5 INSURANCE IN THE USA FIRE INSURANCE Other perils added gradually Each company wrote own contractsContracts were long, complex, varied
6 INSURANCE IN THE USA STANDARDIZED POLICIES Massachusetts first - 1880s NY standard fire policy - adopted by all states 1943More policies being standardized every year
7 INSURANCE IN THE USA 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.
8 TYPES OF INSURANCE COMPANIES STANDARD (ADMITTED) CARRIERSGOVERNMENT INSURERSNON-STANDARD (NON-ADMITTED) CARRIERSREINSURERS
9 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
10 Government Insurers FEDERAL - NFIP, Crop Insurance, FDIC STATE - Texas auto & windstorm pools, now MAP
11 Non-Standard (Non-Admitted) Carriers ALSO KNOWN AS THE EXCESS & SURPLUS MARKETNO MARKETS AVAILABLE THRU STANDARD INSURERSMust be declined by standard marketsExample: Jet Skis, Hot Air Balloons
12 Reinsurers FORM OF INSURANCE BETWEEN INSURERS. HELPS INSURERS EXPAND THEIR CAPACITY (Example: $2,000,000 home)TAKES SOME “HEAT” OFF PRIMARY INSURERS.Primary - the first insurer who pays on a lossExcess - the second company that pays on a loss after insurance limits of first company are used up.
13 BASIC INSURANCE DEFINITIONS RISK - Uncertainty regarding (financial) outcome (loss).INSURANCE - A social device for dealing with riskPOLICY - a contract of insurance which promises to provide protection in the event of a covered loss.
14 DEALING WITH RISK INDIVIDUALS RETAIN RISK AVOID RISK Can’t do anything about it (airplane falls on house)Choose to ignore risk (don’t buy flood insurance)AVOID RISKDon’t buy in earthquake areaMove away from flood areasREDUCE RISK - good roof or alarm systemTRANSFER RISK - buy insurance
16 LAW OF LARGE NUMBERSThe larger the number of separate-but-similar risks in a group, the more predictable future losses become.Insurance companies must predict losses on a group basis in order to arrive at fair premiums for individuals within groups.
17 MORE INSURANCE DEFINITIONS 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 what’s excluded. Burden of proof is on company. Must prove the loss was excluded or pay.
18 MORE INSURANCE DEFINITIONS 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)
19 MORE INS. DEFINITIONSHAZARD -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).
20 BASIC INSURANCE PRINCIPLES 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.LIABILITY - legal responsibility for a loss to someone else (3rd party). BI or PD. Casualty insurance provides this type of coverage.
21 INSURANCE PRINCIPLES Cont’d. INSURABLE INTEREST must exist in order to have a legally enforceable contractLife Insurance - not required if insured purchases policy: if other party purchases, must have I.I. at the time of purchaseProperty/Casualty Insurance - all parties named must have I.I. at time of loss. Each party with interest is covered only up to that amount.
22 INSURANCE PRINCIPLES Cont’d. COINSURANCE - requirement that property be insured to at least 80% of replacement cost or be penalized in the event of a partial loss.VALUED POLICY - In Texas full policy amount is paid in the event of a total loss.
23 INSURANCE PRINCIPLES Cont’d. BASIS OF COINSURANCEActual 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 today’s prices
24 INSURANCE PRINCIPLES Cont’d. CALCULATING COINSURANCEAmount of insurance the client purchasedDivided by amount of insurance client should have purchasedMultiplied by the amount of the lossLess the deductibleEquals the amount which will be paid on the loss
25 INSURANCE PRINCIPLES Cont’d AMBIGUITY in policy language is interpreted in the insured’s favor by the courts. The state and/or insurance company writes the insurance contract and it’s assumed that they write it in their favor.IMPORTANCE OF COURTS IN INSURANCE DECISIONS - new policy language and provisions are tested through court system
26 AGENTS DUTIES AND RESPONSIBILITIES AGENT - the authorized representative of an insurance companyHas authority to act for insurer by written contract. Contract may be terminated if agent acts improperlyIs paid commission for work done for the companyHas binding authority as granted by the companyOwes primary allegiance to the company
27 Agent’s Duties and Responsibilities Cont’d. AGENCY - a fiduciary relationship in which one entity (the principal) authorizes another (the agent) to act on its behalf in dealings with 3rd partiesFIDUCIARY - a relationship in which agent takes in/handles money and signs contracts on behalf of the principal and is accountable.
28 Agent’s Duties and Responsibilities Cont’d AGENTS AUTHORITYEXPRESS - whatever is agreed to in the contractIMPLIED - other acts necessary to carry out express authority (Examples: advertising using company’s logo; hiring a solicitor)APPARENT - based on 3rd party’s reasonable belief that the agent has the authority. (Example: agent has binders, applications, company logo in office; therefore assumed to represent company
29 Agent’s Duties to Company LOYALTY - to interests of companyOBEDIENCE - to all lawful instructions. (Ex: binding authority suspended during hurricanes)REASONABLE CARE - to avoid injury to the principal.ACCOUNTING - for principal’s property/money. (Ex: premium pmts., computer equipment, manuals)INFORMATION - disclosure of all known facts about accounts