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03/10/17 Insure to Ensure Safety 1


Welcome to Insurance Basics

03/10/17 Insure to Ensure Safety 2


Why Insurance

Every person, family and business needs insurance to

Protect assets against unforeseen events causing


financial hazards.

Protect Mortgage Companies Investment on our


assets.

To Indemnify from the loss suffered.

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Purpose

To provide a brief insight into the basis


of Insurance, its coverage along with its three
major working phases namely,

Transfer System
Business
Contract

03/10/17 Insure to Ensure Safety 4


Insurance as Transfer System
Insurance as a system enables us to transfer the costs of
losses from the insured to the insurance company

Insured's exchange the possibility of a large loss


by paying a much smaller periodic payments called
Premium.

Insured who incur covered losses are paid from


insurers funds .Thus total cost of losses is
thereby shared among all insured.

Transfer is done through an Insurance Policy,


which is a contract that states the rights and duties
of both Insurer and Insured regarding transfer

03/10/17 Insure to Ensure Safety 5


Insurance as a Contract

An insurance policy is a contract between the


insured and the insurance company which holds
the promises of insurance company to pay for the
covered losses of the insured.

Insured in turn reduces the uncertainty that may


occur by paying premium to the insurer.

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Loss Exposure
Loss exposure or simply an exposure, is any condition or situation that
presents the possibility of loss.

The major types of loss exposures are

Property Loss exposure - Possibility that a property loss


will happen
Liability Loss exposure - Possibility of legal
responsibilities of a person or
business for injury or damage
suffered by another party.
Human Loss exposure - Possibility of financial loss to
an individuals.
Personnel Loss exposure - Possibility of financial loss to
a Business

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Insurable Loss Exposures
Mutual benefit

Sole idea of insurance is to benefit both the


insurer and insured through the contract
-insurance policy.

By,

Insured transferring the loss of cost to insurer.


Insured charging a premium in turn.
Assuring Ideal characteristics of a property which
makes it ideally insurable form insurers
standpoint.

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Ideally Insurable Loss Exposures

Large number of Similar exposure units

IILE must be common that insurer can pool


the homogeneous exposure units in large
number.
It enables the insurer to predict future losses
accurately and to detect the premium.

Losses that are accidental

If losses are not accidental then the insured might have an


incentive to cause a loss and cannot calculate the accurate
premium.

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Ideally Insurable Loss Exposures
Losses that are definite and measurable

If the time and location of loss is not definite


then one cannot say the actual loss of amount.

For example, sudden bursting of a water pipe


can be insured because its of definite time and
location, where as one cannot claim for the
decay caused by gradual leakage over a
period of time.

In short wear n tear cannot be insured.

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Ideally Insurable Loss Exposures

Losses that are not Catastrophic :

Loss suffered by one insured should not affect


any other insured or group of insured.

An insurer company usually avoids possible


Financial disaster by managing its pool of
insureds in such a way that it does not have
a large portion of insured exposed to a single
event.

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Ideally Insurable Loss Exposures

Losses that are Economically Feasible to Insure

Loss exposures involving small losses as well as


those of high probability are considered
uninsurable.
For small losses the expense of providing
insurance exceeds the amount of potential losses.
eg: Insurance for disappearance of office
supplies.
For large losses the premium would be high
enough that the claim for the potential losses.
eg: Situations were losses are certain to occur

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Types of Insurance

Four types of basic insurances is broadly classified into


two categories namely,

Property Insurance / Liability Insurance

Life Insurance / Health Insurance

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Property Insurance
Definition:
Property Insurance covers the costs of accidental
losses to an insureds property like house, inventory,
equipments.

Types of property insurance are

Fire and Allied Lines Insurance


Business Income Insurance
Crime Insurance
Ocean marine Insurance
Auto physical Damage

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Fire and Allied Line Insurance (FAL)
What FAL covers ?
FAL covers direct damage to or loss of property
such as buildings at fixed location or locations described in the
policy.

Allied Term refers to insurance against cause of loss


written with fire insurance, such as windstorm, hail, smoke,
explosion etc

Policies covering FAL are


A commercial Property policy.
A dwelling policy.

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Business Income Insurance (BII)

What BII Covers ?

Business Income/Interruption Insurance, pays a business for


its loss of net income or additional expenses as a result of
covered loss such as fire.

BII pays the expenses that the insured


incurs because of the loss during the time
needed to restore the business.

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Crime Insurance
What Crime Insurance Covers ?
Money, Securities, merchandise, and other property due to
burglary, robbery, theft and employee dishonesty.

Separate coverage is provided for specific types of property


against specific crime losses.

eg: Policies covering Crime Insurance is


usually Home Owners Policy.

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Ocean Marine Insurance (OMI)

What OMI Covers ?


Being one of the old type of insurance OMI
covers ships and their cargo against fire, lightening
and other perils of sea including high winds ,rough
waters etc

In addition Inland marine Insurance (IMI) covers


miscellaneous type of property, goods in domestic transit, and
those property used in transport and communication.

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Auto Physical Damage Insurance

Auto Physical Damage Insurance usually provides auto


liability coverage, such as a personal auto policy or a business
auto policy.

It is generally meant for damage or loss to specific type


of vehicles from collision, fire etc

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Liability Insurance
Liability Insurance is other wise called Third Party
Insurance as it includes three parties namely Insured, Insurer
and Claimant.

The insurance company pays the claimant on behalf of the


insured if the insured is legally responsible for damage.
Liability insurance includes

Auto Liability,
Commercial General Liability,
Personal Liability,
Professional Liability

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Life Insurance

Insuring ones life can greatly reduce


the adverse financial consequences when
premature death of Primary wage earner
happens in a family.

Basic type of Life insurance

Whole Life Insurance


Term Insurance
Universal life Insurance

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Whole Life Insurance

Whole Life Insurance provides lifetime


protection for insureds whole life( to age 100) and is
considered as permanent insurance.

Whole life policies accrue a cash value that the


policy holder can borrow after a policy period.

Generally, whole life policy finds its effect when a


consumer wants lifetime protection with a level premium and
cash value.

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Term Insurance

Term insurance provides coverage for a specified period,


such as five or ten years, and is therefore not permanent
insurance.

A term insurance policy has no cash value accumulation.

It is used when the consumer wants the maximum amount of


life insurance protection available at low cost.

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Universal Life Insurance
Universal life Insurance policy is a flexible-premium policy that
separates the protection, savings, and expense components and is sold
as an investment vehicle that combines life insurance protection with
savings.

The policy holder has a cash value account that is credited with the
premium paid.

On surrendering the policy, the cash value account may be reduced


by a surrender charge to determine the surrender value paid to the policy
owner.

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Health Insurance

Health Insurance protects individuals and families from


financial losses caused by sickness. Like Life insurance , it can
be provided for individual or a group basis.

Various types of Health insurance are

Medical insurance coverage


Disability insurance coverage

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Medical and Disability Insurance

Medical Insurance covers the cost of medical care, including


doctors bills, hospital charges, laboratory charges, and related
expenses.

Disability Income Insurance provides periodic benefits to an


insured who is unable to
work as a result of accident or illness until
he/she returns back to work or till the
maximum period elapses.

