INS 24-General Insurance for IT

& Support Professionals

Presented By:
Mukta Chimnani
Saurabh Sanjay Khanwalkar
Subodh Porwal
Course Content

SEGMENT - A SEGMENT - B SEGMENT - C

Understanding Insurance Marketing Loss Exposures

Insurers & How They Are Underwriting and

Insurance Policies
Regulated Ratemaking

Insurer Financial
Claims Personal Insurance
Performance

Risk Management Commercial Insurance

ASSIGNMENT 1
Understanding Insurance

Why Need Insurance ?

Every person family, organization, needs to protect itself against unforeseen events
that could cause financial hardships.

Loss Exposure : You are exposed to losses, loss may or may not occur but there is a
possibility of loss.

Insurance As A

Risk Management Technique

Risk Transfer System
Business
Contract
 Insurance as a Risk Management Technique

Risk Management :-
The process of making & implementing decisions that will minimize the adverse effects
of accidental losses on an organization.

Manage Risk

Avoid

Control : loss
Retain Prevention , loss Transfer
Reduction
Insurance Insurance
as a RiskasManagement Technique
a Risk Management Technique

1. Retain Risk : Take the responsibility of risk and provide for financial
consequences. E.g. Flat Tire

2. Avoid : Choose not to opt for it. E.g. Public transport

3. Control :

a) Loss Prevention : A risk control technique that reduces the frequency of a

particular loss, E.g. helmet and safety goggles that reduces frequency of
injuries. (reducing no. of times)
b) Loss Reduction : A risk control technique that reduces the severity of a
particular loss, E.g. installing fire extinguishers. (reducing the impact)

4. Transfer : Sharing the cost of losses, Insurance.

Insurance as a Risk Transfer System

Insurance is a contract between the insurer and insured which enables the insured to
transfer the cost of losses to an insurer, in return of premium amount, and insurer
promises to pay for the losses covered. It is enacted through policies which states the
rights and duties of the parties involved.

Transferring the Costs of Losses: By transferring the cost of losses, insured's exchange
possibility of a large loss for the certainty of a much smaller periodic payment called
premium.

Sharing the Costs of Losses: insurer pools the premium paid by insureds and pays
from the pool to those who incur covered loss. Insurer estimates the future losses
and expenses to determine the premium.
Predict future based on past loss experience.
Law of Large Numbers:
Exposure Unit : A fundamental measure of the loss exposure assumed by an insurer.
Insurance as a Business

Insurance business is divided into 2 sectors:-

Property & Casualty Insurance : mostly covers the financial consequences of damage
to ones own property or legal liability to others.

Life-health Insurance : mostly covers the financial consequences of death, injury and
sickness.
Insurance as a Contract
The contractual nature of insurance policy gives legal force and protection to the
rights and responsibilities of all the parties.

Valid Contract : An agreement between competent parties for legal purpose in

exchange of a consideration.

A contract of utmost good faith : An obligation to act in complete honesty & to

disclose all relevant facts.

Contract of adhesion : Any contract in which one party must either accept the
agreement as written by the other party or reject it

Contract of indemnity : A contract in which the insurer agrees, in the event of a

covered loss, to pay an amount directly related to the amount of the loss. To make
good the losses and no chance of profit.
Types of Insurance
Personal Insurance : Covers individuals and families against their personal (non
business) loss exposure.

Property Insurance : Protects insureds assets by paying to repair or replace property

that is damaged, lost, destroyed, also covers net income lost and extra expenses.

Liability Insurance : Provides payment on behalf of the insured for bodily injury or
property damage for which insured is legally responsible, also covers the cost to
defend insured.

Life Insurance : Replaces income earning potential lost through death, also covers
expenses related to death.

Health Insurance : Protects from financial losses caused by sickness, accident or

disability.

Commercial Insurance : Covers for profit or non-for profit organisations against their
commercial loss exposure.
Ideally Insurable Loss Exposures
Pure Risk Pure risk entails chances of loss or no loss but no chance of gain,
Speculative risk entails chances of loss, no loss or gain.

Fortuitous losses Occurring by chance and not intention, insured should not have
control over the occurrence of loss.

Definite & Measurable losses that are definite in time, cause, & location & that are
measurable (frequency and severity of loss).

Large number of similar exposure units One of a large number of similar exposure
units.

Independent & not catastrophic Not subject to a loss that would simultaneously
affect many other similar loss exposures, not catastrophic.

Affordable Premiums are economically feasible only if exposure is neither too small
to cover neither very high probability of loss to occur.
Benefits of Insurance

Pay for losses : primary purpose is to indemnify insured for covered losses
Manage cash flow uncertainty : financial effect on insureds cash flow is reduced to
deductible amount.
Comply with legal requirements : compulsory for employers to pay for job related
injuries (worker compensation insurance)
Promote risk control activity : insurance promotes insureds to take cost effective risk
control measures.
Efficient use of insureds resources : Insureds need not set aside large sums of money
for loss exposure, may utilize additional funds.
Support for insureds credit : Insurance guarantees that the lender will be paid if the
collateral for loan is destroyed.
Source of investment funds : To both insured and insurer.
Reduce social burden : Provides assistance to victims of natural disaster.
Cost of Insurance
Premiums paid by insured

Operating cost of insurers : Day to day operations of company (salaries, producer

commission, advertising, taxes etc)

Opportunity cost : capital and labor being utilized in insurance industry could be
utilized in other areas.

