Principles of Insurance INS21_Chapter01

5/28/2008 4:54 PM New Brand FMT-P2_28May08 1

– Exam consists of 84 Questions– All of them are multiple choice questions– Part A of the Exam are direct questions– Part B of the Exam are Case Studies– All the chapters are equally important– 70% is the pass percentage– 70-79% - Grade – Pass– 80-89% - Grade – Good– >=90 - Grade – Excellent– Immediate Result

Property and Liability Insurance Principles


Segment A1) Insurance: What is it?2) Who provides Insurance and How is it Regulated3) How is the Financial Performance of Insurers Measured?Segment B4) Marketing5) Underwriting6) ClaimsSegment C7) Insurance Contracts8) Property Loss Exposures and Policy Provisions9) Liability Loss Exposures and Policy Provisions10) Managing Loss Exposures: Risk Management

Property and Liability Insurance Principles


A contract or device for transferring risk from a person, business or organization to an insurance company that agrees, in exchange for a premium, to pay for losses through an accumulation of premium.

Insurance : What is it ?


● Insurance has three components

● A Transfer Mechanism , in which one party - the insured (a person, a business, or an organization whose property, life, or legal liability is covered by an insurance policy) - transfers the chance of financial loss to another party - the insurance company, or the insurer.



● A Business System , which includes various operations that must be conducted in a way that generates sufficient income to pay claims and provide a reasonable profit for its owners.



● A Contract , between the insured and insurer that states what potential costs of loss is transferred to the insurer and expresses the insurer’s promise to pay for those losses in consideration for a stated premium.



● Insurance as a Transfer System

Insurance is a system of both transferring and sharing the costs of losses.



● Insurance as a Transfer System

The law of large numbers is a mathematical principle stating that as the number of similar but independent exposure units increases, the relative accuracy of predictions about future outcomes (losses) based on these exposure units also increases.



● An Exposure Unit is a measure of loss potential and is used in pricing insurance

Types of Loss Exposures●Property loss exposures●Liability loss exposures●Human and Personnel loss exposures



Ideally Insurable Loss Exposures

● Large number of similar exposure units● Losses that are accidental● Losses that are definite and measurable● Losses that are not catastrophic● Losses that are economically feasible to insure



Insurance as a Business

Types of insurers● Private Insurers

● Stock Insurance Companies ● Mutual Insurance companies ● Reciprocal insurance exchanges

● Federal Government Insurance Programs(Social Security Program, National Flood Insurance Program, Federal Crop Insurance Program, Federal Deposit Insurance Corporation, National Credit Union Administration)




● Types of insurers

● State Government Insurance Programs● Workers Compensation Insurance● Unemployment Insurance Plans ● Fair Access to Insurance Requirements (FAIR) plans ● Automobile Insurance Plans




● Insurance Operations● Marketing● Underwriting● Claim handling● Ratemaking




●State Insurance Regulation (Rates, Insurer solvency, and Consumer protection)

● Closely monitor the financial condition of insurance companies and take actions necessary to prevent insurer insolvency

● They will approve the policy language● State insurance departments regulate insurance rates to protect

consumers from excessive rating and thereby avoid discriminations



● Benefits of Insurance

● Payment for the costs of covered losses● Reduction of the insured’s financial uncertainty● Loss control activities of insurance companies● Efficient use of resources● Support for credit● Satisfaction of legal requirements● Satisfaction of business requirements● Source of investment funds● Reduction of social burdens



● Costs of Insurance

● Premiums paid by insureds● Operating costs of insurers● Opportunity costs● Increased losses● Increased lawsuits



● Insurance as Contract

●Insurance is a contract entered into between two parties wherein one party viz., the insurer promises to pay the other viz., insured for a loss which is indemnifiable as per the policy terms conditions and exceptions for a return of a consideration viz., premium.

●The four basic types of insurance (property, liability, life and health) are generally divided into two broad categories:

●Property / Liability Insurance●Life / health Insurance




● Property Insurance ● Fire and allied lines● Business income● Crime● Ocean and inland marine● Auto physical damage




● Liability Insurance ● Auto Liability● Commercial general Liability (Premises, Business Operations, Products)

● Personal Liability● Professional Liability




● LIFE INSURANCE ● Whole life insurance● Term Insurance● Universal life insurance

● HEALTH INSURANCE● Medical Insurance● Disability Income Insurance


Principles of Insurance INS21_Chapter01

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Transcript of Principles of Insurance INS21_Chapter01