Class 15 Flashcards
transfer
- to shift the direct payment of loss as it occurs to another individual or org. (shift risk)
- the variability (RISK) is being transferred
two-party transfer
- aka waiver or exculpatory clause
- contract should indicate who is responsible for what losses (who absorbs loss)
- agreements can only transfer risk associated with losses directly incurred by these two parties
- ex: lease agreements, purchase agreements, and construction agreements
third part transfers
- aka indemnification and hold harmless agreements
- added agreement about who will pay for losses to a third party not associated with the underlying agreement
- generally involve liability losses
- transfer does not shift legal liability, just the financial responsibility
who pays if a consumer is hurt using a product?
-probably both the retailer and the manufacturer
who should pay?
assume the retailer indemnifies and holds harmless the manufacturer
indemnify
- to return to original financial position (repay liabilities)
- -if man. gets sued and losses, retailer reimburses man. for any losses
hold harmless
- promise not to sue for reimbursement
- retailer holds man. harmless, if retailer is sued and loses they cannot seek money from man.
why would a retailer agree to indemnify and hold harmless a Manu.?
allows them to buy from man. for cheaper and eliminates court (trial) costs
what do indemnity and hold harmless do?
- shift risk to the same entity in any given agreement
- which entity bears the risk depends on the negotiations btw the parties
why transfer risk?
should allow us to be more efficient with resources
insurance transfer
- insurance is a mechanism through which a group of insureds (policyholders) pool/share their losses
- they transfer risk to insurers and “pay” for losses through insurance premiums
- through insurance policyholders transfer a large potential loss for small certain loss which is the premium
- we do not transfer losses. We transfer RISK.
where are costs of losses included?
in the premium the policyholder pays (paying more evenly)
types of insurance
life, health, disability, property (including business incomes), liability (including worker’s comp)
newly developing types of insurane
cyber risk
reputation risk
types of insurers
commercial or personal
mutual or stock
mutual insrurers
- owned by policyholders
- they get profits through dividends
- no opportunity to issue stock
- fewer opportunities to get money if in trouble
- need to have lower risk
stock insurers
- shareholders (partial ownership)
- owner gets profits
- willing to have more risk because they can get money faster (issue stock)
components of premiums
E(losses +los adjustment expenses) \+ E(expenses) \+risk charge \+insurer profit -investment return (bottom 4 referred to as premium loadings)
what services do insurers provide policyholders?
- loss control/underwriting
- agent/broker/underwriter to assist in identifying problems and solutions
- claims adjuster to assist in understanding what went wrong that caused the loss
- actuary to help forecast the future
- investment experts to earn returns
- other
who does the aunt work for?
legally for the insurer
who does the broker work for?
for the policyholder
what does a claims adjuster do?
determines if contract says they should be paid and how much
what does the actuary do?
determines similar groups
estimates losses- provides prices for premiums and data analytics
what does an independent agent do?
they can better investigate the market
what does an exclusive agent do?
they understand the product really well