Increased losses : Arson (intentionally staged event in order to grab insurance

money), Claim Build-up (intentional exaggeration of severity of loss), carelessness
(leaving keys in the car).
Insurers & How They
Are Regulated
Type of Insurers
Private Insurers (Non-govt. insurance provider) : Proprietary insurers are formed for
the purpose of earning profit for their owners, e.g. stock and Lloyd's. Cooperative
insurers are formed to provide insurance at minimum cost to policy holder who own
the insurance e.g. Mutual and reciprocal insurer.

Federal Government Insurance

State Government Insurance

Differences Among Types of Private Insurer Ownership
TYPE PURPOSE FOR WHICH LEGAL FORM OWNERSHIP METHOD OF
FORMED OPERATION

Stock Insurer To earn profit for its Corporation Stockholders Board of Directors,
stockholders elected by
stockholders, appoints
officers to manage
company

Mutual Insurer To provide insurance Corporation Policyholders Board of Directors,

for its owners elected by
(policyholders) policyholders, appoints
officers to manage
company

Reciprocal Insurance To provide reciprocity Unincorporated Subscribers (members) Subscribers choose an

(acts both as insurer for subscribers (to association attorney-in-fact to
and insured) cover each other operate the reciprocal
losses)

Lloyds To earn profit for its Unincorporated Investors Lloyds is regulated by

individuals investors association the U.K. Financial
Services Authority,
which delegates much
authority to Council .
Two more types of Private Insurers
Captive Insurers : A subsidiary formed to insure the loss exposure of its parent co.,

Advantages : low insurance cost as cost of acquisition is eliminated.

Desired insurance coverage available at affordable cost.
Premiums paid to the captive remain within the org.

Reinsurance Companies : A contractual agreement under which one insurer

(reinsurer) agrees, in return for a reinsurance premium to indemnify another insurer
(primary insurer) of the financial consequences of loss exposures covered by the
primary insurer.

Need : Primary insurer has exceeded the capacity to insure.

Overview of Insurance Functions

Marketing : Determining the customer needs, wants and delivering it to them in the
best possible way, it includes advertising, training, setting goals etc.

Underwriting : Process of selecting insured's, pricing coverages, determining policy

terms and conditions and monitoring activities.

Claims : Responsible for keeping the promise to insured by providing prompt and
professional loss Adj. services when claim arises.

Risk Control : A conscious act or decision not to act that reduces the frequency or
severity or losses.

Premium Audit : Purpose is to determine any adj. to the premium based on insureds
actual loss exposure, at the end of the policy period.
Government Insurance Programs

Reasons for Government Insurance Program

To fill unmet needs in the private insurance market e.g. TRIP

To facilitate compulsory insurance purchases e.g. worker compensation, Personal
auto liability insurance.
To provide efficiency in the market & convenience to insured e.g. NFIP
To achieve collateral social purposes by providing incentives to purchase insurance.
 Examples of P&C Insurance Offered by Federal Government
Plan
National Flood Insurance Program
Terrorism Risk Insurance Program
Federal Crop Insurance
Characteristics of Govt. Plan Relationship to Private Insurance
Federal govt. can act as primary insurer
Meets previously unmet needs for flood
Federal govt. can partner with private
insurance
insurers. Private insurers sell the
Serves the social purposes of amending
insurance & pay claims; govt. reimburses
& enforcing building codes & reducing
insurers for losses not covered by
new construction in flood zones
premiums.
Designed to temporarily meet the unmet
Private insurers act as the primary
needs for a backstop to insured terrorism
insurer for the terrorism coverage
losses.
Federal govt. temporarily acts as
Serves the social purpose of preventing
reinsurer for terrorism coverage
economic disruptions that market failures
in terrorism coverage could have caused
Provides crop insurance at affordable
Federal govt. subsidizes & reinsures
rates to reduce losses that result from
private insurers; private insurer sell &
unavoidable crop failures
service the federal crop insurance
Covers most crops for perils such as
Private insurers also independently offer
drought, disease, insects, excess rain &
crop insurance for certain perils
hail
 Examples of P&C Insurance Offered by State Governments
Plan
Fair Access to Insurance Requirements
Plans
Worker Compensation Insurance
Beach & Windstorm Plans
Residual Auto Plans
Characteristics of Govt. Plan
Make basic property insurance
available to property owner who are
otherwise unable to obtain insurance
because of their propertys location or
any other reason
Helps employers meet their obligations
under state statutes to injured workers
Make property insurance against
windstorm cause of loss available to
property owner who are otherwise
unable to obtain insurance because of
their propertys location
Make compulsory auto liability
coverage available to high-risk drivers
who have difficulty purchasing coverage
at a reasonable rate in the market
Relationship to Private Insurance
Organization varies by state.
Does not replace normal channels of
insurance; is only for consumers who
could not obtain coverage in the private
market
Private insurers provide workers
compensation insurance
State govt. can operate as an exclusive
insurer, as a competitor to private
insurers
Organization varies by state
Does not replace normal channels of
insurance; is only for consumers who
could not obtain coverage in the private
market
Organization varies by state
Does not replace normal channels of
insurance; is only for consumers who
could not obtain coverage in the private
market
Why Insurance Operations are Regulated
To protect consumers : easy to understand policies, provide expected coverage's,
protect from fraudulent and unethical market behavior.