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Insurance as Business

Insurance is a business were the insurance


company provides coverage in exchange of a
premium amount from the insured

Insurance as business highlights the following

Types of Insurer
Financial Operations
Financial Performance of insurer
State insurance regulation
Benefits and costs of insurance

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Types of Insurer

Many different type of insurers provides different types


of services. In some cases, government insurance plans supply
coverage that is not available from private insurers

Major types of insurers are

Private (Non- Government) insurers


Federal Government Insurance programs
State Government Insurance programs.

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Types of Private Insurers
The major purpose of insurance agent is to indemnify
insureds if a covered loss is occurred.

Major types of the Private insurers are

Stock Insurance Companies


Mutual Insurance Companies
Reciprocal Insurance Exchange
Lloyds Association
Captive Insurance companies
Reinsurance Companies

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Private Insurers

Stock insurance company is an insurer that is owned by its


stock holders and formed as a corporation for the purpose of
earning a profit for these stock holders.

Mutual Insurance company is an insurer that is owned by its


policy holders and formed as a corporation for the purpose of
providing insurance to its policyholder owners.

Demutualization is the process by which a mutual insurer


becomes a stock company, which is then owned by its
stockholders.

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Private Insurers

A reciprocal insurance exchange is an unincorporated


association formed to provide insurance coverage to its members
(Subscribers).

Lloyds of London is an unincorporated association formed to


earn profit for its individual investors and its corporate investors.

A captive insurance company is an insurer that is formed as a


subsidiary of its parent company, organization or group, for the
purpose of writing all or part of the insurance on the parent
company or companies.

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Private Insurers
Reinsurance Companies is a type of insurance in which
one insurer transfers some or all of the loss exposures from
policies written for its insureds to another insurer

In reinsurance, the primary insurer is the insurance


company that transfer its loss exposure to another insurer in the
contractual agreement called reinsurer.

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Federal Government Insurance

Federal government provides coverage which are


behind the scope of private concerns like

Coverage requiring huge financial resources.


eg: Social Security
Coverage required for only certain segment of
population need.
eg: National Flood Insurance program
Insures depositors against loss resulting from
failure of insolvency of banks.
eg: Federal Deposit Insurance Corporation

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State Government Insurance
All states ensures their employers be able to meet the
financial obligations based on workers compensation laws.

Unemployment insurance plan ensures at


least a minimum level of protection for eligible
workers who are unemployed.

Fair Access to Insurance Requirement (FAIR) plan


which provides basic property insurance to property owners which is
other wise cannot obtain coverage.

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Insurance Regulation

To regulate the performance of the insurance companies


The National Association of Insurance Commissioners
(NAIC) was established to encourage co ordination and co
operation among state insurance departments.

A model law is a document drafted by NAIC that reflects


the proposed solution to a given problem and provides a common
basis to the states for drafting laws that affect insurance industry.

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Objective of Insurance Regulation

The NAIC enables state regulators to pool their


resources while preserving state regulation of insurance.

Despite the differences among the states the primary


objective of insurance regulations are,

Rate Regulation
Solvency Surveillance
Consumer Protection

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Rate Regulation

State give rights to the state insurance commissioner the


power to enforce regulation of insurance rates, since rate affects
most people.

Insurer must collect sufficient premium to pay for the


incurred losses that occur, cover the costs of operating the insurance
company.

Rate making is the process by which insurer calculate the


rates that determine the premium to charge for insurance coverage.

Premium = Rate * Number of exposure units

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Objective of Rate Regulation

Rate regulation serves three general objective

To ensure that rates are adequate


To ensure that rates are not excessive
To Ensure that rates are not unfairly
discriminatory .

An actuary using mathematical methods and technology


analysis the loss data and other Statistics to develop systems for
determining insurance rates.

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Insurance Rating Laws

To balance conflicting objectives, state have developed


various insurance rating laws namely,

Prior-approval laws
Flex rating laws
File and Use laws
Use and File laws
Open competition
State mandated rates.

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Solvency Surveillance
Solvency is the ability of the insurance company to meet its
financial obligations as they become due , even those resulting
from insured losses that might be claimed several years in the
future.

Two major aspects of Solvency surveillance are

Insurance Company Examinations


An exam where thorough analysis of an insurance
companys operations and financial condition.
Insurance Regulatory Information System (IRIS).
To help regulators identify insurance companies with
potential financial problems.
03/10/17 Insure to Ensure Safety 40
Consumer Protection

The activities that regulators undertake to protect


insurance consumers include

Licensing Insurers
Licensing Insurance Company representatives
Approving policy Forms
Examining Market Conduct
Investigating Consumer Complaints.

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Excess and Surplus Line Insurance
The Standard market refers collectively to insurers who
voluntarily offer insurance coverages at rates designed for
customers with average or better- than average loss exposure.

Excess and Surplus line Insurance consists of insurance


coverage, usually unavailable in the standard market, that are written
by unlicensed insurers.

The following classes of business are often insured in the


excess and surplus market.

Unusual or unique exposure


Non Standard business
Insured's needing high limits
Insured's needing unusually broad coverage
Exposure that require new forms.

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Welcome to Financial Consequences

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Purpose

The major purpose is to provide a brief insight into the


financial performance of the insurer which assist in sound
management of an insurance company.

Typically includes

Insurers Profitability
Insurers Solvency

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Insurer Profitability
To survive in the long term, insurance company should
manage the overall gain from its operation by managing the
income and the expenses, thereby insuring the profitability

Two major sources of income to the insurance company is


from namely,

Premium Income from sale of insurance


Investment Income from investment of funds.

Some insurers receive from other income from the sales of


specialized services or other incidental activities.

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Premium Income
Premium income is the money an insurer receives from its
policy holders in return for the insurance coverage it provides.

Premium includes

Written Premium premiums on policies written


during a given period.
Earned Premium portion of written premium that
is recognized as time passes.
Unearned Premium portion of written premium that
applies to the policy period
that has not yet occurred.

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Premium Income Calculation
Sample Condition:

Consider an Annual Policy with $600 premium is effective


from July 1.

At the end of first calendar year 1:

Written premium - $600


Earned premium - $300
Unearned premium - $300

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Investment Income

Insurance company has funds available for investment for


two reasons namely

Policyholder Surplus which is maintained


that the insurer can meet its obligation after
catastrophic loss.

Premium funds as the amount is collected


before the claims are paid.

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Expenses

Major expenses incurred by an insurance company are


claim payments for insureds who have suffered loss and cost
associated with handling those claims.

Other major expenses are

Losses and Underwriting Expenses


Investment Expenses.

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Losses and Underwriting Expenses

Expenses associated with insurers underwriting activity


include payment for losses, loss expenses and other underwriting
expenses.

Claim payment includes the following losses

Paid losses Claim payments that an insurer


has made.
Incurred losses Sum of paid losses and
change in loss reserve.

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Loss Reserves

Loss reserves are amounts designated by insurance


companies to pay claims for losses that have already occurred but
not yet settled.

Loss reserve for a particular claim is the insurers best estimate


of the total amount that it will pay in the future for a loss that has
already occurred.

Incurred losses = Paid losses + Change in loss reserve

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Loss Expenses

Loss expenses includes

Expenses necessitated by the process of investigation


insurance claims and settling them according to the terms in the
insurance policy.

For property insurance claims the claim representative must


identify the cause of the loss and decide whether this loss is covered in
the policy.

