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