To maintain insurer solvency : insurer should be able to meet financial obligations as

and when they become due

To prevent destructive competition : keeping a check over insurance rates and

practices.
Insurer Licensing

Insurance companies must be licensed by the state insurance department

Foreign Insurer : licensed to operate in a state but incorporated in another state.

Domestic Insurer : Doing business in the state in which they are domiciled.

Alien Insurer : An insurer domiciled in a country other than in which it wishes to

operate. E.g. Lloyd's

Domestic insurers license generally has no expiration date whereas license of a foreign
and alien insurer must be renewed annually.
Insurance Rate Regulation

Mandatory Rate Law : it imposes strictest control of insurance rates which are set by
state agency and all insurers are req. to use these rates.

Prior-approval Law : Rates and rules must be filed with and approved by state before
they can be used.

File-and-use Law : Insurer must file proposed rates but can use the rates while state
approval is pending.

Use-and-file Law : Rates must be filed with the insurance Dept. within a specific
period after they are put into use.

Flex rating Law : Prior approval is required only if new rates are above or below a
previously specified range.

Open competition : Allows insurers to develop and use rates without filing or getting
approval, it is driven by the economic forces of demand and supply and govt.
intervenes only in exceptional circumstances.
Solvency Surveillance

The process conducted by state insurance regulators of verifying the solvency of

insurer & determine whether their financial condition enables them to meet their
financial obligations & to remain in business.

Establish financial requirement by which to measure solvency, in order to obtain and

keep license insurers must meet certain min. capital and surplus requirements.
Conduct on-site examination to ensure regulatory compliance, a team of state
examiners visit home office and examine financial and other records.
Review annual financial statements, insurers are req. to submit financial stmt. to
state insurance dept. in prescribed format given by NAIC

Administer the Insurance Regulatory Information System designed by the NAIC which
helps to indemnify the insurers with potential financial problems after it analyzes the
financial stmt. Or liquidates them.
Surplus Lines Market Insurance

Surplus lines insurer are permitted to sell insurance which is not readily available by
admitted insurers, Non-admitted insurers are permitted to transact business only
through specially licensed surplus lines producer and they excluded from restrictions
of rates and forms as they explore non-traditional creative market.
Unusual or unique loss exposure e.g. singer not showing up for concert.

Nonstandard business with poor loss exp.

Insured needing high limits of coverage than what is offered by std. mkt.

Insured needing unusually broad coverage to cover specialty items.

Loss exposures that require new forms responding to changing customer needs.
Insurer Financial Performance
Managing Insurer Income

To survive in long run insurer must generate more income than it spends.
Insurer charges insureds premium for insurance coverage, a part of which insurers
invest to earn additional income.
Sources of Income
1) Sale of insurance (underwriting income)
2) sale of investment (investment income)

Written Premium : Total policy premium at the beginning of the policy period.
Earned Premium : Portion of written premium that has been due and received till
date.
Unearned Premium : Portion of the written premium that has been received but not
yet due for the whole policy period.

Example
Managing Insurer Expenses

Underwriting Income : Earned Premium ( Paid losses + LAE )

Loss Adj. Expenses : Expenses that an insurer incurs to investigate, defend and settle
claims.

Net Investment Income : Invest. Income Invest. Expenses

(source of funds are policyholder surplus and receives premiums before it pays claims)

Underwriting Activity Expenses : major expenses are claims

1) Paid losses : Losses that have been paid to or on behalf of insureds during a given
period.
2) Incurred losses : Paid losses + loss reserve
Losses that have occurred during a specific period, no matter when claims resulting
from losses are paid.
3) Incurred but not reported losses to insurer
Understanding Insurer Financial Statements
4) other underwriting exp. : Acquisition expenses (brokerage, advertising, marketing,
personnel training) , general expenses ( related to underwriting and issuing policies,
staff salaries, managing accounts) , Premium taxes, licenses and fees.

Investment Activity Expenses : Include staff salaries and expenses involved in

managing invest. Dept.

Insurer Profitability :
Overall gain or loss from operations (PBT) = Net investment gain or loss + Net
underwriting gain or loss

Profit before Tax Tax = Profit After Tax

Profit After Tax can further be segregated into payment of dividends and setting aside
reserves.
Understanding Insurer Financial
Understanding Statements
Insurer Financial Statements

Balance Sheet shows insurers financial position at a particular point in time.

