Chapter 1 - Fundamentals of Insurance 100% Solved

Chapter 1 - Fundamentals of Insurance 100% Solved Spread of Risk - "The losses of few are shared among the many" - A large pot into which all insureds place their premiums - This pot provides for payment for the losses of those who have claims Basis of Credit System Consumer access to insurance frees up credit Eliminates Worry - Encourages Entrepreneurship - Allows people to engage in many ventures w/o having to set money aside (for future losses) - Premium (defined expenditure) - Covers large but uncertain losses - making you _________. Loss Prevention and Loss Reduction - Nation-wide campaign to fight Insurance Fraud - Industry works hard to prevent and reduce severity Source of Employment and Investment Capital - Insurers are major employers and investors - Insurers employ or contract services from more than 100,000 people, including: independent brokers, adjusters, and actuaries. - Car repair, construction, medicine, law, and accounting derive income from the settlement of insurance claims. - Claims total billions annually. Definition of Insurance - "The undertaking by one person to indemnify another person against loss or liability for loss in respect of certain risk or peril to which the object of insurance may be exposed ... or to pay a sum of money or other thing of value upon the happening of a certain event." Insurance ... - Provides a means of shifting ones financial responsibility for a loss to another party. Payment will be made only in the ... - Event of the happening of a certain risk or peril. Risk - "The chance of financial loss to which the object of insurance may be exposed." Insurance is purchased to .. - Cover the chances of financial loss Risk has also come to mean the ... - "The object of insurance." Peril - "The cause of loss" - i.e. fire, wind, or hail Amount of Payment is restricted to the amount required to indemnify the insured - purpose is to indemnify or compensate the victim of loss Principle of Indemnity - Ensures that people receive the actual amount of their loss, no more, no less. - More than loss would enable people to profit - To pay them less would result in incomplete indemnity Insurance covers losses to which the object of insurance may be exposed - Pay for losses which are both accidental and future. - Not deliberate or already occurred. The indemnity provided can be in the form of ... - a sum of money - a thing of value - the Insurance company always has the right to settle a claim on the basis of repair as opposed to payment Property and Casualty Insurance in Canada - Automobile insurance - Property insurance - Liability insurance Automobile Insurance - Largest single class of property and casualty insurance with premiums exceeding those for all other classes combined. Property Insurance - Habitational and business properties represent the second largest source of premiums to insurers. Liability Insurance - Provides protection when insureds are financially responsible for injury or damage they cause to others. - Third major source of income to insurers Organizations of Insurance - Private insurance companies - Government insurers Private Insurers (a) Stock Companies (b) Mutual Companies Stock Companies - Most insurance written today = stock - Operates through private funds or through public sale of stock - Ownership is with the company's shareholders - Their main purpose? "to derive a profit from their investment." Mutual Companies - Corporation owned by policyholders. - Creation of Profit = Not primary incentive - Their main purpose? "To provide policyholders with insurance at as low as possible." Government Insurers -Fed/Prov governments are involved in providing various insurance plans: including medical, employment, and workers comp. - BC/SASK/MAN/QUE - Compulsory auto insurance coverage to residents How Insurance is Distributed? - Direct Writing System - Independent Brokerage System - Agency System Direct Writing System - Producers are employees of the insurer and are limited to selling only those products provided by in the insurer. - Remuneration may be: a salary or commission basis or combination of salary and bonus - Owns all of business written/ performs all admin functions -Bel Air, RBC Insurance, Desjardin Insurance company Independent Brokerage System - 7,000 + independent brokerage insurance offices in Canada - Employing over 30,000 people & estimated that 80% of all property/casualty insurance is sold through this system. - also used to distribute auto insurance in BC/SASK/MAN - Brokerage owns the business it produces and is responsible for policyholders with a number of client services - Commission based pay Agency System - ______ are distinct from brokers and direct writers - _______ represent one insurer and the Facility Association, but ______ are small business owners. - Paid commission and bonuses for the business they sell and agents have ownership in their book of business - State Farm / Corporates General Insurance Company Departments of an Insurance Company 1. Administration 2. Claims 3. Finance 4. Marketing 5. Underwriting 1. Administration: 1. Human Resources - Hiring/Training/Staffing Organization 2. Legal - compliance with all prov/fed statutes 3. Materials Management - physical management of assets 4. Management Information System - producing reports 2. Claims - most important department in insurance company - to see that all valid insurance losses are investigated properly and paid promptly - ensure that the principle of indemnity is maintained at all times. 