Moral Hazard: Dishonest, Intentional. It increases the frequency or severity of loss.
Morale Hazard (attitudinal hazard): Careless, indifference to a loss, increasing the frequency or severity of loss.
Peril: cause of loss (ex:fire,lighting,earthquake.etc)
Risk Aversion : is a description of an investor who, when faced with two investments with a similar expected return (but different risks), will prefer the one with the lower risk. Risk and reward are certainly related.
Adverse Selection: tendency of persons with a higher than average chance of loss to seek insurance at standard rates, which is not controlled by underwriting, results in higher than expected loss levels.
Brokers: represents the buyer, has a contract with the buyer
Agent: Represents the seller. Wants to be able to sell you the product.
Assets – liabilities = Surplus
Insurable Risk Characteristics
∙ Large Number of Exposure Units (Usually Similar)
∙ Losses are Accidental and Unintentional
∙ Losses are Determinable and Measurable
∙ Losses are Not Catastrophic* when the event happens to many policies at the same time. If you want to learn more check out What is the meaning of broca’s aphasia?
∙ Frequency and Severity are Calculable they don’t all happen at the same time. ∙ Premium is Economically Feasible
Insurance and Pooling: Is a mathematical concept; when the losses of the policies or stocks move together. (catastrophic) pooling works well if the pool is diversified
The law of large number: states that the greater the number of exposures the more closely will the actual results approach the probable results that are expected from an infinite number of exposures.
∙ Retention : keeping the risk, retains part or all of the losses
∙ Avoidance: avoiding a risk
∙ Loss Control: locks, surveillance camera, helmets, safety devices; that reduce the frequency or severity of loss. It can help.
∙ NonInsurance Transfer: waivers
∙ Insurance (Transfer): pooling of losses, payment of fortuitous losses, risk transfer, indemnification.
Steps in a Risk Management Process
∙ Identify loss Exposure If you want to learn more check out Should religion be taught in schools?
∙ Measure and Analyze Exposures as such, Frequency and Severity
∙ Select Appropriate combination Techniques like Risk Control and Financing ∙ Implement and Monitor the risk management process
∙ Determine Appetite and Capacity for Risk
Types of Insurers:
∙ Stock insurers : is a corporation owned by stockholders If you want to learn more check out Who is paul of tarsus?
∙ Mutual insurers: is a corp owned by the policyholders.
∙ Lloyds of London: is not an insurance company, but is society of members (corp, individuals & limited partnerships) who underwrite insurance in syndicates. [Marine, aviation, catastrophe, professional indemnity, &auto insurance coverage.]
∙ Reciprocal exchanges: (interinsurance exchange) can be defined as an unincorporated organization in which insurance is exchanged among the members
∙ Blue cross and blue shield plans: nonprofit community oriented prepayment plans that cover hospital service
∙ Health maintenance organization: (HMO) are organized plans of health care that provide comprehensive health care services to their members.
∙ Other types of private insurers:
captive insurers: is an insurer owned by a parent firm for the purposes of insuring the parent firms loss exposures.
Saving bank life insurance: life insurance that was sold originally by mutual savings banks in three states: Massachusetts, new york & Connecticut.
Operations and Finances for insurance company
1. Ratemaking : the pricing of insurance and the calculation of insurance premiums. 2. Underwriting: the process of selecting, classifying, and pricing applicants for insurance. They decided to accept or reject an application Don't forget about the age old question of What is mass communication course all about?
3. Production: refers to the sales and marketing activities of insurers.
4. Claim settlement:
a. Verification of a covered loss
b. Fair and prompt payment of claims
c. Personal assistance to the insured
5. Reinsurance: is an arrangement by which the primary insurer that initially writes the insurance transfers to another insurer part or all of the potential losses associated with such insurance.
6. Investments: life insurance investments, property and casualty insurance investment.
Insurable Interest: need insurable interest To be able to insure something . What YOU collect is what you lost
Indemnity: to make them hold. To restore them with their pre loss condition. What YOU collect is what you lost.
Exceptions for indemnity:
∙ Valued Policy: arbitrary. Pays the face amount of insurance if a total loss occurs. ∙ Valued Policy Laws: a law that exists in some states that requires payment of the face amount of insurance to the insured if a total loss to real property occurs from a peril specified in the law.
∙ Replacement Cost Insurance:there is no deduction for physical depreciation in determining the amount paid for a loss. If you want to learn more check out What is the main purpose of financial management?
Don't forget about the age old question of What causes combustion?
∙ Life Insurance
Subrogation: substitution of the insurer in place of the insured for the purpose of claiming indemnity from a third party for a loss covered by insurance.
∙ Prevents the insured from collecting twice for the same loss
∙ Used to hold the negligent person responsible for the loss
∙ Helps to hold down insurance rates.
Utmost Good Faith: a higher degree of honesty is imposed on both parties to an insurance contract than is imposed on parties to other contracts.
1)Solvency; they are able to pay their claims
2) Lack of Consumer Knowledge
3) Rate Reasonability
4) Availability: your able to get it, making sure that insurance is being offered. Is one of the functions of regulators.
∙ Insolvent: assets are less than liabilities. They aren’t able to pay back. non standard auto, they tend to sell to riskier drivers.
∙ They want to make sure that people who make promises can honor them. ∙ Paul vs. Virginia (1868) bridges across states, the US supreme court. Insurance is not interstate commerce. The states regulated it.
∙ US vs. SouthEastern Underwriters (1944) insurance is interstate commerce so the states should regulate. Insurance is regulated by state.
∙ McCarranFerguson Act (1945) they continued regulation and taxation of the insurance industry by the states are in the public interest. It also states that federal antitrust laws apply to insurance only to the extent that the insurance industry is not regulated by state law.
This is handled by regulators:
Licensing of insurers : have to give sales people permission
Solvency and Surplus Requirements : surplus is the difference between an insurers assets and its liabilities.
Rate Regulation: in certain states rates are regulated
Policy Forms: (homeowners 3; appx 3)
Sales Practices/consumer protection
If there is a gray area and a customer disputes it with state farm, and if it’s ambiguous. They would go in favor of the consumer.
The reason for insurance policies to contain certain clauses is, to help protect the insurer and it also clarifies what to do if a loss or claim occurs.