Introduction to Property-Casualty Insurance

Six activities of the claims handling process

1. Acknowledging a claim and assigning it to a claims representative 2. Identifying the policy 3. Contacting the insured or the insureds representative 4. Investigating and documenting the claim 5. Determining cause of loss and loss amount 6. Concluding the claim

In evaluating each application, an underwriter has three options:

Accept the application without modification, reject the application, accept the application with modification

Premium Collection

Agency bill may be used for personal insurance policies, but it is more commonly used with large commercial accounts.

Pooling

An arrangement that facilitates the grouping together of loss exposures and the resources to pay for any losses that may occur

Reducing Uncertainity

An individual or family will have increased peace of mind knowing that the possible financial consequences of losses arising from the ownership of a car or home will be covered by insurance. Existing businesses will be more likely to expand knowing insurance coverage is in place.

Direct response distribution center

An insurance distribution channel that markets directly to the customer through such distribution channels as mail, telephone or the internet. Does not use producers.

Direct Writer Marketing System

An insurance marketing system that uses sales agents (or sales representatives) who are direct employees of the insurer. Employed by the insurer and receives a salary. Do not own policy expirations

Exclusive Agency Marketing System

An insurance marketing system under which agents contract to sell insurance exclusively for one insurer (or an associated group of insurers). Not employee of insurer. The insurer will often handle administrative functions of exclusive agency. Do not own policy expirations, insurer does.

Independent Agency and Brokerage Marketing System

An insurance marketing system under which the producers (agents or brokers) who are independent contractors, sell insurance usually as representatives of several unrelated insurers. Not employee of insurer

Personal auto policy (PAP)

An insurance policy that covers an individual or a family against loss exposures arising out of the ownership, maintenance, or use of automobiles

Personal watercraft policy

An insurance policy that covers an individual's or a family's loss exposures arising out of the ownership, maintenance, or use of watercraft used principally for recreational or personal transportation purposes

Underwriter

An insurer employee who evaluated applicants for insurance, selects those that are acceptable to the insurer, prices coverage, and determines policy terms and conditions

Loss exposure

Any condition or situation that presents a possibility of loss, whether or not that loss actually occurs

Producer

Any of several kinds of insurance personnel who place insurance and surety of business with insurers and who represent either insurers or insureds or both (brokers, agents, sales representatives)

Insured

Any person or organization who is insured under an insurance policy

When does a premium audit occur?

At the end of a policy period

Rating classifications

Based on the characteristics of the insured and the loss exposures being insured.

Investments

Because policyholders pay premiums before any losses have happened, and future loss amounts cannot be predicted with complete accuracy, insurers must build a fund or reserves for payment of losses in the future. Insurers may use investment income to offset losses that exceed premiums collected

Common types of commercial insurance

Commercial property, commercial crime, commercial GL, commercial auto, workers compensation, commercial umbrella

Expert systems or knowledge based systems

Computer software programs that supplement the underwriting decision making process. These systems ask for the information necessary to make an underwriting decision, ensuring that no information is overlooked.

Personal Liability Coverage

Coverage for damages, plus costs of any defense related to a claim or suit brought against the insured that resulted from bodily injury or property damage caused by an occurrence covered under the policy

The role of underwriting

Determine which loss exposures will be insured, for what amount of coverage, at what price, and under what conditions

Marketing

Determining the products or services customers want and need and delivering them to those customers

Examples of alternative distribution channels

Direct response, internet, call centers, group marketing, financial institutions

Premium audit

Examination of a policyholder's operations, records, and books of account to determine the actual exposure units and premium for insurance coverages already provided.

Satisfying Legal Requirements

Example is tear owners of automobiles must prove that they have auto liability insurance before their can register their autos. Also, employers generally have to have workers compensation

The underwriting process consists of these activities:

Gathering the necessary information, making the underwriting decision, implementing the underwriting decision, and monitoring the underwriting decision

The two major types of personal property-casualty insurance

Homeowners and personal auto

Common types of personal insurance policies

Homeowners, personal auto, personal watercraft, personal umbrella

Pay Claims

If a loss occurs, the insured files a claim with the insurer. Property claims generally straightforward, liability insurance claims often involve a lawsuit or trial which can last for months or years. A large portion of the premiums insurers collect are used to pay the losses and the expenses related to claim settlement.

