slide set 12: insurance contracts, interests and underwriting 1
TRANSCRIPT
Slide Set 12:Insurance
Contracts, Interests and Underwriting
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Last Time We Spoke About:
• Public Authorities1. Public Benefit Corporations
2. Chartered by State Legislature
3. Builds, Operates, Finances Public Projects
• Limited Liability Companies1. History of LLCs
2. Formation of LLCs
3. Management of LLCs
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Tonight We Will Speak About:
• Insurance
1. What is Insurance?
2. History of Insurance
3. Insurable Interests
4. Types of Insurance
5. Underwriting
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Insurance What is Insurance?
Insurance is a contractual agreement in which a group of individuals (insureds) transfer risk to another party (insurer) in order to combine loss experience. It is the sharing of the risk of loss.
Insurance permits the statistical prediction of losses and provides for the payment of losses from funds contributed (premiums) by all members who transferred risk.
In short, insurance provides protection against financial losses by pooling the resources of policyholders
Insurance is created when people like you and your neighbors pool their resources to protect themselves from loss
If the risk of loss can be spread over a large enough group, the effects of the loss to any one individual can be minimized
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Insurance History of Insurance
Where did the Idea of Insurance First Originate?
The Code of Hammurabi - Created by the Babylonians around 2100 B.C. were the first to use the concept of pooling risks, to insure the safe arrival of their goods by caravan.
The first Laws on Insurance date back to Rome (those early masters of law and commerce) who were the first to develop and apply an actuarial format to assessing the risk of loss.
Early Insurance focused primarily on property loss, especially with respect to maritime commerce, and a failure to deliver promised goods due to weather, accident or theft. The Romans also, however, began to pioneer in the area of Life Insurance and insuring the risks associated with a person’s value.
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Insurance History of Insurance Insurance Companies
The first Insurance Company was formed in 1688 in London(Lloyds of London). It served more as a gaming/odds house thenan actuarial based risk of loss company.
At Lloyds, merchants, ship-owners, and underwriters met at acoffeehouse to discuss how to protect the sea voyages, and sharetheir risk of losses.
The development of more Modern insurance products traces back to the “Great Fire of London” in 1666, when 13,200 houses were
completely destroyed.
Societies were formed to pool money for losses. These collective investments also created the need for modernizing fire fighting
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Insurance History of Insurance Insurance Companies
The first Insurance Company was in the United States was formed inCharlestown, South Carolina in 1735. It specialized in underwriting both maritime risks as well as property and casualty (mostly fire).
Fire Insurance Companies began spreading to northward to New York City and Philadelphia.
Benjamin Franklin was a huge proponent of Insurance. He:• Founded America’s first successful insurance company• Founded the first mutual insurance company• Encouraged prevention by educating the public about fire hazards
• Refused to insure wooden buildings• Coined phrase “an ounce of prevention is worth a pound of cure”
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Insurance Insurance as a Business
Insurance is a Big Business in New York
Insurance is a very heavily regulated industry.
Pursuant to both state and federal law, it is regulated under STATE LAW
In New York, which is home to a great deal of the Insurance Industry, it is regulated by the newly created (2011) Department of Financial Services (formerly the NYS Insurance Department)
Insurance is a nearly 4 Trillion dollar business in New York,Employs over 2 million people in the United States, and nearly
200,000 in New York.
As the population ages and wealth grows, this industry’s growth and importance is predicted to expand. 9
Insurance The Insurance Contract
Insurance is a contract. The contract itself is called a policy.
Under an insurance policy, provision is made by the insurer, in consideration of premium payments, to pay either the insured or a beneficiary, a sum of money, if the insured sustains a specified loss, or is subjected to a specified liability.
In order to purchase an insurance contract, the purchaser must have
what is known as an insurable interest in the subject of the policy.
An insurable interest in property exists when the damage or destruction of the property will cause a direct monetary loss to theinsured.
An insurable interest in the life of the insured exists, if the purchaser would suffer a financial loss from the insured’s death.
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Insurance The Insurance Contract
Duties ofParties
Insured and insurer owe eachother obligationsimposed by the
contract andby statute
TheApplication
Generally partof contract by
expressstipulation of
the policy
StatutoryProvisions
All provisions required by statute apply,even if not
included in thecontract
The Insurance Contract
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Insurance The Insurance Contract
Insurance contracts are often made through • an insurance agent or • an insurance broker.
