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Property and Casualty Insurance
An introduction
Basic Insurance Concepts
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Insurance is a mechanism by which risk is
transferred by a person or business to an
insurer.
The insurer reimburses the insured for
covered losses and provides for the
sharing of losses among all insureds.
Basic Insurance Concepts
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This sharing is possible because the
insurer collects a pool of all of the
“premiums” paid by customers into a fund
from which it pays losses.
The insurer mechanism, therefore,
includes three essential components: a)
Risk, b) Transfer, c) Pooling.
Basic Insurance Concepts
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Risk: The uncertainty about outcomes, some
some of which can be negative.
Transfer: A risk financing technique by which
the financial responsability for losses and
variability is shifted to another party.
Pooling: An arrengement that facilitates the
grouping together of loss exposures and the
resources to pay for any losses that may occur.
Types of Insurance Policies
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Insurance Policy: A contract that states
the agreement between and the rights
and duties of the insurer and the insured.
The types of property-casualty insurance
policies fall into two categories:
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Personal insurance policies
Commercial insurance policies
Personal Insurance Policies
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These are the most common types of
personal insurance policies:
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Homeowners
Personal auto
Personal watercraft
Personal umbrella
Personal Insurance Policies
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Are designed to cover personal loss
exposures such as those that arise from
buildings, personal property (including
contents of the home), physical damage
to vehicles, and legal liability arising
from the ownership of a home, vehicles,
or watercraft as well as the activities of
the individual and families.
Personal Insurance Policies
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Legal Liability: The legally enforceable
obligation of a person or an organization
to pay a sum of money (called damages)
to another person or organization.
Collision: Damage to a motor vehicle
caused by its impact with another vehicle
or object, or by the vehicle’s overturn.
Commercial Insurance Policies
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These are examples of commercial
insurance policies:
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Commercial property
Commercial crime
Employee dishonesty
Commercial general liability
Commercial auto
Workers compensation
Commercial umbrella
Commercial Insurance Policies
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A commercial property policy includes coverage
for damage to buildings or contents that results
from fire, vandalism, and other causes of loss.
Commercial General Liability (CGL) coverage is
also needed to protect the insured against
claims that arise from legal legal liability for
bodily injury to others and for damage to the
property of others.
How Insurance Benefits Society
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The insurance industry provides
individuals and businesses with many
benefits.
The primary benefit is that, through
insurance, individuals and businesses are
reimbursed for the cost of covered losses.
This loss payment allows individuals and
families to recover quickly and businesses
to continue operations.
How Insurance Benefits Society
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A related benefit is that uncertainty about
potential future losses is reduced.
Other benefits of insurance include using
resources efficiently, promoting loss
control, satisfying legal requirements, and
providing a basis for credit.
Premium Allocation
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Insurers allocate the premiums they
collect to pay losses and to pay expenses.
Premium dollars that are not immediately
needed for losses or expenses are
invested.
Premium Allocation
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Insurers collect millions of dollars of
premium each year for the policies they
issue to customers. Insurers allocate these
premium dollars in three principal ways:
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Pay Claims
Pay Expenses
Investments
The Insurance Transaction
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An insurance transaction occurs when a a
customer purchases insurance either
directly from a insurer or through a
“producer”.
Producer: A person who sells insurance
products for one or more insurers.
The Insurance Transaction
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Most insurance transactions involve at
least two parties: an insured (policyholder)
and an insurance company, or insurer.
Many other insurance transactions may
include a third party, the producer.
Producers are involved in the sale of
insurance products and include sales
representatives, agents, and brokers.
Insurer Functions
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Insurers perform many functions to
provide products and services to their
customers.
Insurers sell insurance policies and pay
claims as required by those policies, but
they do much more. They perform
multiple key functions in order to
accomplish their goal of protecting their
customers while earning a profit.
Insurer Functions
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These functions are:
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Marketing
Underwriting
Claims
Loss Control
Premium audit
Insurance Regulation
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Insurers are regulated primarily for three
reasons:
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To protect customers
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To maintain insurer solvency
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To prevent destructive competition
Insurance Regulation
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Insurance regulation focuses primarily on
five key areas:
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Licensing
Insurance rates
Insurance policies
Market conduct
Insurer solvency