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Introduction to InsuranceAn insured is a person, a business, or an organization whose property, life or legal

liability is covered by an insurance policy.

Covered losses are events for which the insurance pays.

Loss exposure is any condition or situation that presents the possibility of a loss.

Insurance is a

1 Transfer system

2 Business

3 Contract

Insurance as a Transfer System

1. Transferring the cost of losses

2. haring the cost of losses

Law of large numbers is a mathematical principle stating that as the number if similar

but independent e!posure units increases, the relative accuracy of predictions aboutfuture outcomes based on these e!posure units also increases.

"n exposure unit is a measure of loss potential and is used in pricing insurance.

Types of Loss exposure

#roperty $oss e!posure % property e!posed to loss

o Real property% $and, buildings, structures attached to land and

embedded in ito Personal property% tangible and intangible property that is not real

property $iability $oss e!posure % possibility for a claim for monetary damages because of

in&ury to another party or damage to another party's property (uman and personnel $oss e!posure

o (uman )personal* loss e!posure + possibility of a financial loss to an

individual or a family by such causes as death, sicness, in&ury orunemployment.

o #ersonnel loss e!posure % possibility of a financial loss to a business

because of death, disability, retirement, or resignation of ey employees.

Net Income is income minus e!penses during a given period.

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Ideally Insurable Loss xposures

-nsurance companies generally prefer to provide insurance for financial conseuences of

loss e!posures that have the following characteristics

1. $arge number of similar e!posure units

2. $osses that are accidental

3. $osses that are definite and measurable

/. $osses that are not catastrophic

0. $osses that are economically feasible to insure

Insurance as a businessTypes of insurers

1. #rivate -nsurers

a. toc -nsurance companies

b. utual -nsurance companies

c. eciprocal -nsurance e!change

2. ederal 4overnment -nsurance programs

a. ocial ecurity program

b. 5ational lood -nsurance program + e!posure to flooding

c. ederal Crop -nsurance program % damages to crops

d. ederal 6eposit -nsurance Corporation % insolvency of bans

e. 5ational Credit 7nion "dministration + insolvency of credit unions

3. tate 4overnment -nsurance programs

a. "- )air "ccess to -nsurance euirements* % basic property insurance

b. 8orers compensation -nsurance #rogram % in some states

Insurance !perations

1. areting % identifying customers and selling and delivering a product or service

2. 7nderwriting % decide potential customers and the coverage to be offered

3. Claim (andling + to determine of a covered loss has occurred and , if so, the

amount to be paid for the loss

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/. atemaing % determine the charging rates for the insureds.

"inancial Performance of Insurers

ources of income

1. #remium

2. -nvestment

9!penses

1. $oss payment

2. $oss settlement e!penses % costs in investigation and settling claims

3. 4eneral e!penses % salary, employee benefits

/. 5ew business e!penses % advertising costs, producers' commissions0. Ta!es, $icensing fees

-nsurance companies aim at generating enough revenues through premium and

investments to pay for covered losses, meet other e!penses and earn a reasonable profit.

State Insurance Regulation

-nsurance regulators closely monitor the financial condition of insurance companies and

tae actions to provide insurer insolvency# They regulate insurance rates to protect the

consumers from

)a* -nadeuate % for insurers to earn enough premium

)b* 9!cessive + to protect insureds from unfairly high premiums

)c* 7nfairly discriminatory rates % the rate must reflect the group's e!posure

to loss otherwise it is unfairly discriminatory

They also perform

)a* olvency urveillance

)b* -nvestigate complaints against insurance companies )-C* and their representatives.

)c* onitor specific -C practices concerning mareting, underwriting and claims

)d* "pprove policy language in policy forms

-C must be licensed to write insurance policies. epresentatives of -C must also be

licensed.

$enefits of Insurance

1. #ayment for the costs of covered losses

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2. eduction of the insured's financial uncertainty

3. $oss control activities of insurance companies

/. 9fficient use of resources

0. upport for credit

:. atisfaction of legal reuirements

;. atisfaction of business reuirements

perating Costs of -nsurers3. >pportunity costs

/. -ncreased losses

0. -ncreased lawsuits

Insurance as a contract

Four basic types of insurance

1. #roperty2. $iability

3. $ife % replaces the income+earning potential lost through death and also helps to

pay e!penses related to an insured's death.

/. (ealth % provides additional economic security by paying medical e!penses

Property Insurance

a* "ire and allied lines% direct damage or loss to covered property

b* $usiness income insurance% covers the loss of net income or additional

e!penses as a result of a covered loss to its propertyc* Crime insurance% protects the insured against loss to covered property from

various causes of loss such as burglary, robbery, theft and employee dishonesty

d* !cean marine insurance% hull )ships* and cargo insurance )goods transportedby ships*

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e* Inland marine insurance% covers miscellaneous types of property, such a

moveable property, goods in domestic transit, and property used in transportation

and communication.

f* Auto P%ysical damage insurance% covers loss or damage to the specified

vehicles owned by the insured and sometimes cover vehicles borrowed or rented

by the insured.

