HISTORY OF INSURANCE
England in the 1600s Ships and cargoes Owners and merchants Lloyds of London Common Law
MARINE INSURANCE
OCEAN - cargo over water INLAND - cargo over land
SHIPS AND CARGOES
INSURANCE IN THE USA
FIRE INSURANCE
Other perils added gradually Each company wrote own contracts Contracts were long, complex, varied
INSURANCE IN THE USA
STANDARDIZED POLICIES
Massachusetts first - 1880s NY standard fire policy - adopted by all states 1943 More policies being standardized every year
INSURANCE IN THE USA
CURRENT
All states but 4 have same basic standard fire policy. Texas is one. Many states have similar auto policies. Most use same rates (ISO). Texas is different. Texas Dept. of Ins. sets rates, forms and rules for personal auto and property insurance. But many types of policies not regulated by State.
TYPES OF INSURANCE COMPANIES
STANDARD (ADMITTED) CARRIERS GOVERNMENT INSURERS NON-STANDARD (NONADMITTED) CARRIERS REINSURERS
Standard (Admitted) Carriers
Stock Companies - Owned by stockholders/investors. Managed by Board of Directors. Purpose to make a profit. Examples: Aetna, Travelers. Mutuals -cooperatives - operate like stock companies but owned by members. Can pay dividends (Ex: USAA) or can use profits to give lower rates ( Ex: State Farm). Exchanges - groups of individuals (subscribers) who insure each other (reciprocal). Managed by Attorney in Fact. Example: Farmers
Government Insurers
FEDERAL - NFIP, Crop Insurance, FDIC STATE - Texas auto & windstorm pools, now MAP
Non-Standard (NonAdmitted) Carriers
ALSO KNOWN AS THE EXCESS & SURPLUS MARKET NO MARKETS AVAILABLE THRU STANDARD INSURERS
Must be declined by standard markets Example: Jet Skis, Hot Air Balloons
Reinsurers
FORM OF INSURANCE BETWEEN INSURERS. HELPS INSURERS EXPAND THEIR CAPACITY (Example: $2,000,000 home) TAKES SOME HEAT OFF PRIMARY INSURERS.
Primary - the first insurer who pays on a loss Excess - the second company that pays on a loss after insurance limits of first
BASIC INSURANCE DEFINITIONS
RISK - Uncertainty regarding (financial) outcome (loss). INSURANCE - A social device for dealing with risk POLICY - a contract of insurance which promises to provide protection in the event of a covered loss.
DEALING WITH RISK
INDIVIDUALS
RETAIN RISK
Cant do anything about it (airplane falls on house) Choose to ignore risk (dont buy flood insurance)
AVOID RISK
Dont buy in earthquake area Move away from flood areas
REDUCE RISK - good roof or alarm system TRANSFER RISK - buy insurance
DEALING WITH RISK
INSURANCE COMPANIES
SPREAD RISK
Geographical - different. areas Financial - different $ ranges
REDUCE RISK
Underwriting guidelines Discounts (alarms, non-smokers, defensive driving)
LAW OF LARGE NUMBERS
The larger the number of separate-butsimilar risks in a group, the more predictable future losses become. Insurance companies must predict losses on a group basis in order to arrive at fair premiums for individuals within groups.
MORE INSURANCE DEFINITIONS
PERIL - the immediate, specific cause of a loss.
Named Perils - such as fire, lightning. Burden of proof of loss is on insured. Must be able to prove loss occurred from a covered peril. All Risk - everything covered except whats excluded. Burden of proof is on company. Must prove the loss was excluded or pay.
MORE INSURANCE DEFINITIONS
PROXIMATE CAUSE - a covered peril is the proximate cause (immediate, specific) of a loss if it initiates an unbroken chain of events leading to a covered loss. Without it no loss would have occurred.
DIRECT PHYSICAL LOSS (lightning strikes building) INDIRECT/CONSEQUENTIAL LOSS (loss of use)
MORE INS. DEFINITIONS
HAZARD -situation that introduces or increases chance of loss from a peril.
Physical Hazards (mfg. fireworks in garage, child care in home, unfenced pool) Moral Hazards - dishonest acts of insured which increase chance of loss. Character, living habits, financial responsibility. (Fake claims to get money when out of a job). Morale Hazards - attitudes of insureds that increase possibility of loss. (Fails to
BASIC INSURANCE PRINCIPLES
INDEMNITY - property insurance is a contract of indemnity - it returns insured to financial position prior to loss. No profit permitted. Life ins. is not indemnity: it pays total sum if loss (death) occurs. LIABILITY - legal responsibility for a loss to someone else (3rd party). BI or PD. Casualty insurance provides this type of coverage.
INSURANCE PRINCIPLES Contd.
INSURABLE INTEREST must exist in order to have a legally enforceable contract
Life Insurance - not required if insured purchases policy: if other party purchases, must have I.I. at the time of purchase Property/Casualty Insurance - all parties named must have I.I. at time of loss. Each party with interest is covered only up to that amount.
INSURANCE PRINCIPLES Contd.
COINSURANCE - requirement that property be insured to at least 80% of replacement cost or be penalized in the event of a partial loss. VALUED POLICY - In Texas full policy amount is paid in the event of a total loss.
INSURANCE PRINCIPLES Contd.
BASIS OF COINSURANCE
Actual Cash Value - what item(s) worth at time of loss (value of used goods). Replacement Cost - what it would cost to replace item(s) at todays prices
INSURANCE PRINCIPLES Contd.
CALCULATING COINSURANCE
Amount of insurance the client purchased Divided by amount of insurance client should have purchased Multiplied by the amount of the loss Less the deductible Equals the amount which will be paid on the loss
INSURANCE PRINCIPLES Contd
AMBIGUITY in policy language is interpreted in the insureds favor by the courts. The state and/or insurance company writes the insurance contract and its assumed that they write it in their favor. IMPORTANCE OF COURTS IN INSURANCE DECISIONS - new policy language and provisions are tested through court system
AGENTS DUTIES AND RESPONSIBILITIES
AGENT - the authorized representative of an insurance company
Has authority to act for insurer by written contract. Contract may be terminated if agent acts improperly Is paid commission for work done for the company Has binding authority as granted by the company Owes primary allegiance to the
Agents Duties and Responsibilities Contd.
AGENCY - a fiduciary relationship in which one entity (the principal) authorizes another (the agent) to act on its behalf in dealings with 3rd parties FIDUCIARY - a relationship in which agent takes in/handles money and signs contracts on behalf of the principal and is accountable.
Agents Duties and Responsibilities Contd
AGENTS AUTHORITY
EXPRESS - whatever is agreed to in the contract IMPLIED - other acts necessary to carry out express authority (Examples: advertising using companys logo; hiring a solicitor) APPARENT - based on 3rd partys reasonable belief that the agent has the authority. (Example: agent has binders, applications, company logo in office;
Agents Duties to Company
LOYALTY - to interests of company OBEDIENCE - to all lawful instructions. (Ex: binding authority suspended during hurricanes) REASONABLE CARE - to avoid injury to the principal. ACCOUNTING - for principals property/money. (Ex: premium pmts., computer equipment, manuals) INFORMATION - disclosure of all known facts about accounts
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