Risk Management

Lloyds Association (Lloyds of London)

-Group of individual underwriters' that accept or reject risks offered to them -Underwriters invest money in risks that cannot get insurance in the normal market -They are not insurance companies, many states prohibit them from forming -Operate mostly in insurance field and provide a meeting facility for underwriters

Insurer as Principal

-Law of Agency -States that the actions of the agent are taken to be the actions of the principal -broker/agent is first and foremost responsible to insurer

Fraternal Benefit Societies

-Life or Health insurance acrries -social nonprofit org. and voluntarily provide insurance ONLY FOR THEIR MEMBERS -ex. religious organization, affiliated lodges -Considered charitable institutions -Not subject to all regualtions that apply to insurers who offer insurance to genreal public

Stock Companies

-Owned by stockholders -Earnings are distributed as taxable dividends on their shares or reinvested -Board of directors is elected by SH to manage the company -non-participating (most often)

Government Plans

-Social insurance: medicare, medicaid and social security -private insurers usually mutual stock, fraternal and reciprocals

Apparent

-appears to have authority -exists when an agent uses material that represents a company -ex. agent accepts an insured's premium after the end of a grace period...even though an agent does not have the power to accept the premium, it appears to the client that the agent has the authoirty to prevent their policy from lapsing

Surplus Lines

-coverage that must be ourchased from an unathorized company because not it is not available through a licensed company -involves insurance in the high risk market -approved by the commissioner to conduct business without a certificate of authoirty under surplus lines laws

Expressed Authoirty

-explicit, definite, written in contract, definite agreement an insurer grants to a producers -when a producer obtains an application and a premium, this represents express authoirty -if a agent misappropriates a premium, express authoirty still exists

Domestic, Foreign and Alien Isnurers

-insurance companies defined by not only corporate status but where they are located, chartered or incorporated -must qualify and receive a certificate of authority before being allowed to transact business within a state

Implied Authoirty

-not formally communicated but assumed by agnet in order to transact business on behalf of hte insurance company -not stated in contract but required for agent to do business -ability to act outside the authoirty granted in an agency agreement and it extends the companies liability -authoirty that is influenced by the expressed authority of an agent but not writte

Mutual Companies

-participating (because policy holders recieve dividends) -owned by policyholders -surplus money is returned in dividends to policy holders -Board of Trustees manage company

Life and Health Insurance Guaranty Corporation

-private, non profit, non stock corporation -policy holders, insureds, beneficiaries, assignees and annuitants of Health and Life insurance polices, annuities and supplemental contracts are protected by The life and health insuarance guaranty corporation -30 day notice is necessary before payment of an assessment is due -mandatory that all insurance companies that sell insurance belong to the life and health insurance guaranty association -funded by its authoirzed members -funds contributed pay benefits for insurers that become insolvent

Reciprocal Insurers

-unincorporated groups of individuals, firms or corporations commonly termed: subscribers, reciprocal insurance company or exchange -mutually insure one another (assume their share of each risk) -Cheif administrator is an attorney/ manages and operates the risk sharing arrangement

What are the various ways insurance is sold?

1) Agency Method 2) Exclusive/captive agents 3) General/managing general agent 4) mass marketing 5) Franchise marketing 6) unfair and misleading marketing

5 Methods of Handling risk

1) Avoidance 2) Retention 3) Sharing 4) Reduction/control 5) Transfer

For a risk to be truly self-insured:

1) Large number of homogenous exposure units must be present so the law of large numbers can be used to predict losses and rates 2) There must be sufficient liquid assets to pay claims and other costs of retaining risk

What elements must be present for a pure risk to be insured?