For liability insurance claims the claim representative must


identify whether the insured is legally responsible for the bodily injury
or property damage to/by the IIIrd party

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Other Underwriting Expense

The major categories of insurer underwriting expenses, other than


losses and loss expenses are

Acquisition expenses The expenses associated with


acquiring new business like
advertisement, agent commissions.
General expenses Includes the infrastructure
management and other support
functions within the organization.
Taxes and fees Includes expenses of tax paying and
participation in state insurance
programs.

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Investment Expenses

Investment expenses include the salaries and all other expenses


related to the activities of the insurance department.

Net Investment Income is calculated by subtracting the investment


expenses from income .

(i.e) Net Investment Income = Investment Income


Investment Expenses

Overall gain (loss) of operation = Net investment gain (loss) +


Net underwriting gain (loss).

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Insurer Solvency

The financial position of an insurance company at any


particular time is measured by its assets, liabilities, and
policyholders surplus.

Assets - Tangible and Intangible property owned


by an entity, in this case.
Admitted assets - The Assets that are easily convertible
to cash at or near the value of the
propertys market value.
Non Admitted assets - Properties like office furniture that are
not easily convertible to market value
easily.

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Insurer Solvency
Liabilities are financial obligations are debts, owed by a
company to another entity, usually the policy holder in case of
insurance company.

Major liabilities are

Loss reserve
Unearned Premium reserve

Policyholders surplus of an insurance company is equal to its


total admitted assets minus its total liabilities.

Policy Holders surplus = Admitted Assets - Liabilities


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Monitoring Financial Performance
Financial statements gives clear view on the financial performance
of the company, which in turn helps the regulators, investors to monitor
the companies financial performance.

Two major financial statements that provide most information are

Balance Sheet Shows companies financial


position at a particular point of time.
Income Statement Shows companies financial
position for a particular period of
time.

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Financial Statement Analysis

Analyzing by comparing two items produces a ratio that


highlights a particular aspect of financial performance.

Several such profitability ratios widely used in the industry


are,

Loss Ratio
Expense Ratio
Combined Ratio
Investment Income Ratio
Overall operating Ratio.

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Loss Ratio
Loss ratio provides the percent of earned premium used to
fund losses and their settlement. One can compare the actual loss
experience with the expected loss experience.

The loss ratio is calculated by dividing an insurers incurred


losses (including loss expenses) for a given period by its earned
premiums for the same period.

Loss Ratio = Incurred losses( including loss expenses)


---------------------------------------------------------
Earned Premium

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Expense Ratio

Expense ratio indicates what proportion of insurers


written premiums is being used to pay acquisition costs, general
expenses and taxes.

Expense ratio compares the underwriting expenses that an


insurer has incurred to its written premiums in a specific time
period.

Expense ratio = Incurred underwriting expenses


--------------------------------------------
Written premium

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Combined and Investment Ratio
Combined ratio compares the inflow and outflows from
insurance operations. It is the sum of the loss ratio and the
expense ratio.

Combined Ratio = Loss Ratio + Expense Ratio.

Investment Income ratio compares the amount of net


investment income with earned premiums over a specific period.
It is defined as
Investment Income ratio = Net Investment Income
-------------------------------
Earned premiums

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Overall Operating Ratio

Overall Operating Ratio is used to provide the overall


measure of the financial performance of the insurance company.

The overall operating ratio is calculated by subtracting the


investment income ratio from the combined ratio.

Overall Operating Ratio = Combined ratio


Investment Income Ratio

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Capacity Ratio
The capacity Ratio compares the insurance companys
written premiums to its policyholders surplus.

Capacity Ratio = Written Premiums


-------------------------
Policyholders surplus

The written premium should not become too large relative to


policyholders surplus, because,
If the losses and expenses exceed written
premium then insurer must use its surplus to
meet its obligations.

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Welcome to Marketing

03/10/17 Insure to Ensure Safety 64


Marketing
Marketing is the process of identifying
customers and their needs and then creating, pricing,
promoting, selling, and distributing products or
services to those needs.

A producer is any person who sells products for an


insurance company or companies.

Agency is a legal relationship that is formed when one


party, the principal, authorizes another party, the agent, to act as
a legal representative of the principal.

An Agency Contract is a written agreement between an


insurance company and an agent that specifies the scope of the
agents authority to conduct business for the insurer.

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Responsibilities

The agency relationship, which is based on mutual trust and


confidence, empowers the agent to act on behalf of the principal and
imposes significant responsibilities on both parties.

It includes

Responsibilities of the agent to the principal


Responsibilities of the principal to the agent
Responsibilities of the agent and principal to
Third parties.

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Authority of Agents

The principal is legally bound by any acts of the agents that


are within the agents authority.

Insurance agents have three types of authority to transact


business on behalf of insurers that they represent.

Express Authority
Implied Authority
Apparent Authority

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Authorities Defined

Express Authority is authority that the principal specifically


grants to the agent.

Binding Authority which is usually granted in the agency


contract, is the authority of an insurance agent to effect
coverage on behalf of a particular insurer.

Implied Authority is authority that arises from actions of


the agent that are in accord with accepted custom and that are
considered to be within the scope of the authority granted by the
principal though such authority is not expressed in the agency
contract.

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Insurance marketing System

Insurance companies have many marketing or


distributing systems, designed to meet their particular marketing
objectives.

Traditional marketing systems like

Independent Agency System


Exclusive Agency System
Direct Writing System
Direct Response System

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Independent Agency System

An independent agency is an independent firm that sells


insurance, usually as a representative of several unrelated insurance
companies.

The agency can be organized as

A sole proprietorship owned by individuals


A partnership owned by two or more individuals
A corporation owned by Stockholders.

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Independent Agency System
People working with independent agency system are

An Independent Agent A producer who works for an


independent agency.

An insurance broker An independent business owner or


firm that sells insurance by
representing customers rather
than insurers.

A Managing General Agency (MGA) - An independent


business organization that appoints and supervises
independent agents for insurance companies that use the
independent agency system.
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Other Agency System

An Exclusive Agent is an agent that has a contract to sell


insurance exclusively for one insurance company ( or a group of
related companies).

The direct writing system of insurance marketing uses


sales representatives who are employees of an insurance
company.

The direct response System includes any insurance


marketing system that does not depend primarily on individual
producers to locate customers and sell insurance but relies mainly
on mail, phone or internet sales.

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Compensation of Products
While some producers receive a salary, commissions provide the
primary form of compensation for producers.

Two types of commissions that producers typically earn are

Sales Commissions
Percentage of the premium that the insurer
pays to the agency or producer for new policies sold or
existing policies renewed.

Contingent Commissions
commission that an insurer pays, usually
annually, to an independent agency and that is based on
the premium volume and profitability level of the agencys
business with that insurer.

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Advertising
In advertising, an independent agency
attempts to attract customers for the agency, and local
advertising agents rather than the various insurers it
represents.

An exclusive agency system, advertising programs


emphasize the name of both insurance company and
agent.
Direct writers tends to emphasize the company itself
rather than individual producers or office location.
Direct response system has no producers, use other
means of advertising and others, working with stable base
relied on free word -of mouth advertising.
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Marketing Management

Insurance companies need some means of managing the


activities of the producers like,

To supervise producers,
To motivate them, and
To provide them with insurance products for sales.

So as to ensure that both the companys and agencys sales


and profit objective are met,.

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Product Supervision

Marketing representatives are insurance company employees


whose roles are

To visit agents representing the insurer to develop and


maintain sound working relationship.
To motivate the agents to produce a satisfactory volume of
profitable business for the insurer.