Assets :
I. Admitted Assets : Category of asset that regulators allow the insurers to show
in their balance sheet, which can be readily converted into cash or near market
value. E.g. Cash, Short term invest. , stock, bonds, premium balance due in less
than 90 days.
II. Non- admitted assets : Regulators do not allow insurers to show them as assets
as it cannot be readily converted into cash if insurer were to liquidate its
holdings. E.g. premiums more than 90 days overdue.

Liabilities :

I. Loss reserve and loss expense reserve : an estimate of the amount of money the
insurer expects to pay in the future for the losses that have already occurred and
been reported but not yet settled.

II. Unearned premium reserve : Premium received from policyholder for which
services has not yet been rendered by insurer.
Understanding Insurer Financial
Understanding Statements
Insurer Financial Statements

III. Other liabilities : miscellaneous obligations.

IV. Policyholder Surplus = Total Admitted Assets Total Liabilities
(Acts as a source of funds to undertake expansion activities and provide for unexpected
catastrophic losses)

FINANCIAL RATIOS
A. Loss Ratio : It measures losses and loss adj. expenses against earned premiums
which reflects the %age of premium being consumed by losses .
B. Expense Ratio : compares insurers incurred underwriting expenses to its written
premiums, it indicates portion of written premium that is used to pay acquisition,
general, taxes, licenses and fees and other underwriting expenses.
C. Combined Ratio = loss Ratio + Expense Ratio
(if it is 0.7 then is shows that for every Rs.1 premium, 70p is paid for losses and
expenses)
Analyzing Insurer Financial Ratio

Loss Ratio = Incurred Losses (Paid loss + Loss Reserve) + LAE

Earned Premiums

Expense Ratio = Incurred Underwriting Expenses (Incl. other exp)

Written Premiums

Combined Ratio = Loss Ratio + Expense Ratio

Investment Income Ratio = Net Investment Income (Income - Expenses)

Earned Premiums

Overall Operating Ratio = Combines Ratio - Investment Income Ratio

Calculations
Earned premium =1,000,000
Written Premium =1,100,000
Incurred Underwriting Exp =330,000
Incurred loss (Inc loss Exp) =750,000
Net Investment Income =100,000

Loss Ratio =750,000/1,000,000=0.75=75%

Expense Ratio =330,000/1,100,000=0.30=30%
Combined ratio =75%+30%=105%
Investment Income ratio =100,000/1,000,000=0.10=10%
Overall operating ratio =105%-10%=95%

Operating ratio less than 100% indicates profit and more than 100% indicates the loss
 SEGMENT- B

Assignment 4- Marketing
Marketing & Other Related Terms

Marketing is the process of communicating the value of a product or service to

customers, for the purpose of selling the product or service. It is a critical business
function for attracting customers.

Agency is a legal relationship that exists when one party (agents) acts on behalf of
another party (Principal, insurer)

Agent is the party in agency contract that is authorized by the principal to act on
principals behalf

Producer is the insurance personnel who place insurance business with insurer and
represents either insured or insurer, sell insurance (produce business)
Principal is the party in an agency relationship that authorizes the agent to act on
that partys behalf
 Legal responsibility of the Agent to the Principal
Be Loyal to the Principal
Obey the principal lawful instructions
Exercise a degree of care in action on behalf of principal
Keep accountability of money and other property of insurer that hold by the agent
Information delivery related to principal

Legal Responsibility of Principal to towards agent

Pay the commission and other specified compensation as promised

Reimburse agent for any losses suffered without agents fault, but arising out of agents
action on behalf of principal
 Agent Authorities

Actual Authority is conferred by Principal on an agent under an agency contract.

Express Authority is the authority that the principal specifically grants to the agent.

Binding Authority form of express authority accomplished by issuing binders (can be

written or oral, its a temporary coverage until a formal policy is issued)

Implied Authority is implicitly conferred on agent by custom, usage or principals

conduct.

Apparent Authority is a third party reasonable belief that an agent has authority to act
on the principals behalf
 Types of Insurance distribution system
Independent agency and Brokerage marketing system :
Uses agents and brokers who are independent contractors rather than employees of
insurers, they are free to represent one to many insurers.

Exclusive agency marketing system :

Agents contract to sell insurance exclusively for one insurer, they are compensated by
commission, insurer exercise great control over exclusive agents. Handel many
administrative functions like policy issuance, premium collection, claim processing.

Direct Writer marketing system :

It uses sales agents who are direct employees of the insurer, they are compensated by
salary. If certain coverage is not available then they engage in brokered business
wherein sales agent may act as broker by contacting an agent who represents another
insurer for specified coverage and sharing commission in return.
 Distribution Channels Used by Insurer

Internet : Interactions range from emails to multi policy quoting, billing, and policy
issuance, insurance portals also common medium of communication.

Call Centers : In addition to making product sales, call center staff can respond to
general inquires, handle claim reporting and answer billing inquires.

Direct Response : This channel markets directly to customer, no agents are involved
hence commission cost is reduced but they incur heavy advertising expenditure.

Group Marketing : They sell products through internet, call centers or direct response
to individuals or groups showing similar characteristics e.g. sharing similar profession,
interest or hobbies.