1) Large numbers of similar risks (homogeneous): *Law of large numbers: grouping of significant large pools into classes with similar risks, to enable an insurer to predict losses and establish rates. Homogenous refers to groups with the same exposure to loss. 2) Loss must be definite and measureable *An insurable risk must be one that is measurable. Ex. in life insurance, monetary value is placed on an insured's life or ability to earn income. In health insurance, economic loss is measured by lost wages or incurred medical expenses. 3) Catastrophic Peril Exclusion *Generally, insurance companies will not insure risks that will expose them to catastrophic losses ex. acts of war, nuclear risk and floods. 4) Insurance must not be mandatory *An insurance company (insurer) must not be forced to issue a policy. The insurance company must be able to require certain underwriting guidelines to be met for actuarial justification 5) Loss must be due to chance *The loss (risk) msut be outside the control of an insured. i.e. accident/heart attack 6) The risk must be predictable *Statistics are used to predict losses. Mortality tables and morbidity table are examples of statistical charts that allow an insurer a method of projecting losses.

What are three ways an Insurance Company can protect itself against adverse selection?

1) Limitations on coverage 2) Higher premiums 3) Rejection of the risk

What are the exposure units used in determining rates?

1) Medical History 2) Sex 3) Age 4) Occupation of an insured

3 types of hazards:

1) Physical 2) Moral 3) Morale

Retention of Risk results from

1) Reduction of expenses & improvement of cash flow 2) Increased control of claim settlements 3) Funding losses that are uninsurable

Types of Insurers

1) Stock companies 2) mutual companies 3) Fraternal Benefit Societies 4) Reciprocal Insurers 5) Lloyds Association 6) Risk Retention Groups 7) Self-insurers 8) Surplus Lines

Morale Hazards

Careless and irresponsible acts - a hazard that refers to one's state of mind or the way one thinks ex. not wearing a seatbelt, failing to repair leaks, not locking doors etc

What is the primary difference between government and private insurers?

Government insurers are tax funded and serve both national and state social needs -private insurers transact insurance by state insurance departments

What is the most common way to transfer Risk

Insurance

What law is the basis for insurance?

Law of Large Numbers

What law is the basis for the statistical prediction of loss?

Law of large numbers

Insurance is a method used to transfer

Loss

Which hazard arises from an insured's indifferent attitude to a loss?

Morale Hazard

Risk

Possibility of an occurance of a loss or chance it may occur 1) Speculative 2) Pure

What principle is Insurance based on?

Principle of Risk Transfer

What is the only type of risk that insurance companies will insure?

Pure risk - can only result in loss or no change

What do insurance companies base their insurance on?

Retention of risk

What is one of the primary reasons insurance is purchased?

Risk

Perils

The causes of a possible loss outlined in an insurance policy ex. Premature death, loss of income caused by sickness or car accident ex. tornados, floods or hurricanes destroying homes *causes of loss

Reinsurance is an agreement between whom?

The ceding insurer and an assuming insurer

Law of Large NUmbers

Theory of probability that is the basis for insurance. The larger the number of risk units considered, the more closely the losses reported will equal the underlying chance of loss. The is the basis for the statistical prediction of loss, which also establishes the rates that Insurance Companies Charge. Ex. Law of Large Numbers helps an insurer predict which types of individuals in the US will die in a given year.

What is the most common method of risk transfer?

When a homeowner purchases insurance on their home

Self-insurers

When an insurance company develops a formal program indentifying, evaluating and funding its losses -means of retaining risk -self insurers buy insurance to cover losses beyond a set limit = stop loss coverage

Retention of Risk

When an insured has decided to assume the financial responsibility for certain events by the use of 1) Deductibles 2) Co-payments 3) Self-insurance

Hazards

circumstances or conditions that increase the possibility that a loss will take place ex. storing explosives in a basement

What is the reason for a claim against an insurance policy?

a loss

Code of ethics

agent always protects the interest of the insured -agent is a fiduciary who handles insurer funds in a trust capacity

Authoirty and power of producers

agent given an agency contract which details the authority they have within an insurance company; there are three types 1) Expressed 2) Implied 3) Apparent

Agent of Insurer

agent/producer will always represent an isnurer -agent/producer solicits and negotiates insurance contracts on behalf of an insurance company

Reinsurance

agreement between Insurance companies under which one insurance company transfers PART OR ALL of its risk to another insurer *Insurance that an insurance company buys for its own protection