In some companies Product Underwriters who in addition to


underwriting work, also travel to visit and rapport with agents and
sometimes clients.

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Unfair Trade Practices Law
Unfair Trade Practices Laws are state laws that specify
certain prohibited business practices like,

Misrepresentation and False Advertising - due to


misrepresenting the benefits, terms and condition of
the policy.

Tie in Sales - when one producer ties the purchase of


insurance to some other sale or financial arrangement.

Rebating is offering anything of value than the


insurance itself, to an applicant as an inducement to
buy or maintain insurance.

Other Deceptive practices includes insurer and


agents from making a false statement about the
financial condition of another insurer.
03/10/17 Insure to Ensure Safety 77
Welcome to Underwriting

03/10/17 Insure to Ensure Safety 78


Underwriting

Underwriting is the process in which decides who are


the potential customers to insure and what coverage to offer
them.

It Includes

Selecting insured
Pricing coverage
Determining insurance policy terms and conditions
Monitoring the underwriting decisions made,

Usually done by an underwriter who is an insurance


companys employee.

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Selecting Insured

Proper selection of Insured's prevents the risk of some


insured purchasing insurance that do not adequately reflect their
loss exposures.

An insurance company limits its applicants based on the


following reason.

Adverse selection consideration


Capacity factor consideration.

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Adverse Selection Consideration

An Adverse Selection, a situation where people with


greatest probability of loss are the ones mostly like to purchase
insurance.

Adverse selection normally occurs if the premium is low


relative to the loss exposure.

Poor underwriting may result in adverse selection, so try to


underwriters avoid such situations by screening applications to
identify apt ones, and decline coverage to those present high loss
potentials.

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Capacity Consideration

Capacity refers to the amount of business an insurer is


able to write, usually based on the comparison of the insurers
written premiums to the size of its policyholders surplus.

Insurance companies attempt to protect their available


capacity in three primary ways :

Maintaining a spread of risk


Optimizing use of available resources
Arranging reinsurance

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Maintaining a Spread of Risk
Risk in the world of insurance mean the financial loss.

By spreading their risks among various types of


insurance and different geographic areas, insurance companies
reduce the chances of large number of losses in one type of
insurance or territory.

eg: Toronto might require an insurer to pay extensive


property claims in one community , but these claims would be
balanced against premium from other community that do not
experience in the same year.

03/10/17 Insure to Ensure Safety 83


Optimizing Use of available
Resources
Underwriting and servicing some kinds of insurance require
special skills or experience , and many insurers offer only certain
types of insurance and not others.

eg : An insurer might chose not to accept the applications for


insurance on farms if that insurer does not have personnel
experience in handling farm business.

On the other hand an insurer possession resource capable


of handling farm business will tend to increase its capacity to
write for farmers.

03/10/17 Insure to Ensure Safety 84


Arranging Reinsurance
In Reinsurance, the reinsurer receives a portion of the
premium from the primary insurers policies and assumes some
of the losses on the policies.

The primary insurer usually retains a portion of the premiums


and pays the insured losses on the reinsured policies and then it
is reimbursed by the reinsurer for losses for which the reinsurer is
contractually responsible.

If reinsurer is available then the insurance company can


increase the number of new policies.

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Pricing Coverage

Each insureds premium should be set at a level that is


adequate to pay the loss expenses of the group and in turn earns
reasonable profit to the insurer.

Pricing insurance involves

Classify the applicant according to the loss


exposure.
Determining premium by applying appropriate
rate to the applicants exposure units.

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Premium Determination
Premium is determined by multiplying the rate by the number of
exposure units.
where ,

Rate - The price of insurance charged


per exposure unit
Exposure unit - A measure of loss potential used
in rating insurance.

The premium for property insurance with a limit of $ 250,000 at


a rate of$.40 per $100 of insurance is $1000.

Premium = $250000
---------------- * $.40 per unit = $ 1,000.
$100

03/10/17 Insure to Ensure Safety 87


Determining Policy Terms and
Conditions
The insurer must decide exactly what types of coverage it
will provide to each applicant and then charge a premium
appropriate to that coverage.

In addition to developing loss costs, insurance advisory


organizations develop policy forms using standard insurance
wording and are called as Standard Forms.

When advisory organizations develop insurance policies,


they also develop rules specifying what kinds of insured will be
eligible for certain policies and its up to Insurers to modify or stick
to these rules.

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Monitoring Underwriting Decisions

Underwriters periodically monitor the hazards, loss


experience and other conditions of specific insured to determine
whether any significant changes have occurred. So as to alter
coverage and premium necessary.

Monitoring also applies to underwriting decisions on a entire


Book of Business ( or portfolio).

A book of business is a group of policies with a


common characteristics, such as territory or type of
coverage.
It also refers to all policies written by a particular insurer
or agency.

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Underwriting management
The role of an insurance companys underwriting
management involves various responsibilities.

Participating in the overall management of the insurance


company
Arranging reinsurance
Delegating underwriting authority
Making and enforcing underwriting authority
Monitoring the results of underwriting guidelines.

Underwriting management is the conduit for implementing


these changes.

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Ratemaking

Rate Making is the process by which the


insurers
determine the rates to charge the thousands
(or millions) of similar but independent insureds.

Insurer needs appropriate rates to have enough


money to pay for losses, cover operating expenses, and earn a
reasonable profit.

Ultimately in the long run the insurance company,


exceed the amount it pays for claims and administrative expenses
to remain financially liable in the market.

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Types of Rates

To determine the appropriate premium to charge for coverage,


insurers use either rates or individual rates.

Class rates (manual rates):


Those rates apply to all insureds in the same
rating category, or rating class.
Merit rates :
Rating plans that modify class rates to reflect
loss characteristics of a particular insured.

eg: In home owners insurance, insurers typically


provide premium discounts for insureds with fire alarm or
burglar alarms.

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Types of Rates

Individual Rates (Specific Rates) :


Used to assign a specific insurance rate that
reflects the unique characteristics of an insured
or the insureds property.

A judgment rate :
Type of individual rate used to develop a premium
for a unique exposure for which there is no
established rate and the underwriter relies heavily
on his or her experience .

eg: Judgment rating is often used in rating ocean marine


insurance covering many types of cargo being transported to
ports worldwide.

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Underwriting process
To make decisions underwriters use

Expert Systems ( Knowledge- Based Systems) :

These computerized system are programmed


to emulate the under writing decision making process as it
would be performed by expert underwriters.

Steps in underwriting process are

Gathering the necessary information


Making the underwriting decision
Implementing the decision
Monitoring the decision
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Making the Underwriting Decisions

Once the underwriter has gathered the necessary


information, he or she must analyze the information to determine
what hazards, the applicant presents.

Hazards are conditions that increase the chance of a loss


occurring and an underwriter must evaluate the following
hazards,

Physical Hazard are tangible characteristics of


property , persons or operations that tend to increase
the probable frequency or severity of loss.

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Analyzing Hazards

Moral hazards are dishonest tendencies in the character


of the insured that increases the probability of a loss
occurring.

Morale hazards or attitudinal Hazards involve


carelessness about, or indifference to, potential loss on the
part of an insured or applicant.

Legal Hazards are the characteristics of the legal or


regulatory environment that affect an insurers ability to collect
a premium commensurate with the exposure to loss .

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Welcome to Claim Handling

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Claims

Claim is a demand by a person or business seeking to


recover from an insurance company for a loss that might be
covered by an insurance policy.