Financial Institutions : Tie up with financial institutions to market products, has

advantage of diversifying into new markets, approach to strong customer base,
strength in processing transaction.
 Functions of Insurance Producers
A. Prospecting : locating entities that may be interested in purchasing insurance.

B. Risk Management Review : Determines a prospects insurance needs, for individuals

questionnaire helps in identifying the loss exposure and suggest risk control and
retention measures, for business entities loss run reports are helpful (it details an
insureds history of claims that has occurred over a specific period and value as of
specific date.)

C. Sales : Contact client, analyze needs, prepare proposal, close the sale, earn
commission based on sales.

D. Policy Issuance : At producers request, insurer issues policies.

Functions of Insurance Producers
Functions of Insurance Producers

E. Premium Collection : Agency Bill Procedure (producer sends the net premium to the
insurer after deducting the their commission).
Item Basis : Premium (less commission) is forwarded to the insurer when the
producer collects it, not required to pay insurer until producer collects it.
Statement Basis : producer is obligated to pay the premiums indicated as due or
shown in the statement.
Account current basis : Producer periodically prepares statements showing
premiums due, after deducting commission, producer must transfer premium even if
policy holder have not paid producer, to give protection against late payment,
premium becomes due 30-45 days after policy effective date.

F. Direct Bill : Insurer assumes all responsibility of sending premium bills, collecting
premium, and sending commission to producer.

G. Customer Service : Respond to billing inquires, preforming customer account review,

obtain loss rum reports, answer queries.

H. Claim Handling : Producers are policyholders principal contact with the insurer, so
they contact them first when claim occurs.

I. Consulting : Many producers offer consulting services to insureds for which they are
paid on fee basis.
 How States Regulate Insurance marketing Activities
Licensing to Insurer and Agent : legally agents must be licensed in the state in which
they wish to operate, they need to pass an exam and do proper classroom training.
Producers (Agents, Brokers, Solicitors, Public Adjusters), licenses have specific term
and must be renewed by paying fees specified by state.
By Issuing license to insurer, state indicates that insurer meets min. standard of financial
strength, competency and is authorized to do business.
Compensation
Salary : For Direct Writers
Sales Commissions : Based on the premium / revenue generated.
Contingent Commission : Based on profit of insurer.

Unfair trade Practices (Prohibited Business Practice)

Misrepresentation and False Statement
Tie-in sales (making compulsory for insured to purchase other financial products)
Rebating (producer paying a portion of premium or doing business with
policyholders)
Others Deceptive Practices (entering false information on application so that it
not rejected)
 SEGMENT- B

Assignment 5- Underwriting &

Ratemaking
Underwriting

Underwriting is the process of selecting the insured, pricing coverage, Determining

insurance policy terms and conditions and than monitoring the underwriting decision
made.

Underwriters are the ones who perform underwriting duties.

Line Underwriter- Who evaluate new submission and performing renewal
underwriting and work directly with producers and agents
Staff Underwriter are more in Risk Selection process and are in direct contact of
line underwriters and other departments to manage the product, price and
guidelines
Front Line Underwriters- Usually Agents

Purpose of Underwriting :
Guarding against adverse selection
Ensuring adequate policyholder surplus
Enforcing Underwriting guidance
Underwriting Activities
Line Underwriters Staff underwriters

Select Insured Research the market

Classify and Price accounts Formulate underwriting policy

Recommend or provide coverage Revise underwriting guidelines

Manage a book of business Evaluate loss experience

Support producers & insured Research & develop coverage forms

Coordinate with marketing efforts Review & revise pricing plans

Arrange treaty reinsurance

Assist others with complex accounts

Conduct underwriting audits

Participate in industry associations

Conduct education & training

 Steps in Underwriting Process
Evaluate the submission
Applicants loss exposures and associated hazards.
Develop underwriting alternatives
4 ways to develop underwriting alternatives
Ask for risk control measures, change insurance rates and premium, Amend policy terms and
conditions and Going for facultative reinsurance.
Select an underwriting alternative
Selecting the most appropriate underwriting alternative from the available ones.
Determine an appropriate premium
For all the loss exposures.
Implement the underwriting decision
Communicating the insurers decision to the applicant and issue the required documents.
Monitor the underwriting decision
Monitoring individual policies and Monitoring books of businesses.
 Underwriting Management Responsibilities

Participating in Insurer Management Meetings

And guiding the others departments through the decisions made so as to achieve the goals.

Arranging Reinsurance
Treaty Reinsurance- For all eligible policies
Facultative Reinsurance- Transaction specific for each reinsured policy

Delegating Underwriting Authority

The decisions which an underwriter can make without receiving approval from someone at a higher
level.
Developing and Enforcing Underwriting Guidelines
Which needs to be followed by all the employees in order to achieve the insurers objective.
Monitoring Underwriting Results and decision
In regular intervals so as to have the desired effect.
 Regulation of Underwriting Activities

Prohibition of unfair discrimination based on gender, race or marital status

Mandates on Issue, cancellation and renewal

Prior notice to insured
Check the company capacity

Premium Calculation
Premium = Rate per unit * Number of exposure units

Rate per unit = $100 and Number of exposure units = 10

Premium = $100 * 10 = $1,000

 Important terms
Book of Business is a group of policies with a common characteristic such as territory
or the type of coverage or policies written by a particular agency.