Adverse selection

In general, the tendency for people with the greatest probability of loss to be the ones most likely to purchase insurance

Transfer

In the context of risk management, a risk financing technique by which the financial responsibility for loss and variability in cash flows is shifted to another party

Types of marketing systems

Independent agency and brokerage, exclusive agency, direct writer, alternative distribution channels

The two broad groups of customers that PC insurers sell insurance to

Individuals and families, businesses and non profit organizations

Using Resources Efficiently

Insurance makes it unnecessary for individuals and businesses to set aside large amounts of money to pay for the financial consequences of losses that can be insured. This money can be used to improve a family's quality of life or contribute to the growth of a business.

Commercial crime insurance

Insurance that covers 1) money and securities against numerous perils(not limited to crime perils) and 2) property other than money and securities against crime perils, such as employee theft, robbery, theft by outsiders, and extortion

Commercial auto insurance

Insurance that covers a busyness or a not for profit organization against loss exposures arising out of the ownership, maintenance, or use of automobiles.

Commercial property insurance

Insurance that covers commercial buildings and their contents against various types of property loss.

Commercial general liability (GCL) Insurance

Insurance that covers many of the common liability exposures faced by an organization, including its premises, operations, and products.

Workers compensation insurance

Insurance that provides coverage for benefits an employer is obligated to pay under workers compensation law (medical care and lost wages)

Pay expenses

Insurers use the collected premiums to pay expenses for running the insurance operation. These expenses are related to selling, issuing and servicing the policies sold by the insurer. Commissions, salaries, benefits, mortgage, taxes, advertising, etc.

Prospecting

Involves locating persons, businesses, or other entities that might be interested in purchasing the insurance products and services offered by the insurer.

What is included in successful marketing?

Market research to determine needs of potential customers, Advertising, Selecting appropriate marketing systems,Training to prepare the sales force to meet customers needs, Setting sales goals and implementing strategies to achieve them, motivating and managing sales force.

The key functions of insurers

Marketing, Underwriting, Claims, Risk Control, Premium audit

How do underwriters monitor the results of the initial underwriting decision?

Monitoring claims activity on policies, monitoring hazards that develop due to changes of policies, and monitoring the overall profitability of the book of business for which the underwriter is responsible.

Providing a Basis for Credit

Most banks require property insurance on home before they will provide a mortgage to help the buyer pay for the home. When a business applies for a loan the lender might require the borrower to show insurance.

Customer Service

Most producers are involved in customer service to some degree by personalized insurance packages, policy change requests, quote for additional coverage, transfer a customer, respond to questions, facilitate contact between policyholders and insurer personnel

P-C Insurance

One of the two main sectors of the insurance industry, encompassing numerous types of insurance, most of which cover the financial consequences of damage to one's own property or legal liability to others

How does insurance benefit society?

Paying losses, reducing uncertainty, using resources efficiently, promoting risk control, satisfying legal requirements, providing a basis for credit

The types of P-C Insurance policies available for individuals, families, and businesses fall into two categories:

Personal insurance and commercial insurance policies

Homeowners policy

Policy that covers most of the property and liability loss exposures that arise out of residential property ownership and occupancy, as well as property and liability loss exposures that individuals and families may have while they are away from their residences

Commercial package policy (CPP)

Policy that covers two or more lines of business by combining ISO's commercial lines coverage parts.

Claim Handling

Producers are the policyholders first contact with the insurer, so many insureds naturally call the producer first when a claim occurs. In some cases, the producer may simply give the policyholder the telephone number of the insurer's claims department, or the producer may obtain some basic information and relay the information to the insurer. Finally, many producers are authorized by their insurers to adjust some types of claims.

The sources in which underwriters obtain information from:

Producers, Inspection reports, government records, financial rating services, claims files, applicant or insureds records

Producer's typical functions

Prospecting, Risk management review, sales, policy issuance, premium collection, customer service, claims handling

Promoting Risk Control

Provide premium reductions for those insureds who practice risk control. These risk control actives can either lower the frequency of potential losses(loss prevention) or reduce the severity (loss reduction)

How can prospects be located?

Referrals from present clients, referrals from strategic partners, advertising and direct mail, interactive websites, telephone solicitation and cold calls

Three essential components of the insurance mechanism

Risk, Transfer, Pooling

Examples of underwriting activities

Selecting insureds, pricing coverage, determining policy terms and conditions

Sales

Selling insurance products and services is one of the most important functions of an insurance producer because sales are essential to sustaining the livelihood of the agency or brokerage. Commission is the principal source of income for producers.