A claim representative or adjuster is a person


responsible for investigating, evaluating, and settling claims.

A claimant is anyone who submits a claim to an insurance


company. In liability claims the claimant is the third party that has
suffered a loss and seeks to collect the loss from then insured

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Claim Handling

Claim handling enables insurance companies to determine


whether a covered loss has occurred and decides the amount to be
paid for the loss.

The role of the claim representative is to satisfy the insurers


obligations under an insurance policy

by

Promptly responding to claims,


Gathering information to respond to claims,
Finally reaching a fair settlement.

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Responsibilities of the Claim
Representative
The claim representative must verify whether the claim is
covered under the policy, then he may send a Reservation of
rights letter to the insureds policy.

Reservation of rights letter serves for two purposes namely

To inform the insured that a coverage problem might


exist
To protect the insurer so that it can deny coverage
later, if necessary.

And, finally the claim representative should determine the


dollar amount payable under the policy.

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Types of Claim Representative

Several type of claim representatives who perform the


complex claim handling activities depending on the circumstances:

They are
Staff claim representatives
Independent adjusters
Agent
Public adjusters.

In addition, an organization that has established a self


insurance plan must make provisions to settle its own claims by
using either an internal claim department or an outside
administrator.

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Staff Claim Representatives
Most insurance companies have at least two kinds of staff
claim representatives

Inside Claim Representative

Those who work exclusively inside the office to


handle the claims, usually through telephone or letter.

Outside Claim Representative

Those who travel to the site of loss to perform claim


investigations and evaluations, interviewing witnesses,
investigating damage and is a part of the insurers
staff located in a branch office.
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Independent Adjusters

Independent claim representatives offer claim handling


services to insurance companies for a fee.

They can be either be either self-employed or


work for an independent adjusting firm.

Expert independent adjusting firms can meet the


special claim handling needs of the insurance
companies.

In case of natural disasters, independent adjusters


can handle huge claims along with their claim
handling staffs to meet the obligations.

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Agents and Public Adjusters

In exclusive agency, the agency usually contains one


person , several people, or a department responsible for handling
claims.

If the agents has draft authority i.e. authority given by the


insurer to settle the claim by writing a claim draft up to specific
limit.

On the other hand , a public adjuster is a person hired by a


insured to represent the insured in handling a claim and he acts
as an advocate for the insured in the negotiation.

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Internal Claim Administration
A self insurance plan is an arrangement in which an
organization pays for its losses with its own resources rather than
purchasing insurance.

However, the organization might choose to purchase


insurance for losses that exceed a certain limit.

Organizations with self-insurance plans has two provisions for


handling claims, namely

Internal Claim Departments


organizations personnel to handle claims.
Third party Administrators
Business firm that contract to provide
administrative services to other business.

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The Claim Handling Process
Claims vary for different cases, but despite of unique
challenges the same three steps is involved in the process of
most claims.

They are

Investigation
Valuation
Negotiation

But the manner these claims handled are different from


property insurance claims and for liability insurance claims.

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Investigation
Investigation begins when the claim representative
receives the initial report of a claim, he or she must investigate to
gather further information relevant to the loss.

It involves,

Determining the causes the loss and assessing


damage.
Verifying Coverage by confirming whether the insured
have an insurable interest in the property, damaged
property and the cause covered under the policy.

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Valuation

Valuation of the property includes

Actual cash value Replacement cost minus depreciation


Replacement Cost The cost to repair or replace
Agreed value The value agreed for the property
at the time of policy.

If the property loss occurs , the insurer will pay the agreed
value, without regard to the exact value of the property at the time of
the loss.

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Replacement Costs

The replacement costs for the Real property is usually estimated


by using the following factors

Square footage of the property


If the property is damaged then its area can be
calculated from the blue print.
Quality of construction
Deals with quality ,for Eg: an house with furnished
high quality working will have a greater
replacement cost than a normal house.
Construction cost per square foot
Here the replacement can be found by multiplying
the square footage and cost per square foot.

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Negotiation and Settlement
After investigation and valuation of the claim handling
process, the claim representative and the insured
negotiates on the loss and settlement of claim.

Once the claim representative and the insured agree on


the amount of the settlement , the following affects the
insurers cost of property claims,

Subrogation Insurer's right to recover payment from a


negligent third party.
Salvage rights The rights of the insurer to recover and
sell or otherwise dispose of the insured
property on which the insurer has paid a
total loss.

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Liability damages
Legal liability cases might involve the following types of damages

Compensatory Damages includes both special and


general damages that are intended to compensate a victim for
harm suffered.
Special damages Specific, out-of-pocket expenses, such
as doctor and hospital bills.
General damages losses such as pain and suffering, which
do not have a specific economic value.
Punitive Damages awarded by court to punish wrong doers
who, through malicious or outrageous actions, cause injury or
damage to others.

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Unfair Claim Practices laws

Unfair claim practices law are state laws that specify claim
practices that are illegal.

The prohibited claim practices includes

Misrepresentations of pertinent facts or insurance


policy provisions
Failure to promptly responding to the Claims
Actions that compel an insured to sue to recover
amounts that are substantially lower than those
covered.
Refusal to pay the amount without first conducting a
reasonable investigation based on all available
information.

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Welcome to Insurance Contract

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Insurance Contracts

Insurance contract is the insurance


companys promise that, it will pay claims in the future
for losses that are covered under the policy.

An insurance contract, called a policy, is a complete


written contract of insurance .The validity of a contract depends
on four essential elements:

Agreement (offer and acceptance)


Competent parties
Legal Purpose
Consideration

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Characteristics of Insurance
Contracts
The Wording of insurance policy reflects certain fundamental
principles of insurance. An insurance policy generally contains distinct
characteristics

A personal Contract
Insurers right to select Insureds.
A Conditional Contract
Action performed under Specified
condition.
A contract of Utmost Good Faith Concealment and
Misrepresentation.
A contract of adhesion Rules insureds should stick to.
A contract of Indemnity To recover an insured from covered
loss.
A contract Involving the exchange of unequal amounts

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Insurance Policy Provisions

The best way to determine the coverage provided by a


particular policy is to examine its provisions in the policy.

They are
Declarations
Definitions
Insuring Agreements
Exclusions
Conditions
Miscellaneous provisions.

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Self Contained Policy
Insurance Companies use two approaches to structuring an
insurance policy manuscript or standardized.

A policy can be either Self contained or modular.

A Self contained policy is a single document that contains


all the agreements between the insurer and the insured and that
forms a complete policy by itself.
eg: Personal auto policy is a self contained policy
An endorsement is a document that amends /apology an
insurance policy in some way. It may delete or add coverage,
include state specific changes, show a change in the insureds
exposure or otherwise modify the policy.

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Modular Policy
A modular policy consists of several different documents,
none of which by itself forms a complete contract. It combine
coverage forms and other documents to tailor a policy to the
insureds needs.
eg: Commercial package policies (CCPs).

All CCPs must contain,

Common Policy Considerations It contains information


that applies to entire policy , such as the name and address
of the insured.
Common Policy Conditions It contains standard condition
that applies to all CCPs regardless of the coverage included

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Conditions Found in Property and
Liability Policies
The conditions provide the rules for the
relationship between the insurance company and the
insured, using which the operation becomes efficient.

