HISTORY OF INSURANCE
England in the 1600s
 Ships and cargoes
 Owners and merchants
 Lloyds of London
 Common Law

MARINE INSURANCE
OCEAN - cargo over water
 INLAND - cargo over land

SHIPS AND CARGOES
INSURANCE IN THE USA

FIRE INSURANCE
– Other perils added gradually
– Each company wrote own contracts
– Contracts were long, complex, varied
INSURANCE IN THE USA

STANDARDIZED POLICIES
– Massachusetts first - 1880s
– NY standard fire policy - adopted by all
states 1943
– More policies being standardized every
year
INSURANCE 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.
TYPES OF INSURANCE
COMPANIES
STANDARD (ADMITTED)
CARRIERS
 GOVERNMENT INSURERS
 NON-STANDARD (NONADMITTED) CARRIERS
 REINSURERS

Standard (Admitted) Carriers
– 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
Government Insurers
FEDERAL - NFIP, Crop Insurance,
FDIC
 STATE - Texas auto & windstorm
pools, now MAP

Non-Standard (NonAdmitted) 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
Reinsurers
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
BASIC INSURANCE
DEFINITIONS
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.

DEALING 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
DEALING WITH RISK

INSURANCE COMPANIES
– SPREAD RISK
» Geographical - different. areas
» Financial - different $ ranges
– REDUCE RISK
» Underwriting guidelines
» Discounts (alarms, non-smokers, defensive
driving)
LAW OF LARGE NUMBERS

The larger the number of separate-butsimilar 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.
MORE INSURANCE
DEFINITIONS

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.
MORE INSURANCE
DEFINITIONS

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)
MORE 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
BASIC INSURANCE
PRINCIPLES
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.

INSURANCE PRINCIPLES
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.
INSURANCE PRINCIPLES
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.

INSURANCE PRINCIPLES
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
INSURANCE PRINCIPLES
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
INSURANCE PRINCIPLES
Cont’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

AGENTS DUTIES AND
RESPONSIBILITIES

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
Agent’s Duties and
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.

Agent’s Duties and
Responsibilities 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;
Agent’s Duties to Company
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

THE END