3. Finance - Corporate investments, broker statement preparation, accounts payable and receivable, payroll, pensions, employee benefits, and financial statement preparation for senior management as well as for provincial and federal governments 4. Marketing - to indicate the department that is responsible to develop the insurance products required by consumers thus enabling the company to grow and profit. - also responsible for the distribution/promotion of the products to the system or representatives. 5. Underwriting - Responsible to develop proper statistics to enable the company to price their insurance products properly - ensure that the premium charged by the company is adequate to pay all insured losses that occur and expense related to losses. Reinsurance (Transfer) - is a contractual arrangement under which one insurer (the reinsured), transfers to another insurer (the reinsurer), some or all of the reinsured's obligations under primary policy - reinsurance allows an insurer to transfer a portion of its risk to another organization, called the reinsurer. Retrocessions/Retrocessionnaire (Reinsurance) - Reinsurers can in turn reinsure some of the loss exposures they assume under reinsurance contracts (retrocessions) - the insurer or the reinsurer to which the exposure is transferred is known as the (retrocessionnaire) Why Reinsurance? 1. Underwriting Capacity. 2. Maintaining Proper Reserves 3. Catastrophe Protection 4. Retirement from a Class of Business 1. Underwriting Capacity - _______________ is the amount of coverage that an insurer can reasonably assume. - Few insurers have enough resources to independently write the millions of dollars of coverage that a large organization may need - allows an insurer to underwrite large exposures, and retain only that portion of the risk that it can bear 2. Maintaining Proper Reserves (Premium Capacity) - is the aggregate premium volume an insurer can safely write in a given accounting period - this is limited by the Insurance Acts and generally accepted accounting principles 3. Catastrophe Protection - Earthquakes, hurricanes, tornadoes - suddenly obligate insurers to pay millions of dollars to help insureds finance recovery from such losses - reinsurance allows most potentially catastrophic exposures to be distributed among many insurers, reinsurers, and retrocessionnaires Retirement from a Class of Business - an insurer might decide to withdraw from a class of insurance activities - can obtain reinsurance to avoid incurring ill will, adverse publicity, and perhaps lawsuits by simply cancelling its policies Classification: reinsurance contracts can be classified according to the following two characteristics: 1. How they describe the way in which insurance is to be placed 2. How they apportion the obligations and the premiums received between the insurer and the reinsurer Treaty Reinsurance - deals informly with reinsured policies Facultative Reinsurance - deals separately with individual reinsured primary policies Reinsurance contracts are either ... 1. Proporitional 2. Non-Proportional Proportional Reinsurance - the reinsurer and insurer divide all premiums and losses according to some fixed percentage Non-Proportional - the reinsurer bears only the upper portion of large losses, as defined in the reinsurance contract, and receives some part of the premium for losses the reinsurer pays (Most reinsurance today on this basis) The Major Function of insurance is to achieve a spread of risk. Explain what is meant by, "Spread of Risk." Spread of Risk: Identify and provide a brief explanation of the 5 important points when defining ... Insurance: Risk? = Peril? = Three types of insurance included within the broad are of... Property and Casualty Insurance = What other name is given to this area of Insurance? = Two Types of Private Insurers: Identify & Provide two examples of organizational differences = Three methods insurers use to sell their products? Then: explain how each method deals with the following matters: (a) remuneration (b) ownership of client files (c) administrative functions Which is most common (out of the three methods)?