Conditions common to most property and liability


insurance policies , both personal and commercial,
includes

Cancellation
Changes
Duties of the insured after a loss
Assignment
Subrogation

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Cancellation

Cancellation refers to the termination of a policy by either


the insurer or the insured , during the policy period.

Cancellation may be because of

Cancellation by the insured


Cancellation by the Insurance company

Prior written notice is must in both the process to avoid


dispute over a cancellation request.

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Cancellation

When a policy is canceled, the insured might be entitled to a


refund.

If the insurance company cancels the policy , the


return premium is calculated on pro rata refund, which is the
unused premium returned to the insured when a policy is
canceled.

If the insured cancel the policy , the return premium is


calculated on Short rate fund and it would be obvious less than
the Pro Rata refund.

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Changes
Many policies contain a policy change provision stating
that the written insurance policy contains all the agreement
between the insurer and the insured and the term of the policy
can be changed only by a written endorsement issued by the
insurer.

A liberalization clause is a policy condition that


provides that if a policy form is broadened at no additional
premium, the broadened coverage automatically applies to all
existing policies of the same type.

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Duties of the Insured After a Loss

Insureds part is high in settling a loss,

If a covered loss is to be paid ,promptly, the insurer must be


informed that the loss occurred .
Insured should prepare an inventory of damaged and
undamaged property and protect the property from further
damage.
Liability Insurance policies usually require that the insured
promptly forward all papers regarding a claim or suit to the
insurer.

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Assignment and Subrogation

Assignment is the transfer of the rights or interest


in a policy to another party by the insured. Most
policies cannot be assigned without written permission
of the insurer.

It is also called Transfer of your Rights and Duties


Under This Policy , which makes clear that assignment is not
permitted without the written consent of the insurer.

Subrogation is the insurers right to recover payment from a


negligent third party for losses the insurer has paid to an insured.

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Welcome to Property Loss Exposure

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Property Loss Exposure and Policy
Provisions

A Property loss exposure is any condition or situation that


presents the possibility that a property loss will happen.

The three main aspects of property loss exposure are

Types of Property
Causes of loss
Financial Consequences

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Types of Property

Property is any item with value. Property can decline in


value or even become worthless if it is lost, damaged or
destroyed.

Two types of property are,

Real property - Land and any property attached to it.


eg : A house, a storage shed, flagpole.

Personal property - All tangible and intangible property


that is not real.
eg : Money, automobiles, patents and
copy rights.

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Property By Insurance
Insurance practitioners use categories that relate to the
insurance treatment of property such as

Buildings
Personal Property
Money and Security
Motor Vehicles and Trailers
Property in Transit
Ships and their Cargo
Boilers and Machinery

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Buildings
Buildings includes all Properties that are permanently attached
to the structure, such as
Wall to wall carpeting
Built-in appliances
Paneling
Personal property includes the contents contained inside
the building. The contents of a commercial building might include

Furniture and fixtures


Machinery and equipment
Stock
So, when the contents of a commercial building are
involved, policies generally use the term business personal
property.

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Money and Securities
Money means currency, coins, and bank notes.
Travelers checks, credit card slips, and money
orders
held for sale to the public are also considered money
in some cases.

Securities are written instruments representing either


money or other property. Stocks and bonds for example, are
securities.

Money and securities are also light in weight, easily


concealed, and easy to transport.

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Motor Vehicles and Trailers
To identify property loss exposures, motor vehicles are
categorized into three types namely

Autos and other highway vehicles


It includes vehicles like car ,trucks such
those designed for use on public roads.
Mobile equipment
It includes Off road vehicles like tractors,
bulldozers, road graders.
Recreation vehicles
It includes vehicles like dune buggies,
all - terrain vehicles, dirt bikes and most

snow mobiles.

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Boilers and Machinery
Boilers and machinery share two characteristics

Those susceptible to explosion or breakdown that can result


in serious financial losses.
Those less likely to have explosion or breakdown if they are
periodically inspected and properly maintained.

So as others include ships and cargo which are exposed to


special perils that are not encountered in the other means of
perils.
eg: If the ship is not able to reach the intended designation
and the cargo must be sold in a different port which may result in
fluctuation of the expected price.

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Cause of loss to Property

A cause of loss (or peril) is the actual means by which


property is damaged or destroyed like fire, lighting, windstorm,
hail and theft.

Named perils are listed and described in the policy , only


these named perils are covered.

Special form coverage ( open perils) provides coverage to


risks of direct loss i.e. coverage is provided for any direct loss to
property unless the loss is caused by a peril specifically excluded
by the policy.

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Financial Consequences of
Financial Losses
The loss of or damage to property can have undesirable
financial consequences .

The adverse financial effects of a property loss might occur


in any of the following ways

Reduction in the value of the property


Loss Income
Increased Expenses

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Reduction in value of Property
When a property loss occurs, the property is reduced in
value.

The reduction in value can be measured in different ways.

If the property can be repaired or restored , the


reduction in value can be measured by the cost of the
repair or restoration.
Replacement cost is the cost to repair or replace
property using new materials of like kind and quality with
no deduction for depreciation.

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Loss Income and Increased
Expenses
When property is damaged, income might be lost as the
income producing capacity of the property is reduced or
terminated until the property is repaired, restored or replaced.

The additional expenses may be due to acquiring a


temporary substitute or in temporarily maintaining the property in
usable condition.

eg : A family whose house is damaged might have to live in a


hotel temporarily at considerably greater expense than living at
home

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Parties Affected by Property Loss
Parties that might be affected by a property loss include the
following:

Property owner - owns the property.


Secured Lenders
Secured even when the borrower fails
to make loan payments.
Users of Property
Events results in losses to users of the
damaged property.
Other Holders of Property
A Bailee is a person or business that holds
the property of others for some specific
purpose.

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Property Insurance policy Provisions
Property insurance policy must clearly specify exactly

Which property loss exposures are covered


- the types and locations of property, cause of loss,
and the financial consequences that are covered.
What parties are covered
How the value of insured property will be determined.

Property other than the insureds buildings and contents include

Autos
Non owned property
Movable property

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Covered Cause of Loss
Property and commercial property insurance policies on
buildings and personal property are available with three different
degree of coverage's namely,

Basic form Coverage The lowest cost version that


provides coverage for
approximately dozen named perils.
Broad form Coverage A highest cost version of coverage
that adds several perils to those
covered by basic coverage
Special form (open perils) Includes all cause of losses that
are not specifically excluded.

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Basic Form coverage
The following are the causes of loss , generally included in
both commercial and personal policies , that provides basic form
coverage

Fire and lighting


Windstorm
Hail
Aircraft
Vehicle Damage
Riot and civil Commotion
Explosion
Smoke
Vandalism

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Board Form coverage

Broad form coverage includes those not included in the


basic form coverage

Breakage of glass
Falling objects
Weight of snow, ice or sleet.
Sudden and accidental water damage
Collapse
Crime perils

Some policies the perils of theft and others covers only a


specific type of theft like burglary and robbery.

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Auto Physical Damage
Insurance policies that provide auto physical damage
coverage offer the following types of coverage

Collision Covers the damage to an insured


motor vehicle.
Comprehension Covers losses due to fire, theft,
( other than collision) vandalism etc

Specified causes of loss Less expensive alternate to


comprehensive coverage in
commercial auto policies.

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Cause of Loss Often Excluded
Certain insurance policies contain exclusions for
several reasons like,

To avoid covering uninsurable losses


To avoid insuring losses that could be prevented,
duplicate coverage and to keep insurance premium
reasonable.

