HISTORY OF INSURANCE
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Transcript of HISTORY OF INSURANCE
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HISTORY OF HISTORY OF INSURANCEINSURANCE England in the 1600s Ships and cargoes Owners and merchants Lloyds of London Common Law
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MARINE INSURANCEMARINE INSURANCE
OCEAN - cargo over water INLAND - cargo over land
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SHIPS AND CARGOESSHIPS AND CARGOES
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INSURANCE IN THE USAINSURANCE IN THE USA FIRE INSURANCE
– Other perils added gradually– Each company wrote own
contracts– Contracts were long, complex,
varied
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INSURANCE IN THE USAINSURANCE IN THE USA STANDARDIZED POLICIES
– Massachusetts first - 1880s– NY standard fire policy - adopted
by all states 1943– More policies being standardized
every year
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INSURANCE IN THE USAINSURANCE IN THE USA CURRENT
– All states but 4 have same basic standard fire policy. Texas is one.
– Many states have similar auto policies. Most use same rates (ISO). Texas is different.
– Texas Dept. of Ins. sets rates, forms and rules for personal auto and property insurance. But many types of policies not regulated by State.
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TYPES OF INSURANCE TYPES OF INSURANCE COMPANIESCOMPANIES
STANDARD (ADMITTED) CARRIERS
GOVERNMENT INSURERS NON-STANDARD (NON-
ADMITTED) CARRIERS REINSURERS
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Standard (Admitted) Standard (Admitted) CarriersCarriers– Stock Companies - Owned by
stockholders/investors. Managed by Board of Directors. Purpose to make a profit. Examples: Aetna, Travelers.
– Mutuals -cooperatives - operate like stock companies but owned by members. Can pay dividends (Ex: USAA) or can use profits to give lower rates ( Ex: State Farm).
– Exchanges - groups of individuals (subscribers) who insure each other (reciprocal). Managed by Attorney in Fact. Example: Farmers
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Government InsurersGovernment Insurers
FEDERAL - NFIP, Crop Insurance, FDIC
STATE - Texas auto & windstorm pools, now MAP
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Non-Standard (Non-Non-Standard (Non-Admitted) Carriers Admitted) Carriers
ALSO KNOWN AS THE EXCESS & SURPLUS MARKET
NO MARKETS AVAILABLE THRU STANDARD INSURERS– Must be declined by standard
markets– Example: Jet Skis, Hot Air
Balloons
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ReinsurersReinsurers FORM OF INSURANCE BETWEEN
INSURERS. HELPS INSURERS EXPAND THEIR
CAPACITY (Example: $2,000,000 home) TAKES SOME “HEAT” OFF PRIMARY
INSURERS.– Primary - the first insurer who pays on a loss– Excess - the second company that pays on a
loss after insurance limits of first company are used up.
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BASIC INSURANCE BASIC INSURANCE DEFINITIONSDEFINITIONS RISK - Uncertainty regarding
(financial) outcome (loss). INSURANCE - A social device
for dealing with risk POLICY - a contract of
insurance which promises to provide protection in the event of a covered loss.
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DEALING WITH RISKDEALING WITH RISK INDIVIDUALS
– RETAIN RISK»Can’t do anything about it (airplane falls on
house)»Choose to ignore risk (don’t buy flood
insurance)– AVOID RISK
»Don’t buy in earthquake area»Move away from flood areas
– REDUCE RISK - good roof or alarm system– TRANSFER RISK - buy insurance
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DEALING WITH RISKDEALING WITH RISK
INSURANCE COMPANIES– SPREAD RISK
»Geographical - different. areas»Financial - different $ ranges
– REDUCE RISK»Underwriting guidelines»Discounts (alarms, non-smokers,
defensive driving)
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LAW OF LARGE LAW OF LARGE NUMBERSNUMBERS The larger the number of separate-
but-similar risks in a group, the more predictable future losses become.
Insurance companies must predict losses on a group basis in order to arrive at fair premiums for individuals within groups.
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MORE INSURANCE MORE INSURANCE DEFINITIONSDEFINITIONS PERIL - the immediate, specific
cause of a loss.– Named Perils - such as fire, lightning.
Burden of proof of loss is on insured. Must be able to prove loss occurred from a covered peril.
– All Risk - everything covered except what’s excluded. Burden of proof is on company. Must prove the loss was excluded or pay.