Agent

anyone who solicits, sells, procures or gains renewal of insurance on behalf of another

Reinsurance benefits an insurer by providing protection against..

catastrophic loss

Physical Hazards

cause one's body to become physically stressed and increase the chances of a loss ex. lifestyle, slippery floors, sky diving

Facultative Reinsurnace

insures a specific type of risk

Foreign Insurer

conducts business outside of its state of incorporation ex. puerto rico or washington dc

Domestic Insurer

conducts business within the state where it s incorporated or chartered

Adverse Selection

describes the tendancy of an individual with ag reater than average chance of loss to purchase insurance. **INSURING RISKS MORE PRONE TO LOSSES THAN AN AVERAGE RISK**

Insurance

device for transferring the chance of a financial loss among a large number of people

Avoidance of risk

ending a specific exposure or taking steps to remove a hazard ex. Being afraid of a car accident = not driving or riding in a car *Avoidance is not a practical way to handle risk. It is a way to handle a risk by not being exposed to an activity.

Purchasing Groups

entities that buy insurance for groups with related business and similar exposures to risk -exempt from most state laws or regulation outside the state -can only write liability insurance CANNOT WRITE WORKERS COMPENSATION OR PERSONAL LINES OF INSURANCE -groups member sbelong to businesses with same type of liability

Mass marketing

ex. direct response, vending machines and franchies

General Managing General agent

exclusive agent who hires and trains other producers/agents in a specified geographic area -compensated on commissions and overrides on the agents he/she trains and also for advertising, office expenses and staffing

Financial Status (independent rating services) and operating results

financial integrity, strength and stability are highly important factors to potentional and current people insured -financial strenght = determined by prior claims experience, investment earnings etc.

When an agent solicits insureance they must porvide their purchaser:

full name of their insurer and that their actions are of a licensed agent

Moral Hazards

hazards that are the result of maximizing behavior ex. dishonesty, lies on an application, creating a loss on purpose

Agency Method

independent insurance agents sell the products of several companies and are appointed on a nonexclusive basis -earns commissions on persional sales, overrides of other agents and owns the expirations of hte policies he or she sells -may place the renewal business in best interest of the client

Alien Insurer

insurance company that is incorporated or chartered outside the US = another country

Risk Retention Groups

liability insurance companies not regulated by the state -membership is limited to people in same business -purpose is to assume and spread liability exposure to the group member -often cover hospitals, manufacturers and municipalities against commercial casualites

Exposure

measure of the vulnerability of a loss, usually expressed in dollars or units to determine the rates charged for insurance

Define Nonparticipating

policy holders do not partiicpate in earnings of the company ex. Stock Companies

Direct Response Marketing System

producer/agent is bypassed an insurer directly contacts hte public ex. cold calling

Franchise marketing

provides coverage to employees of small firms that do not qualify as a true group -premiums are generally less than individual policy but more than group coverage

Exclusive or Capitve Agents

represents only one insurance company and is appointed on exclusive or captive basis -compensated by commission on personal sale and overrides other agents -do not own expirations of the renewal business and all business is placed with an insurer

Speculative Risk

risk for which it is uncertain to whether the final outcome is a gain or loss **It is not insurable ex. Gambling

Pure Risk

risk that involves the probability or possibility of a loss with no chance for gain ex. accidents, death & sicknesses

Reduction/Control of Risk

the attempt to reduce the possibility of death, injury or loss property. 1) Annual physicals 2) Installation of alarms 3) Changing diets

Sharing of risk

the dividing or sharing of a risk for a business or a group of individuals, with the SAME or SIMILAR exposure to a loss ex. Reciprocal Insurance Exchange = risk sharing arrangement

When an agent accepta premium from a policy owner it is the same as the payment being given to

the insurer

Transfer of Risk

transferring all or part of a risk to another party

Loss

unintentional reduction, decrease or disappearance of value of a person or property insured by a policy

Reinsurance Treaty

when an Insurance company has an open (automatic) insurance agreement that binds the reinsurer to accept all risks given to it. *most often negotiated for 1 year or more