It includes
Catastrophe perils - war and nuclear risks
Coverage on ocean going vessels and cargo.
Maintenance perils - Wear and tear, Marring and
scratching, rust, Gradual,
damage by insects, etc

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Amounts of Recovery

Amounts of recovery says how much will an insurer pay to a


covered party with a insurable interest.

It depends on the following provisions namely,

Policy Limit
Valuation Provision
Settlement Options
Deductibles
Insurance to value provisions
Other insurance provisions.

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Policy Limit and Valuation
Provision
A policy limit

Tells the insured the maximum amount of money that can


be recovered from the insurance company after a loss.
Tells the insurer the maximum amount it may have to pay
for a covered loss.
For most property insurance coverage , the premium
charged is directly related to the policy limit.

Two most common valuation approaches in property insurance


policies are

Replacement cost
Actual cash Value

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Settlement Options

Property insurance policies usually give the insurer the


choice of different ways to settle a loss.

The Insurer generally has the following options

Paying the value


Paying the cost to repair or replace the property
Repairing, rebuilding, or replacing the property with
other property of like and quality.

These options for settling property loses can often reduce


the insurers costs of settling claims without diminishing the
insureds actual indemnification.

03/10/17 Insure to Ensure Safety 146


Deductibles and Insurance to Value
Provisions
A deductible is a portion of a covered loss that is not paid by
the insurer. The deductible is subtracted from the amount the
insurer would otherwise be obligated to pay the insured.

Insurance to value provisions are provisions in property


insurance policies that encourage insureds to purchase an
amount of insurance that is equal to , or close to, the value of the
covered property.

Coinsurance is an insurance to value provision in many


property insurance policies. If the property is underinsured, the
coinsurance provision reduces the amount that an insurer will
pay for a covered loss.

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Welcome to Liability Loss Exposure

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Liability Loss Exposure And Policy
Provision

Definition:

A liability loss exposure is any condition or situation that


presents the possibility that a liability loss will happen.

Basic understanding of legal liability is essential for anyone


dealing with liability loss exposures.

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Why Laws?

Law exists in civilized society to enforce certain


standards of conduct and accomplishes its objective
by
holding people responsible for their actions.

The legal System is derived from

The Constitution - Source of Constitutional Law


Legislative Bodies - Source of Statutory Law
Court Decisions - Source of Common Law

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Constitutional Law
Constitutional Law consists of the Constitution itself and all the
decisions of the Supreme Court that involves the constitution.

It specifies
The structure of the federal government
Outlines the respective powers of the legislative,
executive, and judicial branches of the government.
It guarantees certain fundamental rights such as

Freedom of speech
Freedom of religion
Freedom from unreasonable searches, right to trail by
jury.
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Statutory Law
Statutory Law consists of the formal laws, or statues,
enacted by federal state, or local legislative bodies.

It Includes

A bill receiving a majority of vote in both Senate and the


House, becomes a Law on presidents sign.
The laws made by the local government are often called
ordinances
Agencies like Federal trade Commission, the Environmental
protection agency have regulatory powers granted by the
legislative bodies to cover a particular public concern.

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Criminal Law

Criminal law that applies to wrongful acts that society


deems so harmful to the public welfare that government takes the
responsibility for prosecuting and punishing wrongdoers.

Criminal Law prohibits murder, rape, robbery,


arson, theft, and driving while intoxicated.

Crimes are punishable by fines, imprisonment, or,


in some states even death.

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Civil Law

Civil law is the category of law that deals with the rights and
responsibilities of citizens with respect to one another and applies to
legal matters that not governed by criminal law.

Civil law protects personal and property rights and thus


contributes to the welfare and safety of the society.

If someone invades the privacy or property of other , the


injured may seek amends in court.

Contract law is the branch of civil law that deals with


contracts and settles contract disputes.

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Elements of Liability Loss Exposure

A liability loss exposure involves the possibility of


one party becoming legally responsible for injury or harm to
another party.

The elements of such exposure are

The legal basis of a claim by one party against


another for damage.
The financial consequences that might occur
from a liability loss.

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Legal Basis of Liability Claim

For injured party to have the recover from liable party,


some principle of law must create a link between two parties.

The different aspects of civil law that can give an injured


party the legal basis for recovering damages from another party
are

Torts
Contracts
Statutes

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Torts

A tort is any wrongful act other crime or breach of


contract, committed by one party against the other.

Tort law determine the responsibility for injury or


damage, Under which an individual or organization can
face a claim for legal liability on the any one of the following
basics namely,
Negligence
Intentional Torts
Absolute Liability
Tort law is based on common law.

03/10/17 Insure to Ensure Safety 157


Negligence

Negligence is failure to act in a manner that is reasonably


prudent and usually occurs when a person or organization fails to
exercise the appropriate amount of care under given
circumstances.

A liability judgment based on negligence depends on the


following,

A duty owed to another


A breach of that duty
Injury or damage
Unbroken chain of events between the
breach of the duty and the injury or damage.

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Intentional Torts
A deliberate act other than breach of contract that cause harm
to another person , regardless of whether the harm is intended.

Intentional torts include,

Assault -
Intentional threat of bodily harm
Battery -
Unlawful physical contact
Libel -
Written untrue statement
Slander -
Oral untrue statement
False Arrest -
Unlawful physical restrain of
anothers freedom
Invasion of privacy - Violation on another persons right
to be left alone.

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Absolute Liability

Absolute liability is legal liability that arises from


inherently dangerous activities or dangerously defective products
that results in injury or harm to another, regardless of how much
care was taken.

Its also called as Strict liability.

eg: The owner of wild animal, such as snake or circus lion,


is liable for any injury caused by the animals regardless of how
much care was taken.

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Contracts

Contract law enable an injured party to seek recovery


because another party has breached a duty voluntarily accepted
in a contract.

Two areas of contract important to insurance are

Liability assumed under contract.


Breach of Warranty

Hold Harmless agreement is a contractual provision that


obligates one party to assume the legal liability of another.

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Statutes

Statutory liabilities is the legal liability imposed by a specific


statute or law.

Common law may cover a particular situation , statutory laws


may extend ,restrict, or clarify the rights of the injured parties in that
situation or similar ones.

Prominent examples are

No Fault Auto Laws - to minimize legal proceedings


Work Compensation Laws - to benefit the employee.

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Potential Financial Consequences
of Liability Loss
A person must sustain some definite harm for
a liability loss to result in valid claim.

It includes

Damages
For those who can show that
actual harm or loss occurred
due to negligence.
Defense Costs Those who required to defend
themselves in court.

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Activities leading to Liability Loss
Liability loss exists whenever some activity or relationship can
create liability to others.

Possible liability exposures are,

Automobiles and other conveyances


Premises
Business operations
Completed operations
Products & Advertising
Pollution & Liquor
Professional activities

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Difference b/w Property & Liability
Loss exposures
Property insurance claim usually involves two parties
namely insured, insurer where as Liability includes an additional
person called claimant who bring legal complaints against the
insured for injury or damage.

In Property insurance insurer pays for the covered loss to


the insured, where as in Liability insurance insurer pays to a third
party on behalf of insured.

Property Insurance should clarify which property cause of


loss the policy covers, where as liability indicates the activities and
types of injury or damage that covered.

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Terms in Liability Policy

Named Insured is the policy holder whose name (s) appears


on the declaration page of an insurance policy.

