Module 2 Flashcards
is the pooling of fortuitous
losses by transfer of such risks to insurers, who agree to indemnify insureds for such losses, to provide other pecuniary benefits on their
occurrence, or to render services connected with
the risk.
insurance
BASIC CHARACTERISTICS OF INSURANCE
- Pooling of losses
- Payment of fortuitous losses
- Risk Transfer
- Indemnification
is the heart of Insurance. Few over the entire group, so that in the process, average loss is substituted for actual loss.
In addition, pooling involves the grouping of a large
number of exposure units so that the law of large
numbers can operate to provide a substantially
accurate prediction of future losses.
pooling
is one that is unforeseen
and unexpected by the insured and occurs because of chance. In other words, the loss must
be accidental.
fortuitous loss
means that a pure risk is transferred from the insured to the insurer, who typically is in a stronger financial position to pay the loss than the insured. From the viewpoint of theindividual, pure risks that are typically transferred to insurers include the risk of premature death, excessive longevity, poor health, disability,destruction and theft of property, and personal liability lawsuits.
risk transfer
It means that the insured is restored to his or her approximate financial position prior to the occurrence of the loss.
indemnification
CHARACTERISTICS OF IDEALLY INSURABLE RISK
- There must be a large number of exposure
units. - The loss must be accidental and
unintentional. - The loss must be determinable and
measurable. - The loss should not be catastrophic.
- The chance of loss must be calculable.
- The premium must be economically
feasible.
there should be a large group of roughly similar, but not necessarily identical,
exposure units that are subject to the same peril or
group of perils.
large number of exposure units
This means the loss should be definite as to cause, time, place, and amount. Life insurance in most cases meets this requirement easily. The cause and time of death can be readily determined in most cases, and if the person is
insured, the face amount of the life insurance policy
is the amount paid.
determinable and memorable loss
A large proportion of exposure units should not incur losses at the same time. As we stated earlier, pooling is the essence of insurance. If most or all of the exposure units in a certain class simultaneously incur a loss, then the pooling technique breaks down and becomes unworkable. Insurers ideally wish to avoid all catastrophic losses. In reality, however, that is impossible, because catastrophic losses periodically result from floods, hurricanes, tornadoes, earthquakes, forest fires, and other natural disasters. Catastrophic losses can also result from acts of terrorism.
no catastrophic loss
The insurer must be able to calculate both the average frequency and the average severity of future losses with some accuracy. This requirement is necessary so that a proper premium can be
charged that is sufficient to pay all claims and expenses and yields a profit during the policy
period.
calculable chance of loss
The insured must be able to afford the premium. In addition, for the insurance to be an attractive purchase, the premiums paid must be
substantially less than the face value, or amount, of
the policy.
economically feasible premium
is the tendency of persons with a higher- than-average chance of loss to seek insurance at
standard (average) rates, which if not controlled by underwriting, results in higher-than-expected loss levels.
adverse selection
is a financial strategy used to offset potential losses or gains in an investment or asset. It involves taking a position
in a related asset or derivative that moves in the opposite direction to the asset being hedged.
hedging
Types of Insurance
Private Insurance
Property and Liability Insurance
pays death benefits to designated beneficiaries when the insured dies.
life insurance
although many life insurers
escribed above also sell some type of individual or group health insurance plan, the health insurance Industry overall is highly specialized and controlled by a relatively small number of insurers.
health insurance
indemnifies Property owners
against the loss or damage of real or personal property caused by various perils, such as fire, lightning, windstorm, or tornado.
property insurance
covers the insured’s legal
liability arising out of property damage or bodily
liability insurance
Property and liability insurance is also called
property and casualty insurance
is a broad field of insurance that covers whatever is not covered by fire, marine, and life
insurance; casualty lines include auto, liability, burglary and theft, workers compensation, and health insurance.
casualty insurance
Two major categories of insurance
Personal Lines
Commercial Lines
refer to coverages that insure the real estate and personal property of individuals and
families or provide them with Protection against
legal liability.
personal lines
Major personal Lines include the following:
Private passenger auto insurance
Homeowners insurance
Personal umbrella liability insurance
Earthquake Insurance
Federal Flood Insurance
protects the insured against legal liability arising out
of auto accidents that cause property damage or bodily injury to others.
Private passenger auto insurance
is a package policy
that provides property insurance and personal liability insurance in one policy.
There are a number of homeowners policies
available that cover the dwelling, other structures, and personal property against
loss or damage From numerous perils, including fire, lightning, windstorm, or
tornado.
Homeowners insurance
provides Protection against a catastrophic lawsuit or Judgment.