Liability Insurance

a* Auto Liability + covers an insured's liability for bodily -n&ury )B-* to others anddamage to property of others resulting from auto accidents

b* Commercial general Liability% covers businesses for their liability for B- and

property damage )#6*

a. #remisesb. Business operations

c. #roducts

d. Completed operations

c* Personal Liability% provides liability coverage to individuals and families for B-

and #6 arising from the insured's personal premises or activities.

d* Professional Liability% protects physicians, accountants, engineers, attorneys,

insurance agents and broers, and other professionals against liability arising outof their professional acts or omissions

Life Insurance

a* &%ole life insurance% lifetime protection % level premium % accrues cash value

b* Term insurance% temporary protection % no cash value % ma!imum amount of

life insurance protection available at the lowest cost.

c* 'niversal life insurance% combines life insurance protection with savings %

le!ible+premium policy that separates the protection, savings and e!pensecomponents

Cas% value is a savings fund that accumulates in a whole life insurance policy and that

policyholder can access in several ways including borrowing, purchasing paid+up lifeinsurance, and surrendering the policy in e!change for the cash value.

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(ealt% Insurance

)edical insurance% covers the cost of medical care, including doctors' bills, hospital

charges, laboratory charges and related e!penses

*isability income insurance is a form of health insurance that replaces an insured's

income if the insured is unable to wor because of illness or in&ury.

Insurers and Regulations

Types of Insurers

Type Purpose for

w%ic%

formed

Legal "orm !wners%ip )et%od of

operation

Companies

toc -nsurer To earnprofit for its

stocholders

Corporation tocholders Board ofdirectors,

elected bystocholders

appointsofficers to

manage the

company

(artfordand

"9C>

utual

-nsurer

To provide

insurance forits

policyholders

Corporation #olicyholders Board of

directors,elected by

policyholders

appoints

officers tomanage the

company

tate arm

insurancecompanies

and $iberty

utual

-nsuranceCompany

eciprocal

-nsurance

e!change)interinsuran

ce e!change*

To provide

reciprocity

for itssubscribers

)to cover

each otherlosses*

7nincorporated

association

ubscribers

)members*

ubscribers

choose an

attorney+in+fact to

operate the

reciprocal

armers

insurance

e!change,7""

)7nited

tates"utomobile

"ssociation*

$loyd's of$ondon To earnprofit for its

individual

)?5ame@*and

corporate

investors

7nincorporatedassociation -nvestors Thecommittee of

$loyd's is the

governingbody and

must approve

all investorsfor

$loyd's of$ondon and

"merican

$loyds

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membership

*emutuali+ation is the process by which a mutual insurer, which is owned by its

policyholders, becomes a stoc company, which is then owned by its stocholders.

Lloyds of London

-ndividual % apply for insurance % syndicate underwriter accepts % application taen to

other syndicates % insurance written.

-ndividual + liable only for amount written.

Corporate + limited liability

$loyds of $ondon % individual member % 5ame + liable for amount written.

"merican $loyd % individual member % 7nderwriter % limited liability

Captive Insurance Company is an insurer that is formed as a subsidiary of its parent

company, organization, or group, for the purpose of writing all or part of the insurance on

the parent company or companies.

Factors contributed to growth of captives

1A. $ow -nsurance cost

11. -nsurance availability

12. -mproved Cash flow.

Reinsurance company , is a type of insurance in which one insurer transfers some or all

of the loss e!posures from policies written for its insureds to another insurer.

-n reinsurance, the primary insurer is the insurance company that transfers its loss

e!posures to another insurer in contractual arrangement.

" reinsurer is the insurance company that accepts the loss e!posures of the primaryinsurer.

'nderwriting'nderwriting is the process of selecting insureds, pricing coverage, determininginsurance policy terms and conditions, and then monitoring the underwriting decisionsmade.

"n 'nderwriter is an insurance company employee who evaluates applicants for

insurance, selects those that are acceptable to the insurer, prices coverage, and determines

the policy terms and conditions.

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nly losses

caused by these perils are covered by the policy.

!pen peril policy or special form coverage policy ,provides coverage to any direct

loss to property unless the loss is caused by a peril specifically e!cluded by the policy.

eril cause of loss

(azard % anything that increases the lielihood of a loss or a possible severity of a loss.

$urden of proof

Named peril , insured , for coverage to apply, the insured must prove that theloss was caused by a covered cause of loss.

Special form coverage , insurer% if a loss occurs, it is initially assumed that thecoverage applies. (owever, coverage may be denied if the insurer can prove thatthe loss was caused by an e!cluded cause of loss.

Potential "inancial conse7uences of property loss

eduction in the value of property $ost income -ncreased e!penditure

"CD F eplacement cost % depreciation

Parties affected by property loss

1. The property owner

2. ecured lenders of money to the property owner

3. 7sers of the property

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/. >ther holders of the property

ortgagee + ecured lender

ortgagor % Borrower

Bailee % holders of property entrusted to them by others

"loaters are policies that are designed to cover property that ?loats@, or moves

from one location to another.

xclusion% eliminates all coverage for e!cluded property or cause of loss.

Limitation% places a specific dollar limit on specific property that is covered.