Bodily injury is any physical injury to a person, including


sickness, disease and death.

Property damage is physical injury to, destruction of , or loss


of use of tangible property .

Personal injury used to mean injury, other than bodily injury


arising out of intentional torts , libel, slander or invasion of privacy.

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Terms in Liability Policy

Advertising injury includes Libel and slander, publication


of material that constitutes an invasion of privacy,
misappropriation of advertising ideas and infringement of
copyright, title, or slogan.

Litigation expenses are the expenses incurred for legal


defense, such as attorneys fees, expert witness fees and the
cost of legal research.

Supplementary payments are amounts the insurer agrees


to pay( in addition to liability limits) for items such as premium on
bail bonds, loss of insureds earnings because of attendance at
trails.

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Terms in Liability Policy

Pre judgment interest is interest that might accrue on


damages before a judgment has been rendered.

Post judgment interest is interest that might accrue on


damages after a judgment has been entered in a court and before the
money is paid.

Occurrence basis coverage covers liability claims that occur


during the policy period, regardless of when the claim is submitted to
the insurer.

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Terms in Liability Policy

Claims made coverage covers liability claims that are


made during the policy period for covered events that occur on or
after the retroactive date and between the end of the policy.

A retroactive date in a claims made policy is the date on or


after which injury or damage must occur in order to be covered.

An each person limit is the maximum amount an insurer will


pay for injury to anyone person for a covered loss

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Terms in Liability Policy
.
An each occurrence limit is the maximum amount an insurer
will pay for all covered losses from a single occurrence.

An aggregate limit is the maximum limit an insurer will pay


for all covered losses during the covered policy
period.

A Split limit are separate limits that an insurer will pay for
bodily injury and for property damage.

A single limit of liability is the maximum amount an insurer will


pay for the insured's liability and property damage that arise from a
single occurrence.

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Welcome to Risk Management

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Purpose

To provide a brief insight into loss exposures


management.

Typically includes

Risk management objectives


Steps involved In Risk management
Benefits of Risk Management.

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Risk Management & Steps Involved

Risk Management is the process of making and


implementing decisions to deal with loss exposures.

It demands careful attention in all well managed


household or organization regardless of its nature involving the
following steps.

Identifying and analyzing loss exposures


Examining Risk Management Techniques
Selecting more appropriate Technique
Implementation of selected Techniques
Monitoring and Modifying the Techniques

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Identifying Loss Exposures
Identifying involves developing a complete list of loss exposures
and the possible accidental losses which may affect the household or
organization.

It involves the following steps


Physical inspection - Physically inspecting all the
locations ,operations, maintenance routines,
safety and other activities.
A loss exposure survey - A checklist or questionnaire
listing the potential losses.
Flowchart - Diagram that depicts the flow of a particular
operation or set of related operations
within
the organization.
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Analyzing Loss Exposures

Analyzing involves how often losses may occur and to


determine how these losses might interfere with the activities and
objectives of the household or organization.

It involves determining the financial effect of a potential


loss by measuring
Loss Frequency
Loss Severity of the losses.

Analyzing enables the risk manager to


priorities the significant exposures.

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Analyzing Methods

Loss Frequency indicates how often losses occur or


expected to occur, thus used to predict the likelihood of similar
losses in the future.

eg: Losses like minor auto accident , spoilage of super


market products occur much frequently than earthquake and
hurricanes
.
Loss Severity refers to the dollar amount of damage that
results or might result from loss exposures, thus used to predict
how costly future losses are likely to be.

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Risk Management Techniques

After identifying and analyzing the loss exposure, all


possible techniques should be examined for treating the
exposure, which includes

Avoidance
Loss Control
Retention
Non Insurance Transfer
Insurance

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Avoidance

Avoidance eliminates the chance of a particular type of


loss by either disposing of an existing loss exposure or by not
assuming a new exposure.

eg: A manufacture of sports equipments might


decide not to manufacture football helmets to its line
of product to avoid the possibility of large lawsuits
from head injuries.

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Loss Control
Loss control involves procedure to lower the frequency or
severity of losses.
This technique is rarely used by itself and is often most
effective when used in conjunction with other risk management
techniques.

It includes

Loss prevention - to control the number of losses.

Loss reduction - to decrease the dollar amount of losses.

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Retention

Retention involves retaining all or part of a


particular loss exposure. Thus the organization or
household must pay for losses resulting from the
exposure with its own funds or from its own assets.

Retention May be either Intentional or unintentional,


but mostly they are unintentional due to the lack of exposure
identification or analysis.

eg: A restaurant might not identify its liability exposure


serving too many alcohol to a customer.

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Non Insurance Transfer

Non Insurance Transfer involves, one party transferring


the potential financial consequences of a particular loss exposure to
another party that is not an insurance company.

eg: The landlord of a commercial building might wish to


transfer the liability exposure arising out of activities of a tenant.

Here, transfer is accomplished by having the tenant signed


Hold harmless agreement, which is a contractual provision in
which one party assumes the legal liability of another party.

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Insurance

Insurance is the most effective method of risk


management where one can transfer financial consequences of
specified losses from one party to the insurance company in
exchange for a specified fee called premium.

eg: A family purchasing home owners


and personal auto policies from an
insurance company.

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Selecting Appropriate Technique

Selecting appropriate risk management technique


involves basically two factors namely,

Decisions based on Financial Criteria


Done by business organizations that are accustomed to
reaching decisions based on expected profits and other financial
standards.

Decisions based on Informal Guidelines


Done by business organizations that are less financially
oriented.

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Informal Guidelines
Most households and small organizations follow less
formal guidelines in selecting risk management techniques
namely,

Do not retain more than you can afford to loss.


Do not retain large exposures to save a little
premium.
Do not spend a lot of money for a little protection.
Do not consider Insurance a Substitute for loss
control.
Do not consider Insurance a substitute for loss
control

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Implementing the Chosen Technique

The following decisions should be considered by the risk


manager of an organization before implementing the chosen
technique,

Deciding what should be done


Deciding who should be responsible
Communicating Risk Management Information
Allocating costs of the Risk Management
Program.

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Monitoring and modification

Monitoring the risk management program is an ongoing


activity which includes handling routine matters like updating
fleets of vehicles.

To monitor and modify the risk management program , the


risk manager should periodically identify and analyze new and
existing loss exposures, Reexamine, select, and implement
appropriate risk management techniques

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Benefits of Risk management

Insurance is an essential part of most sound risk management


programs. Risk management has many advantage over merely buying
insurance.

They are

Benefits to Business
Benefits to Individuals
Benefits to Families
Benefits to society
Benefits to Insurers.

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Costs of Insurance

Benefits of insurance are not cost free, still it


outweighs the costs and provides tremendous economic
and social benefits.

Major Costs of insurance are

Premium paid by insureds


Operating costs of insureds
Opportunity costs
Increased losses
Increased lawsuits

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Benefits of Insurance

On the whole the benefits of insurance are as follows,

Payments for the costs of covered loss,


Reduction of the insureds financial uncertainty,
Loss control activities of insurance company,
Efficient use of resources,
Support for credit,
Satisfaction of legal requirement,
Satisfaction of business requirement,
Source of investment funds and
Reduction of social burdens

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Reference

Books:

Property and Liability Insurance Principles ( INS 21) by


Constance M. Luthardt . Third Edition(1999).

Web:
www.googleimages.com
www.animationfactory.com

Thank you.!

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