Agenda
of the Session: (29/ 09/ 2016)
Insurance Concepts
Ø Insurance: A transfer
system, in which one party – the insured – transfers the chance of financial
loss to another party – the insurer.
Ø Law of Large
Numbers
- A Mathematical principle which enables the insurers to make predictions about
losses.
Ø It states
that as the number of similar but independent exposure units increases, the
relative accuracy of predictions about future outcomes (losses) based on these
exposures also increases.
Ø An exposure
unit is a measure of loss potential and is used in pricing insurance.
E.g.:
In a HO-W Insurance, each home is an exposure unit. The insurer insures
thousands of home owners who face the same uncertainty.
Ø Premium: Is a small
periodic payment the insured pays for long term insurance coverage.
Calculation of Premium: Premium = Rate x
Number of exposure units
Ideally Insurable Loss Exposures
Ø Insurance companies
generally prefer to provide insurance for the loss exposures that have the
following characteristics:
a.
Large number of similar exposure units.
b. Losses that are accidental.
c. Losses that definite and measurable.
d. Losses that are not catastrophic.
e.
Losses that are economically feasible to insure.
Check
Point….
Ø Voice of a
singer…is it an ideal loss exposure???
Ø Gambling is
it an ideal loss exposure??
Ø Robbery
\Theft is it an ideal loss exposure???
Insurance Operations
Main
Operations of Insurance Company:
Ø Marketing: Insurance Marketing is
the process of identifying customers, selling and delivering a product or
service. Other important aspect of marketing are advertising and marketing management.
Ø Underwriting: Underwriting is the
process by which insurance companies decide which potential customers to insure
and what coverage to offer. Underwriters are insurance company employees
responsible for selecting insured's, pricing coverage's, and determining policy
terms and conditions.
Ø Claim
handling –
enables insurance companies to determine whether a covered loss has occurred
and, if so, the amount to be paid for loss. Claims are generally handled by
Claim Representatives.
Ø Rate Making: Rate making is the process by which insurers
determine the rates to charge the thousands of similar but independent
insured's.
Check
Point….
Ø Identifying Customers …comes under
A. Marketing
B.
Underwriting
Ø Pricing
Coverage comes under
A.
Underwriting
B.
Rate Making
Line of Insurance Business
Ø Line of
insurance is just another way of saying type of insurance.
Ø Personal
Lines:
is any type of insurance purchased by
individuals and families to cover non business loss exposures.
Ø Commercial
Lines:
Insurance is any type of insurance that covers loss exposures for business and
organizations.
Check
Point….
ü Can you name
some Policy types which come under Personal Lines??
ü Can you name
some Policy types which come under Commercial Lines
Types of Insurance
Ø Property
Insurance:
Property Insurance covers the costs of accidental losses to an insured’s
property. The insured could be a person insuring his house and personal
property or a business insuring its building, inventory and equipment.
E.g.: Fire & Allied lines, Crime, Ocean
& inland marine insurance come under Property insurance.
Ø Liability Insurance: Liability
insurance also called as third-party insurance as, three parties are involved :
the insured, the insurance company and the party who is injured or whose
property is damaged by the insured.
E.g.: Auto Liability & Personal Liability come under Liability Insurance.
Ø Life
Insurance: Life Insurance generally reduces the adverse
consequences of premature death of a family member, by providing funds to
replace the lost income and to pay expenses associated with final illness.
E.g.: Whole Life Insurance, Term Life
Insurance & Universal life Insurance are the types of Life Insurances.
Ø Health
Insurance: Health Insurance is designed to protect individuals and families
from financial losses caused by accidents and sickness.
E.g.: Medical Insurance & Disability
income insurance come under Health Insurance.
Types of Insurers
Ø Stock
Insurers: Is
an insurer that is owned by its stock – holders and formed as a corporation for
the purpose of earning a profit for
these stockholders.
E.g.: Hartford and SAFECO Insurance
Companies.
Ø Mutual
Insurers:
Is an insurer that is owned by its policy holders and formed as a corporation
for purpose of providing insurance to its policy holders.
E.g.: State Farm Insurance Companies.
Government Insurance Programs
Ø Some federal
government insurance programs exist because huge amount of financial resources
are needed to provide insurance to its citizens.
Ø Federal
Government programs provides insurance for Catastrophic losses.
E.g.: Social Security, National
Flood Insurance Program.
Agents & Brokers
Ø Agents: Legal representatives of the insurance
company for which they have contractual agreements to sell insurance.
Ø Brokers: An independent
business owner or firm that sells insurance by representing customers rather
than insurer.
Ø The
authority of the Agent and Brokers are generally stated in a written document
called a Agency agreement or Agency contract.
Underwriting
Ø Underwriting
is a heart of a Insurance Business. To a large extent a company’s goals depends on the
effectiveness of its underwriting.
Underwriting process involves:
Ø Selecting
Insured:
Selecting those applicants who meet the company’s underwriting guidelines.
Ø Pricing
Coverage:
Pricing the coverage to charge the premium commensurate with the exposure.
Ø Determining policy terms and conditions
Ø Monitoring underwriting decisions to
see whether they have desired effect or not.
Ø Underwriting
management sets the company’s guidelines in order to make optimal use of
resources and avoid adverse selection.
Reinsurance
Ø One of the
main important aspect of the Underwriter is to arrange for Reinsurance.
Ø Types of Reinsurance are:
a.