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MORE INSURANCE MORE INSURANCE DEFINITIONSDEFINITIONS PROXIMATE CAUSE - a covered peril
is the proximate cause (immediate, specific) of a loss if it initiates an unbroken chain of events leading to a covered loss. Without it no loss would have occurred. – DIRECT PHYSICAL LOSS (lightning
strikes building)– INDIRECT/CONSEQUENTIAL LOSS (loss of
use)
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MORE INS. DEFINITIONSMORE INS. DEFINITIONS HAZARD -situation that introduces or
increases chance of loss from a peril.– Physical Hazards (mfg. fireworks in garage,
child care in home, unfenced pool)– Moral Hazards - dishonest acts of insured
which increase chance of loss. Character, living habits, financial responsibility. (Fake claims to get money when out of a job).
– Morale Hazards - attitudes of insureds that increase possibility of loss. (Fails to fix roof when needed: let insurer pay after storm).
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BASIC INSURANCE BASIC INSURANCE PRINCIPLESPRINCIPLES INDEMNITY - property insurance is a
contract of indemnity - it returns insured to financial position prior to loss. No profit permitted. Life ins. is not indemnity: it pays total sum if loss (death) occurs.
LIABILITY - legal responsibility for a loss to someone else (3rd party). BI or PD. Casualty insurance provides this type of coverage.
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INSURANCE PRINCIPLES INSURANCE PRINCIPLES Cont’d.Cont’d. INSURABLE INTEREST must exist in
order to have a legally enforceable contract– Life Insurance - not required if insured
purchases policy: if other party purchases, must have I.I. at the time of purchase
– Property/Casualty Insurance - all parties named must have I.I. at time of loss. Each party with interest is covered only up to that amount.
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INSURANCE PRINCIPLES INSURANCE PRINCIPLES Cont’d.Cont’d.
COINSURANCE - requirement that property be insured to at least 80% of replacement cost or be penalized in the event of a partial loss.
VALUED POLICY - In Texas full policy amount is paid in the event of a total loss.
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INSURANCE PRINCIPLES INSURANCE PRINCIPLES Cont’d.Cont’d. BASIS OF COINSURANCE
– Actual Cash Value - what item(s) worth at time of loss (value of used goods).
– Replacement Cost - what it would cost to replace item(s) at today’s prices
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INSURANCE PRINCIPLES INSURANCE PRINCIPLES Cont’d.Cont’d. CALCULATING COINSURANCE
– Amount of insurance the client purchased
– Divided by amount of insurance client should have purchased
– Multiplied by the amount of the loss– Less the deductible– Equals the amount which will be
paid on the loss
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INSURANCE PRINCIPLES INSURANCE PRINCIPLES Cont’dCont’d AMBIGUITY in policy language is
interpreted in the insured’s favor by the courts. The state and/or insurance company writes the insurance contract and it’s assumed that they write it in their favor.
IMPORTANCE OF COURTS IN INSURANCE DECISIONS - new policy language and provisions are tested through court system
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AGENTS DUTIES AND AGENTS DUTIES AND RESPONSIBILITIESRESPONSIBILITIES
AGENT - the authorized representative of an insurance company– Has authority to act for insurer by
written contract. Contract may be terminated if agent acts improperly
– Is paid commission for work done for the company
– Has binding authority as granted by the company
– Owes primary allegiance to the company
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Agent’s Duties and Agent’s Duties and Responsibilities Cont’d.Responsibilities Cont’d. AGENCY - a fiduciary relationship
in which one entity (the principal) authorizes another (the agent) to act on its behalf in dealings with 3rd parties
FIDUCIARY - a relationship in which agent takes in/handles money and signs contracts on behalf of the principal and is accountable.
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Agent’s Duties and Agent’s Duties and Responsibilities Cont’dResponsibilities Cont’d AGENTS AUTHORITY
– EXPRESS - whatever is agreed to in the contract
– IMPLIED - other acts necessary to carry out express authority (Examples: advertising using company’s logo; hiring a solicitor)
– APPARENT - based on 3rd party’s reasonable belief that the agent has the authority. (Example: agent has binders, applications, company logo in office; therefore assumed to represent company
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Agent’s Duties to Agent’s Duties to CompanyCompany LOYALTY - to interests of company OBEDIENCE - to all lawful instructions. (Ex:
binding authority suspended during hurricanes)
REASONABLE CARE - to avoid injury to the principal.
ACCOUNTING - for principal’s property/money. (Ex: premium pmts., computer equipment, manuals)
INFORMATION - disclosure of all known facts about accounts
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THE ENDTHE END