Policy Issuance

Some producers maintain a supply of an insurers preprinted policies and forms in their office, or use their own agency management system to generate computer issued policies on site. More common is the insurers practice of assembling policies at the producers request and either mailing them directly to policyholders or sending them to the producer for delivery to the insured.

Capacity

The amount of business an insurer is able to write, usually based on a comparison of the insurers written premiums to its policyholders surplus.

Who does the agent represent?

The insurer

Legal liability

The legally enforceable obligation of a person or an organization to pay a sum of money (called damages) to another person or organization

Loss Costs

The portion of the rate that covers projected claim payments and loss adjusting expenses

Premium

The price of the insurance coverage provided for a specified period

Rate

The price per exposure unit for insurance coverage. The "unit price"

Risk Management Review

The principal method used to determine a prospects insurance needs. Most likely more complex for a business than families

Ratemaking

The process insurers use to calculate insurance rates, which are a premium component

Underwriting

The process of selecting insureds, pricing coverage, determining insurance policy terms and conditions, and then monitoring the underwriting decisions made.

What does the brokers represent?

The prospective insured

Agency Expiration List

The record of an insurance agency present policyholders and the dates their policies expire

Exposure Units

The unit of measure (for example area, gross receipts, payroll) used to determine an insurance policy premium

Paying losses

Through indemnification, individuals and businesses are able to maintain their economic position without becoming a burden on others. Businesses may avoid bankruptcy and continue to contribute to society (products, jobs, business)

What is the purpose of the premium audit

To determine any adjustments to the premium that may be required based on the insured's actual loss exposures during that period

How do insurers use the premiums they receive?

To pay claims, pay expenses, and investments

Primary purpose of risk control

To prevent or reduce losses

Risk

Uncertainty about outcomes that can be either negative or positive

Policyholders Surplus

Under statutory accounting principles (SAP), an insurers total admitted assets minus its total liabilities

Other factors affecting premium determination

manual rate, experience or schedule rating (Use this to reflect the differences between the applicant and the average risk), minimum premiums, additional coverages, good student discounts, fire protection systems

Premium Formula

rate x exposure units

Advantages of claims handling by a producer

1. Quicker service to policyholders, and lower loss adjustment expenses for the insurer. However, if the producer is not properly trained, overpayment of claims may offset the savings.

Insurer

A company that sells insurance policies to protect insureds against financial hardship caused by financial losses

Hazard

A condition that increases the frequency or severity of a loss Ex)Inexperienced driver in auto policy

Risk Control

A conscious act or decision not to act that reduces the frequency and or severity of losses or makes losses more predictable

Insurance Policy

A contract that states the agreement between the rights and duties of the insurer and the insured

Claim

A demand by a person or business seeking to recover from an insurer for a loss that may be covered by an insurance policy

Book of business

A group of policies with a common characteristic, such as territory or type of coverage, or all policies written by a particular insurer or agency

Umbrella liability policy

A liability policy that provides excess coverage above underlying policies and may also provide coverage not available in the underlying policies, subject to a self insured retention.

Preferred risk rate

A lower rate offered to substantially better than average applicants

Business owners Policy (BOP)

A package policy that combines moots the property and liability coverage needed by small and medium sized businesses.

Agency Bill

A payment procedure in which a producer sends premium bills to the insured, collects the premium and sends the premium to the insurer, less any applicable commission.

Direct Bill

A payment procedure in which the insurer assumes all responsibility for sending premium bills to the insured, collecting the premium, and sending an commission payable on the premium collected to the producer.

Commission

A percentage of the premium that the insurer pays to the agency or producer for new policies sold or existing policies renewed

Actuary

A person who used mathematical methods to analyze insurance data for various purposes, such as to develop insurance rates or set claim reserves

Deductible

A portion of the covered loss that is not paid by the insurer

Predictive Modeling

A process in which historical data based on behaviors and events are blended with multiple variables and used to construct models of anticipated future claims outcomes

Rate manual

A resource for classifying accounts and developing premiums for given types of insurance, includes necessary rules, factors, and guidelines to apply those rates

Insurance

A risk management technique that transfers the potential financial consequences of certain specified loss exposures from the insured to the insurer

Binder

A temporary written or oral agreement to provide insurance coverage until a formal written policy is issued