Adverse Selection a tendency for people with the greatest probability of loss to be the
ones most likely to take insurance

Expert System/Knowledge based system is the computer software programs that

supplement the underwriting decision making process. System ask for the information
necessary to make underwriting decision ensuring that no information is overlooked

Hazards is a condition that increases the frequency or severity of a loss

Physical Hazards A tangible characteristic of property, persons or operations that
tends to increase the frequency or severity of loss
Moral Hazards A condition that increases the likelihood that a person will
intentionally cause a loss
Morale Hazards A condition of carelessness or the attitude of carelessness that
increase the frequency or severity of losses
Underwriting Audit a review of underwriting files and records to ensure that
individual underwriters are adhering to underwriting guidelines
 Important terms
Binder is a temporary written or oral agreement to provide insurance coverage until a
formal written policy is issued
Rate Manual is a resource for classifying accounts and developing premiums for given
types of insurance which includes rules, factors and guidelines to apply those rates
Premium Calculation formula = Number of exposure units * Rate per unit
Actuary is a person who uses mathematical methods to analyze loss data and develop
insurance rates
Loss Costs is the portion of the rate that covers projected claim payment and loss
adjustment expenses
Ratemaking is a process that insurer use to calculate insurance rates which are a
premium component
Individual rate/ Specific rate is a type of insurance rate that reflects the unique
characteristic of an insured or insureds property . eg. Organs of playes, Voices of
singers etc.
Ratemaking Process

Ratemaking process involves 5 steps

Insurer with the help of Insurance advisory organization gathers historical loss
cost.
Insurers then calculate their historical loss costs, predict the future loss costs as
a result of inflation and other measurable trends.
Insurers enters loss cost data into rating system and the exposure units are
categorized under a specific class.
Insurer determines its future expenses, losses and contingencies.
The final rates are determined.
Claims
Chapter 6
Claim It is the amount given by the insurer to the insured after the loss has occurred.

First-Party Claim:- A demand by an insured person or organization seeking to recover

from its insurer for a loss that its insurance policy may cover

Third-Party Claim:- A demand against an insured by a person or organization other

than the insured or the insurer, seeking to recover damages that may be payable by
the insureds liability insurance

Third-party Administrator (TPA):- An organization that provide administrative services

associated with risk financing and insurance
CLAIM DEPARTMENT STRUCTURE
Staff Claim Representatives:- Employees of Insurance company who handle claim

Independent Adjusters:- An independent claim representative who handles claims for

insurers for a fee

Third-Party Administrators:- TPAs are often associated with large independent

adjusting firms or with subsidiaries of insurance companies

Public Adjusters:- An outside organization or person hired by an insured to represent

the insured in a claim in exchange for a fee
CLAIM HANDLING PROCESS
Acknowledging and assigning the claim

Identifying the policy and setting reserves

Contacting the insured or the insureds representative

Investigating the claim

Documenting the claim

Determining the cause of loss, liability, and the loss amount

Concluding the claim

ALTERNATIVE DISPUTE RESOLUTION AND LITIGATION
If an insurer or insured do not agree on the claim value, they may resolve the
disagreement in the court which includes 5 types of techniques -

Mediation Use a neutral outside party to develop a mutually agreeable settlement.

Arbitration - Use a neutral outside party to develop a mutually agreeable settlement

which can be final and binding.

Appraisal Negotiate over the amount of claim.

Mini trial Jury asks questions and opinions to both the parties.

Summary Jury Trial Parties present evidence of few witnesses to a panel who takes
the decision.
GOOD FAITH CLAIM HANDLING
Claims should be handled in an unbiased and in good faith by an insurer or agent.

Since the insurance policies require utmost good faith between both the parties,
good faith claim handling is essential to an insurers ability to fulfil its legal duties to
insureds.
Company may not deny a claim or any part of a claim based upon insufficient
information, speculation or biased information.
If full or partial denial, Company must give written explanation, pointing to the facts
and policy provisions.
If denial, must promptly give policyholder a reasonable explanation of the basis in
the insurance policy in relation to the facts, policy provisions or applicable law upon
which it relies for denial of claim.
Cannot discriminate in the claim settlement practices based on the claimants race,
gender, income, religion, sexual orientation, national origin, or physical disability or
the territory of the property or person insured.