6welling personal property % covered anywhere in the world.Business personal property % covers property within usual 1AA+feet limits or

specified policy territory.

oney and securities % covered in crime insurance policies

Business personal property in transit covered by transportation policies.

#ersonal and Commercial property insurance policies on buildings and personal

property are available with three different degrees of coverage

1. $asic form coverage% the lowest+cost version that provides coverage forappro!. a dozen named perils.

2. $road form coverage% a higher+cost version of coverage that adds severalperils to those covered by basic coverage

3. Special form coverage% the version that covers all causes of loss that are not

specifically e!cluded.

(omeowner policies are mostly broad or special.

,asic form coverage covered causes of loss

1. ire and lightning

2. 8indstorm % includes hurricane and tornadoes3. (ail

/. "ircraft

0. Dehicle 6amage

:. iot and civil commotion

;. 9!plosion

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Specified causes of loss is a less e!pensive alternative to comprehensive

coverage in commercial auto policies. This coverage is named perils coverage

that covers loss to a covered auto caused by fire, lightning, theft, windstorm,hail, earthuae, flood, vandalism and other specifically listed perils.

Causes of loss often excluded

Catastrophe perils )war, nuclear reaction, sometimes earthuae, flood* aintenance perils

o 8ear and tear

o arring and scratching

o usto 4radual seepage of water

o 6amage by insects, rodents or other animals

Covered "inancial conse7uences 6ecrease in value of property )direct losses* results directly and often

immediately from damage to that property Time 9lement loss)indirect loss* taes place over days,months or even years

following a direct loss

o $ost income Business income % lost profits and reimbursement e!penses

(omeowners % ?fair rental value@ coverage

o 9!tra e!penses Business income % xtra expenses are e!penses that reduce the

length of a business interruption or enable a business to continue

some operations when the property has been damaged by a coveredloss

Additional living expenses is coverage in homeowners policies

that indemnifies the insured for the additional e!penses that are

incurred following a covered property loss so that the householdcan maintain its normal standard of living while the dwelling is

inhabitable Personal auto policies , optional rental reimbursement coverage

pays up to a certain amount per day towards the cost of renting a

substitute vehicle.

Parties covered by Property insurance

!wner of building % named insured in property insurance policy

Party t%at owns and occupies the building % named insured in building and

personal property policy Tenant , named insured in personal property policy

Secured lender ,listed by name in the declaration as a mortgagee or loss payee

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$ailee ,named insured on a bailee policy

5amed insured % policy holder whose name)s* appear on the declaration page of thepolicy

The first named insured is the person or organization whose name appears first as the

named insured on a commercial insurance policy conditions, might be the oneresponsible for paying premiums and the one who has the right to receive any returnpremiums, to cancel the policy, and to receive the notice of cancellation or nonrenewal.

The mortgage clause .or mortgage %olders clause/ of a property insurance policy

protects the insurable interest of the mortgagee by giving it certain rights, such as the

right to be named on claim drafts for losses to insured property and the right to benotified of policy cancellation.

$oss payee is a lender, named in an insurance policy, who has loaned money on a

personal property. " Loss payable clauseprovides that the loss will be paid to both the

insured and the loss payee as their interests appear and gives the loss payee certain rights,

(owever, a loss payable clause does not e!tend as many rights to the lender as does amortgage clause. " loss payee does not have any right to recover in cases where the

insured cannot recover.

!t%er parties w%ose property is covered

" homeowner's policy provides coverage for property owned by relatives andother persons under the age of 21 who reside in the named insured's household.

" homeowner's policy provides coverage for property owned by guests, residence

employees and others while it is in the named insured's household. " #"# can provide coverage for collision damage if the named insured borrows a

car belonging to somebody else, the car sustains collision damage, and the owner

of the borrowed car has no insurance. " commercial property policy providing coverage on the named isured's personal

property can also provide limited coverage for

o The personal effects of officers, partners, or employees

o #ersonal property of others in the care, custody, or control of the insured.

Amounts of Recovery

Policy Limits

-t is the ma!imum amount of money that can be recovered from the insurance companyafter a loss. The premium charged is directly related to the policy limit.

6aluation Provisions

eplacement cost "ctual cash value. "greed value

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Settlement !ptions

1. #aying the value )as determined by the valuation provision* of the lost or

damaged property

2. #aying the cost to repair or replace the property

3. epairing, replacing, or replacing the property with other property of lie indand uality

*eductibles

-t is a portion of a covered loss that is not paid by the insurer. The deductible is

subtracted from the amount the insurer would otherwise be obligated to pay to the

insured.

Insurance2 to2value provision

They are provisions in property insurance policies that encourage insureds to purchase anamount of insurance that us eual to, or close to, the value of the covered property.

Coinsurance is an insurance+ to+value provision in any property insurance policies. -f theproperty is underinsured, the coinsurance provision reduces the amount that the insurer

will pay for a covered loss.

8!t%er Insurance4 Provisions

-n some case, the same property might be covered by more than one insurance policy.

ost policies contain ?>ther insurance@ provision to determine which insurer shouldprovide compensation.