Personal umbrella liability insurance
covers damage that
can Result from the shaking and cracking of buildings and damage to personal property
in an Earthquake.
earthquake insurance
is a federal program that provides coverage for flood
Losses to homeowners and business firms in flood zones. Flood losses are excluded
under standard homeowners and renters. Flood insurance is typically sold by participating property and casualty insurers.
federal flood insurance
refer to Property and casualty
coverages for business firms, non-profit organizations, and government
commercial lines
Major commercial lines include the Following:
Fire insurance
Commercial multiple-peril insurance
General liability insurance
Products liability insurance
Workers Compensation Insurance
Commercial auto insurance
Accident and health insurance
Inland marine insurance
Ocean marine insurance
Professional liability insurance
Directors and officers (D& O) liability
insurance
Boiler and machinery insurance
Fidelity bonds cover
Crime insurance
covers the loss of money,
securities, and other property because of burglary, robbery, theft, and other crime
perils.
crime insurance
loss caused by the dishonest or fraudulent acts of employees,
such as embezzlement and the theft of money. Surety bonds Provide for monetary
compensation in the case Of failure by bonded persons to perform certain Acts, such as failure of a contractor to construct A building on time.
fidelity bonds
(also known as mechanical breakdown, equipment breakdown, Or systems
breakdown coverage) is a highly
Specialized line that covers losses due to the Accidental breakdown of covered equipment.
Boiler and machinery insurance
provides financial protection for
the Directors and officers and the corporation if the directors and officers are sued for mismanagement of the company’s affairs.
directors and officers liability insurance
provides Protection against malpractice lawsuits or Lawsuits that result from a substantial error or omission. Professional liability insurance
covers the professional acts or omissions of Physicians, surgeons, attorneys,
accountants, and other professionals.
professional liability insurance
covers ocean-going Vessels and their cargo from loss or
damage Because of perils of the sea; contracts are also Written to cover the legal
liability of shippers and owners.
ocean marine insurance
covers goods being Shipped on land, which include imports, exports, domestic shipments, and instrumentalities of transportation (for example, bridges, tunnels, and pipelines).
Inland marine insurance also covers personal property such as fine art, jewelry, and furs.
inland marine insurance
is also sold by some property and casualty insurers. This line Is similar to the health insurance coverages Sold by life and health insurers.
accident and health insurance
covers workers for a job-related accident or disease. The insurance pays for medical
bills, disability income benefits,
rehabilitation benefits, and death benefits to the dependents of an employee whose death is job-related.
workers compensation insurance
covers losses caused by fire
and lightning; it is usually sold as part of a package policy, such as a commercial
multiple-peril policy. Indirect losses can also be covered, including The loss of
business income, rents, and extra Expenses.
fire insurance
is a package policy, which can be written to include property insurance, general liability
insurance, business income insurance, equipment breakdown insurance, and crime insurance.
commercial multiple-peril insurance
covers the legal Liability of business firms and other organizations that arise out of property damage Or bodily injury to others. Legal
liability Can arise out of the ownership of business property, sale or distribution of
products, And manufacturing or contracting operations.
general liability insurance
the legal Liability of manufacturers, wholesalers, and retailers to persons who are injured or incur property damage from defective products.
products liability insurance
Major social insurance programs in the
Philippines include the following:
Social Security System (SSS)
Government Service Insurance System (GSIS)
Home Development Mutual Fund (Pag-
IBIG)
Philippine Health Insurance Corporation
(PhilHealth)
implements the National
Health Insurance Program that aims to provide Filipinos with financial assistance and access to affordable health services. It covers hospital costs, subsidy for room and boarding, medicine, and professional services.
Philippine Health Insurance Corporation
(PhilHealth)
It is a social insurance institution in the Philippines that provides various
insurance benefits and loans to
government employees, including retirement, disability, survivorship, and other related benefits.
GSIS
Is a government agency that
provides social insurance, including retirement, sickness, disability, and maternity benefits, as well as loans
and other services, to Filipino
workers and their beneficiaries.
SSS
BENEFITS OF INSURANCE TO SOCIETY
Indemnification for loss
Reduction of worry and fear
Source of investment funds
Loss prevention
Enhancement of credit
permits individuals and
families to be restored to their former financial position after a loss occurs.
Indemnification for loss
The insurance industry is an important source of funds for capital investment and
accumulation. Premiums are collected in advance
of the loss, and funds not needed to pay immediate
losses and expenses can be loaned to business
firms.
source of investment fund
Insurance companies are actively involved in numerous loss-prevention programs and also employ a wide variety of loss-prevention personnel,
including safety engineers and specialists in fire prevention, occupational safety and health, and products liability.
loss prevention
Insurance makes a borrower a
better credit risk because it guarantees the value of
the borrower’s collateral or gives greater assurance
that the loan will be repaid.
enhancement of credit
COST OF INSURANCE TO SOCIETY
Cost of doing business
Fraudulent claims
Inflated claims
Insurers consume scarce economic resources—land, labor, capital, and business
enterprise—in providing insurance to society. In financial terms, an expense loading must be added to the pure premium to cover the expenses
incurred by insurance companies in their daily
operations.
cost of doing busines
comes from the
submission of fraudulent claims.
fraudulent claims
Another cost of insurance relates to the submission of inflated or “padded” claims. Although the loss is not intentionally caused by the insured, the dollar amount of the claim may exceed the
actual financial loss.
inflated claims