Both an agent and a broker are agents
• An insurance agent is an agent for the insurance company,
• An insurance broker is the agent of the insured.
Insurance can be purchased directly by the insured from the insurance company. In such cases neither an agent nor a broker is involved in the transaction.
Insurance Agents and Brokers are licensed by the state.12
Insurance The Insurance Contract
• Insurance is very highly regulated industry.
• Insurance contracts are regulated with respect to both form and content.
• When the regulations are silent, contract provisions are governed by general contract principles.
• The lapse, redemption and cancellation of insurance contracts, are all highly regulated, and the manner in which such contracts are interpreted is pursuant to such.
• Insurers that engage in bad faith with respect to the payment and settlement of claims will be held liable. 13
WHY IS IT IMPORTANT TO HAVE INSURANCE?
Risk - chance of loss from an
event that cannot be entirely controlled
Emergency savings - at least
six months of expenses set aside to cover
costs of unexpected
events
Insurance - transfers risk
from an individual to an
insurance organization
is managed by
What are examples of unexpected events that may
result in a financial loss?
INSURANCE NOMENCLATURE
Experts say that buying insurance is buying financial security.
Coverage – The risks covered and amount of money paid for losses under an insurance policy
If the event happens the insurance company will make a payment to the policyholder (person who owns the policy) to cover all or part of the resulting loss
Premium – Money paid to purchase the policy
AN ILLUSTRATION OF HOW INSURANCE WORKS
Insurance shifts the risk of big loss from the individual to the insurance company
With a 1% chance that any one of them could
get sick and require $10,000 in medical
care
But, no one knows who will get sick
If each person pays $100 into a “pool” they will collectively have $10,000 to cover the medical costs of the person who gets sick
So, everyone gives up $100, but
nobody loses more than $100
99 people do not collect anything, but they gain peace of mind and important protection against
large loss
Suppose there are 100 persons in a
group.
THE BENEFITS OF INSURANCE
Payments received from an insurance policy can far exceed the premiums paid
That is why Insurance provides financial security and peace of mind
The best outcome is to have insurance but never collect on it.
Long-term Care
Health
Disability
Life
Property & Liability
THE INSURANCE PROCESS
Claim - paperwork submitted to insurance organization describing
the accident, illness or injury
Deductible - amount of money paid out of pocket by
policyholder before the insurance coverage begins
Co-insurance - amount of money, after deductible, that is paid jointly by the insured and
the insurance company
Event occurs resulting in loss
Policyholder makes claim to
insurance organization
Insurance carrier determines if
event is covered by policy
If so, policyholder
pays a deductible
Remaining amount owed is
paid by co-insurance (if applicable)
BOB’S ACCIDENT
Even with insurance Bob still needs
funds to pay the
deductible and co-
insurance
What would Bob’s options have been if he did not have insurance?
Bob pays the first $500 of any covered medical
care plus 20% of the remaining costs
Bob is in an accident resulting in a $5,000
medical procedure that is covered by insurance
Bob pays $500 + 20% of the remaining $4,500 for a
total of $1,400
The insurance company pays $3,600
Bob has a health insurance policy with a
$500 deductable and 20% co-insurance
THE MATH OF INSURANCE CLAIMS
Bob was involved in an automobile accident that resulted in $3,788 worth of damage to his car.
How much does Bob pay and how much does the insurance Company pay?
Bob has a property and liability insurance policy with a $500 deductible and 0% co-insurance
How much does Bob pay?
How much does his insurance Company pay?
$500
$3,288
Insurance Kinds of Insurance
1. Property and Casualty Insurance• Auto Insurance• Marine Insurance• Home Owners / Property Insurance• Fire Insurance• Personal Liability
2. Commercial Liability Insurance• Professional Liability Insurance (Malpractice)• Directors and Officers Liability Insurance• Construction / Surety Bonds
3. Health and Life Insurance• Health Insurance• Life Insurance• Disability Insurance
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Insurance Kinds of Insurance
Property and Casualty InsuranceAuto Insurance
• Automobile insurance may provide protection for collision damage to the insured’s property and injury to persons.
• It may also cover liability to third persons for injury and property damage, and loss by fire or theft.