LAW OF BAD FAITH

An insurance companys unreasonable refusal to provide coverage in violation of the
duties of good faith and fair dealing owed to an insured.
Important Terms
Insurable Interest:- An interest in the subject of an Insurance policy and that would
cause the interested party to suffer financial loss if a loss occurred

Actual Cash Value (ACV):- Cost to replace property with new property of like kind and
quality less depreciation

Depreciation:- The reduction in value caused by the physical wear and tear or
technological wear tear of property

Replacement Cost:- The cost to repair or replace property using new material of like
kind and quality with no deduction for depreciation

Agreed Value Method:- A method of valuing property in which the insurer & insured
agree at the time the policy is written or the maximum amount that will be paid in
the event of a total loss
 Subrogation:- The process by which an insurer can, after it has paid a loss under the
policy, recover the amount paid from any party (other than the insured) who caused
the loss or is otherwise legally liable for the loss

Salvage Rights:- The insurers rights to recover & sell or otherwise dispose of insured
property on which the insurer has paid a total loss

Constructive Total Loss:- A loss that occurs when the cost to repair damaged property
plus its remaining salvage value equals or exceeds the propertys pre-loss value

Damages:- Money claimed by or a monetary award to a party who has suffered

bodily injury or property damage for which another party is legally responsible
 Compensatory Damages:- A payment awarded by a court to reimburse a victim for
actual harm

Special Damages:- Damages for medical expenses or lost wages

General Damages:- Damages for pain and suffering that do not involve specific
measurable expenses

Punitive Damages:- A payment awarded by a court to punish a defendant

Chapter 7

Risk Management
Risk Management

Risk Management involves the efforts of individuals or organizations to efficiently

and effectively assess, control and finance risk in order to minimize the adverse effect
of losses

Pure Risk:- A chance of loss or no loss but no chance of gain

Speculative Risk:- A chance of loss, no loss, or gain

RISK MANAGEMENT PROCESS

Step 1
Identifying
loss exposures

Step 6
Monitoring
results and Step 2
revising the Analyzing loss
risk exposures
management
program

Step 3
Step 5
Examining
Implementing
feasibility of
selected risk
risk
management
management
techniques
techniques
Step 4
Selecting the
appropriate
risk
management
techniques
RISK MANAGEMENT TECHNIQUES
Risk Control Techniques

Technique What the Technique Does Example

Eliminates the chance of particular type of loss by A family decides not to purchase a
Avoidance either disposing of an existing loss exposure or by boat & therefore avoids the loss
not assuming a new exposure exposure associated with boat

A business installs bars on windows

Loss Prevention Lower loss frequency (No. of losses) & door deadbolts to prevent
burglaries

A business installs a sprinkler

Loss Reduction Lower loss severity (dollar amount of losses) system to reduce the amount of
fire damages

A business buys multiple small

Separation Lowers Loss severity warehouses to contain the effects
to single loss
A taxi firm maintains a few spare
vehicles to keep all drivers on the
Duplication Lowers Loss frequency
road even if one vehicle needs
repair
RISK MANAGEMENT TECHNIQUES

Risk Financing Techniques

Technique What the Technique Does Example

A business decides not to purchase

Retains all or part of a loss exposure which means
collision coverage for its fleet of
Retention that losses must be paid for with available funds or
vehicles & sets aside its own funds
other assets
to pay for possible collision losses

Transfers potential financial consequences of a loss In a lease a landlord transfers the

Noninsurance
exposure from one party to another party that is liability exposures of a rented
Transfer
not an insurer building to the tenant

Transfers financial consequences of specified

A family purchases HO or Auto
Insurance losses from one party to another party who is an
policy from an Insurer
Insurance company
BENEFITS OF RISK MANAGEMENT
Benefits of Risk Management to Businesses

Benefits of Risk Management to Individuals and Families

Benefits of Risk Management to Society

Benefits of Risk Management to Insurers

Chapter - 8
Loss Exposures
LOSS EXPOSURES

Property Loss Exposures Liability Loss Exposures

Assets exposed to property loss Building, Personal

Property, Money & Securities, Vehicles & Watercraft, Assets exposed to liability loss Mostly money
Property in transit

Cause of liability loss Autos, watercraft, Premises,

Cause of Loss Fire, lightning, windstorm, hail, theft Personal activities, Business operations, Products,
Advertising, Pollution, Liquor, Professional activities

Financial consequences Those consequences that

Financial consequences Damages, Defense Costs
may result from a property loss. E.g. Net income loss
BASIS OF LEGAL LIABILITY

A legal right of recovery can be based on

TORTS CONTRACTS STATUTES

Liability
Worker
Intentional Strict Assumed Breach of No-Fault
Negligence Compensati
Torts Liability Under Warranty Auto Laws
ons Laws
Contract
 TYPES OF TORTS

Description Elements Examples

Duty owned to another

Driving while intoxicated &
Breach of that duty
Negligence Failure to act in a causing an accident
Breach of duty is proximate cause
prudent manner Allowing a pet dog to run loose &
of injury or damage
bite a child
Injury or damage

Assault
Battery
Intentional Torts Deliberate acts Deliberate act that causes harm to Libel
that cause harm another person Slander
False arrest
Invasion of privacy

Inherently dangerous activities or

Strict Liability Inherently Owning a wild animal
dangerously defective products
dangerous activities Blasting operations
that result in injury or harm
LOSS EXPOSURES

Personnel Loss Exposures Net Income Loss Exposures

Assets Exposed to Personnel Loss Employees,

Assets Exposed to Net Income Loss Future Income
Owners, Officers, Managers

Cause of Loss Death, Disability, Resignation, layoffs Cause of Net Income Loss Property Loss, Liability
& firing, Retirement Loss, Personnel Loss

Financial Consequences Loss of value the employee

contributed to the organization, replacement cost
Financial Consequences
(recruitment, training cost), loss to organization
values by negative publicity
Chapter 9
Insurance Policies
ELEMENTS OF A CONTRACT
Agreement (Offer & Acceptance)

Capacity to Contract

Consideration

Legal Purpose
CHARACTERISTICS OF INSURANCE POLICIES
Contract of Indemnity

Contract of Utmost Good Faith

Contract Involving Fortuitous Events & Exchange of Unequal Amount

Contract of Adhesion

Conditional Contract

Nontransferable Contract
INSURANCE POLICY STRUCTURE
Preprinted Form:- An Insurance form that meets the needs of many policyholders & is
therefore printed in bulk for future use.