Treaty Reinsurance: Is an arrangement whereby a reinsure agrees to reinsure automatically a portion of
all eligible insurance of the primary insurer.
b.
Facultative reinsurance: Involves separate transaction for each reinsured
policy. That is, the reinsure evaluates individually each policy it is asked to reinsure.
Claims
Ø Claim: Demand by
a person or business seeking to recover from an insurance company for a loss
that might be covered in the insurance policy.
Ø The
employees of the insurance company who handle the claims are called as Claim
representative or Adjuster.
Ø The
responsibilities of a Claim
representative are:
a. Respond promptly to the submitted claim.
b. Obtain adequate information
c. Properly evaluate the claim
d. To treat all parties fairly.
Ø The person
who submits the claim to an insurance company is called a claimant.
Ø In liability
insurance the claimant is the third party. In all other cases the claimant is
the insured (primary or first – party).
Ø Independent
Adjusters are independent claim representatives who offer claim handling
services to insurance companies for a fee.
Claim Handling Process
Ø The Claim
Handling process generally involves three steps:
a. Investigation
b.
Valuation
c. Negotiation and Settlement
Valuation
Ø Common
Property Valuation Methods:
Ø Actual Cash Value(ACV): The cost to replace the property minus an allowance
for the property’s depreciation.
Ø Cost to Replace: Is
calculated on the basis of like kind & Quality.
Ø Depreciation: Allowance for physical
wear and tear.
Ø Replacement
Cost Analysis: In this case, deduction
for depreciation is not a part of the valuation.
Ø Agreed Value: Agreed
value is a method of valuating property in which the insurer and the insured
agree on the value of the property at the time the policy is written and that
amount is stated in the policy declarations.
Check Point…..
ü Ryan’s sofa
purchased for $500, five years back is damaged in a hostile Fire accident, Ryan
has a Personal Property policy with SF Insurance.
Q1.
By ACV Method what amount will SF pay if depreciation is $300 & Replacement Cost is $500???
Negotiate and Settle
Ø After the
claim representative and the insured agree on the amount of the settlement,
Other factor that can affect the insurers cost for property claims is:
“Subrogation”
Ø Subrogation:
Subrogation is the insurers right to
recover payment from a negligent third party. When an insurer pays an insured
for a loss, the insurer assumes the insured’s right to collect damages from a
third party responsible for loss.
Solvency of Insurance Company
Ø The ability
to pay expenses and still make a reasonable profit is a measure of an insurance
company’s solvency, that is, its long – term financial strength.
Ø Income: Insurance
companies receive income from two major sources. The first is the sale of
insurance and the second is from investments it makes.
Ø Written
Premium:
Total Premium on all policies put into effect, or “written” during a given
period. Even if the premium is not collect
Ø Earned
Premium:
Is the portion of the written premium that applies to the part of the policy
period that has already occurred.
Ø Unearned
Premium:
The portion of the written premium that applies to the part of the policy
period that has not yet occurred.
Ø Investment
Income: As insurance company handles large amount of
money , it invests available funds in
the stock market or purchase bonds to generate additional income.
Ø Insurance
companies select high-quality investments that are relatively secure and that
can be readily converted to cash. E.g.: Stocks & Bonds.
Check Point….
ü Sam paid a
premium of $1200 on January 1st
2010 for a Annual policy.
Q1. As on Jan 1st 2010. How much is
the Written Premium???
Q2. As on May 1st 2010. How much is
the Earned Premium??
Q3.
As of May 1st 2010. How much is Unearned Premium.??
Q4.
If Sam cancels the policy on September 1st
2010. How much is the Written Premium.??
EXPENSES
Ø EXPENSES: The major
expenses incurred by an insurance company are claim payments for insured's who
have suffered losses and the costs associated with handling those claims .
Ø Other
expenses are General expenses that relate to Marketing, day to day Operations ,
staffing, accounting and maintenance.
Ø For an
insurer to be Profitable,
Premium + Investment Income > Total loss
payments and other expenses.
Profitability Ratio
Ø Profitability
ratios are generally used to analyze the financial performance of the insurance
company.
Ø Loss ratio = Incurred
loss expenses/Earned Premium
Ø Expense
ratio
= Incurred Underwriting expenses Written
Premium
Ø Combined
Ratio : Loss ratio + Expense Ratio
Ø Investment income ratio:
Net investment Income/Earned Premium
Ø Overall
Operating ratio: Combined ratio – Investment ratio
Overall Operating Ratio
Ø An insurer
with an overall operating ratio of 100% breaks even.
Ø If the
Overall Operating ratio is greater than 100%, it indicates that an operating
loss has occurred because expenses are greater than revenues.
Ø If the
Overall Operating ratio is less than 100%, it indicates an overall operating
gain because revenues are greater than expenses.
Ø Even
monitoring financial results from past years helps to determine the accuracy of
the insurance company’s loss reserve estimates.
Questions Time
ü Determine
based on the following the Solvency of A Insurance Company.
•
Earned Premium: $ 50,000
•
Written Premium: $100,000
•
Incurred Loss: $20,000
•
Incurred underwriting expenses: $10,000
•
Net Investment Income: $5,000
Q1.
Loss Ratio =
Q2.
Expense Ratio=
Q3.
Combined Ratio=
Q3. Net Investment Ratio =
Q4.
Overall Operating Ratio =
1.
Profit
2.
Loss
3.
Break Even