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Insurance Kinds of Insurance
Property and Casualty InsuranceMarine Insurance
• Ocean marine policies insure ships and their cargoes against the perils of the sea.
• Inland marine policies insure goods being transported by land, by air, or on inland and coastal waterways.
• This type of insurance interacts with Admiralty Law andin rem jurisdiction for ships.
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Insurance Kinds of Insurance
Property and Casualty InsuranceHome Owners and Fire Insurance
In order for a fire loss to be covered by fire insurance, there must be an actual, hostile fire that is the immediate cause of the loss.
The insurer is liable for the actual amount of the loss sustained up to the maximum amount stated in the policy.
A homeowners insurance policy provides fire, theft, and liability protection in a single contract.
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Insurance Kinds of Insurance
Property and Casualty InsurancePersonal Liability
Personal Liability Insurance can cover a variety of issuesand basically addresses risks that an individual may
sustain as a result of their actions in negligenceor by virtue of their legal activities.
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Insurance Kinds of Insurance
Commercial Liability InsuranceProfessional Liability Insurance (Malpractice)
Professional Liability Insurance covers malpractice that might occur as a result of negligence of a
professional in their field.
This occurs when a Doctor, Lawyer, Engineer, ectcauses harm by means of a failure to performto the level of professional standards in a practice.
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Insurance Kinds of Insurance
Property and Casualty InsuranceDirectors and Officers Liability Insurance
Directors and Officers Liability Insurance covers the negligence of an officer or director of a corporation when they make a mistake in operating a corporateentity.
Like medical malpractice, this insurance coversliability that occurs when a director or officer failsto act in a manner that a reasonable officer of director would act under the circumstances
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Insurance Kinds of Insurance
Commercial Liability InsuranceConstruction Insurance / Surety Bonds
Construction Insurance covers negligence that might occur as a result of the construction of a building or
other site.
A Surety or Performance Bond provides insuranceagainst the failure to complete a project, construction orotherwise, in the time or manner required in a contract, and which results in damages, either actual,consequential, or both.
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Insurance Kinds of Insurance
Health and Life InsuranceLife Insurance
A life insurance policy requires the insurer to pay a stated sum of money to a named beneficiary upon the death of
the insured.
It may be a term insurance policy, a whole life policy, or an endowment policy.
State law commonly requires the inclusion of an incontestability clause, whereby, at the conclusion of the contestability period, the insurer cannot contest the validity of the policy.
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Insurance Kinds of Insurance
Health and Life InsuranceHealth Insurance
A Health insurance policy requires the insurer to pay for services and medication provided to an insured or a
family member upon illness.
Usually provided as part of an employment benefitthis insurance can be purchased individually, and ispriced based upon the risk of the individuals insured,
unless otherwise regulated by state law.
The new federal Patient Protection and Affordable Care Act (Obama-Care) requires individuals to purchase
private health insurance, purchase government insurance, or pay a tax. 30
Insurance Kinds of Insurance
Health and Life InsuranceDisability Insurance
A Disability insurance policy requires the insurer to pay for a determined (usually monthly) amount in the eventof the disability of the insured.
Such disability policy can be for total or partial disability.
Disability depends upon the nature of the conditionas well as the nature of the person and theiremployment.
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Insurance Underwriting
Insurance is the spreading of the risk of lossbased upon an actuarial determination of such risk.
Remember one thing.
Its all about the chance of the riskand the size of the loss
These two elements determine the cost of the insurance.
Underwriting an insurance policy involves balancing these two elements by evaluating the risks of insuring a particular person or asset and uses that information to set premium pricing for insurance policies.
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Insurance Underwriters
Those persons who determine this risk/premium cost analysis are known as Underwriters.
Underwriters are financial professionals that evaluate the risks of insuring a particular person or asset and uses that information to set premium pricing for insurance policies. Insurance underwriters are employed by insurance companies to help price life insurance, health insurance, property/casualty insurance and homeowners insurance, among others.
Underwriters use computer programs and actuarial data to determine the likelihood and magnitude of a payout over the life of the policy. Higher-risk individuals and assets will have to pay more in premiums to receive the same level of protection as a (perceived) lower-risk person or asset.
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Thank you for Coming• Bonus Questions of the Day • For next time – Read Chapter 33
We are a hot bench.• Questions.
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