Manuscript Form:- An insurance form that is drafted according to terms negotiated

between a specific insured and an insurer

Self Contained Policies- A single document policy

Modular Policies:- A combination of documents to include all the agreements

between insured and insurer
POLICY PROVISIONS

CATEGORY DESCRIPTION
Unique information on the insured, list of forms
Declarations
included in policy

Definitions Words with special meanings in policy

Statements containing insurers promise to make

Insuring Agreements
payment

Conditions Qualifications on promise to make payment

Exclusions Provisions stating what the insurer will not cover

Miscellaneous Provisions Wide variety of provisions that may alter policy

 PROPERTY POLICY PROVISIONS LIABILITY POLICY PROVISIONS

Covered Property Covered Activities

Covered Types of Injury Bodily Injury / Property

Covered Locations
Damaged / Personal Injury

Covered Causes of Loss Named Peril/Special or Open

Excluded Loss Exposures
Perils

Covered Costs Damages / Defense Cost /

Excluded Causes of Loss Supplementary Payment (Pre & Post Judgment Interest)
/ Medical Payments

Covered Time Period Occurrence Basis Coverage /

Covered Financial Consequences
Claims-made Coverage

Amount of Recovery Policy Limits / Valuation

Provisions / Settlement Options / Deductible /
Covered Parties
Insurance-to-value Provisions / Other Insurance
Provisions

Amount of Recovery Policy Limits (Each Person Limit,

---------- Each Occurrence Limit, Split Limit, Single Limit) /
Defense Cost Provisions / Other Insurance Provisions
Assignment 10
Personal Insurance
HOMEOWNER POLICY

SECTION 1 PROPERTY COVERAGE SECTION 2 LIABILITY COVERAGE

A Dwelling E Personal Liability

F Medical
B Other Structure
Payments to Others

C Personal Property

D Loss of Use
DIFFERENT TYPES OF HOMEOWNERS POLICIES
POLICY FORM COVERAGE PROVIDED

Owner Occupants basis. It provide Section-I coverage

HO-2 Broad Form
on named perils basis & Provide Section-II Coverage

Owner Occupants basis. It provide Section-I

HO-3 Special Form Coverage A & B on Open perils & Coverage C on
named basis & Provide Section-II Coverage

HO-4 Content Broad Form For Tenants- Coverage C & Provide Section-II Coverage

Owner Occupants basis. Section-I Coverage on Open

HO-5 Comprehensive Form
peril & Provide Section-II Coverage

Coverage C on Named Perils & Limited Coverage A

HO-6 Unit-Owner Form
Section-II Coverage

Owner-Occupants basis. It provide Section 1, A ,B C on

HO-8 Modified Coverage Form
a named perils
PERSONAL AUTO POLICY - PAP
PAP

A Liability Coverage

B Medical Payment Coverage

C Uninsured UM & Underinsured UIM Coverage

D Physical Damage Coverage

Personal Injury Protection PIP

Assignment 11
Commercial Insurance
Commercial Insurance
Commercial Insurance
Is a insurance policy for organizations or business to deal with their property and liability
related loss exposures cause by their building, product, operation or services.

Understanding Property Insurance Elements

Covered Property
Building
Business Personal Property
Personal Property of Others

Covered Location

Covered Cause of Loss

Basic, Broad & Special

Covered Financial consequences Business income, Extra expense

Perils Covered In Basic & Broad Form
Basic Form Broad form Also Covers

Fire Falling objects

Lightning Weight of Snow, Ice or Sleet

Explosion Water Damage

Windstorm or Hail Collapse caused by certain perils

Smoke

Aircraft or Vehicles

Riot or Civil Commotion

Vandalism

Sprinkler Leakage

Sinkhole Collapse

Volcanic Action

Fungus, Wet rot, Dry rot and bacteria

Commercial Liability Coverage
Commercial general Liability Insurance (CGL)
is a insurance policy commonly used for insuring organizations premises, operations,
products and completed operations related liability loss exposures

CGL Coverages
Coverage A- BI & PD Liability
Coverage B- Personal & Advertising Injury Liability
Coverage C- Medical Payments
Other Commercial Insurance
Worker compensation & Employer Liability Insurance
Building & Personal property coverage form
Commercial Umbrella Liability Insurance
 Thank You
for
Patient Listening

All the best for Paper

From : Mukta, Saurabh and Subodh