. –Examples Using a seat belt Installing smoke detectors Driving a vehicle Playing sports Purchasing an insurance policy

Risk Management Managing risk includes: –Transfer part of risk of financial loss to an insurance company Auto, life, health, disability, property insurances –Retain (keep) the risk of financial loss using high deductible –Abstain or choose not to participate in risky activities Do not drive car, buy home, play sports, etc. Decisions are based on their individuals and Risk

ADHESION CONTRACT standard form contract that is written primarily by one party (Insurance policies) Policyholder (buyer) cannot usually change: –Policy language –Perils covered Policyholder can change: –The dollar limit of coverage –Specific items to be covered Unconscionable if they take advantage of one party

Insurance Planned protection provided by sharing economic losses Insurance companies provide a risk management service to consumers Insurance does indemnify or financially repay the insured a portion of the loss All insurance policies have a specified limit of coverage

NC Department of Insurance Insurance is a highly regulated business activity governed by the laws of each state NC Department of Insurance (NCDOI) handles: –Consumer complaints –Fraud investigations and prosecution –Approval of requested rate increases/decreases –Regulation of agent licensing requirements –Censuring unethical/illegal actions of agents Head of NCDOI is the insurance commissioner

Insurance – Basic Terms Insurance policy- a contract issued by the insurance company (insurer) for coverage of the policyholder Policyholder- the person who buys or owns the policy Insured – the person whose life or property is insured, may or may not also be the policyholder

More Basic Terms Insurer- the insurance company that provides planned protection against economic losses Binder- a temporary document proving the insurance contract is in force until the actual policy is issued by the insurer

Insurable Interest A financial interest in property or a persons life that permits someone to buy insurance to protect against the financial loss of that property or persons life Examples: –You can insure cars owned or leased by you, but not a car belonging to another person –You can purchase life insurance on someone whose death would be a financial loss to you

Premium The amount of money the policyholder must pay for insurance coverage 1.An insurance underwriter determines the cost of the policy using risk factors and statistical data 2.An agent represents the company to the consumer 3.Equals consideration in the insurance contract

Non-Payment of Premium If the premium is not paid, the policy may lapse or cancel, voiding the contract If claims are made after a lapse, the claim is denied Grace period (not required) –Late premiums are received –Policies are reinstated

Claims The request for payment from an insurance company to cover the financial losses Examples: –Automobile-car accident –Medical-doctors appointment –Life-covered person dies –Disability-out of work for health reasons –Unemployment-laid off from job

Deductibles Cost of the claim paid by the insured. –Deductible On auto coverage, the amount the insured pays before the insurer pays collision or comprehensive damage claims On health coverage, the amount the patient pays before the insurance company pays any covered medical expenses

Deductibles –The insured chooses the amount of risk retained by choosing the deductible amount –The higher the deductible chosen by the insured, the lower the premium for the coverage. Self Insurance: no insurance is purchased or purchase from your investment accounts 100% self insurance = 100% risk retention

Exclusions Limitations to policy coverage Examples: –No coverage for flood on homeowners policy –No coverage for CD player in car unless permanently attached to vehicle –No coverage for self inflicted injury filed as workers compensation claim

Insurance Fraud False claims made to an insurance company Federal prosecution is more frequent under mail and wire fraud schemes because the USPS is involved

Insurance Fraud Examples –Arson for profit (felony) –Staging car accidents (felony) –Inflated cost of damage repairs –Faked deaths for life insurance (felony) –Overstated health care billings or service not provided –Phony workers compensation filed when hurt at home not work –False statements made on an application may also create a voidable contract for the insurance company