Basics of Insurance

Participant’s Guide
 Table of Content

Unit 1 Insurance Overview

Unit 2 Types of Insurance

Unit 3 Insurance Functions: Marketing

Unit 4 Insurance Functions: Underwriting

Unit 5 Insurance Functions: Claims

Unit 6 Insurance Regulation

Unit 7 Insurance Policies

Unit 8 Commercial Property Insurance

Unit 9 Commercial Liability Insurance

Unit 10 Insurance Terminologies

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 Unit 1
Insurance Overview

What is Risk?

An uncertainty about outcomes, some of which can be negative. Risk results in either a loss or no
loss.

Examples of risk include the possibility of each of the following:

 A house or warehouse burning down

 A person or business being sued
 A person’s house or a business being burglarized
 A car being damaged in an accident
 A tornado destroying a house or an office building
 An employee stealing from his or her employer

Risk Classification

Pure Risk: Pure risk are those where there is only a possibility of loss and no chances of any gain. At
best what may be achieved out of a pure risk could be a break-even situation

Examples include:-

 Traveling home in a car – At best we may hope for safe arrival. However, there is a
possibility that there might be an accident and the car gets damaged

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  The risk of fire – Damage to personal or business property due to fire could cause financial
loss.

Speculative Risk: Speculative risk are those which involve a degree of speculative about making
some kind of gain. Thus, a speculative risk has three possible outcomes – loss, gain or a situation of
no change.

Examples include:-

 Investing in stock market – An individual might make huge gain or may suffer losses while
investing in stocks.
 Starting a new business – A new business might do very well, generating profits for the
owners or might run into losses.

Particular Risk: Particular risks are localized or even personal in their cause and effect. Particular
risks usually affect individual or a small group of people.

Examples include:-

 A factory fire – It would cause localized damage to the factory and possible to its
surroundings, but would not affect the whole community.
 A car collision – Damage to the vehicle and injuries to its occupants are localized events
affecting relatively few individuals

Fundamental Risk: Fundamental risks occur on such a vast scale that they are uninsurable. These
tend to affect countries, regions or communities.

Examples include:-

 Earthquake risk in an earthquake prone area

 Famine
 War

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Risk Management

Risk Management and its Benefits

 Risk management is the identification, assessment and prioritization of risks.

 It helps individuals and businesses reduce the cost of risk
 It helps individuals and businesses worry less about their risks.

Risk Management Techniques

Risk Control: Risk control primarily involves effects to avoid, prevent or reduce risks. It also includes
separation, duplication and diversification.

Avoidance measures

 Not owning or driving a car

 Selling a vacant lot
 Not manufacturing a product
 Not owning a home
 Accepting only credit cards or check purchases

Loss Prevention: Loss prevention technique focus on keeping losses from occurring

Loss Reduction: Loss reduction technique focus on reducing the costs of any losses that do occur.

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Risk Financing: Risk financing involves shifting the financial burden of loss to another party.
Insurance is type of “risk financing” that people and businesses commonly use: however, people
and businesses consider methods other than insurance (retention and transfer) for managing risks
as well.

Risk Retention: Risk retention involves retaining the risk to one self

What is Insurance?

Insurance is a mechanism by which risk is transferred by a person or business to an insurer, which

reimburses the insured person or business for covered losses and provides for the sharing of losses
among all insureds. This sharing is possible because the insurer collect a pool of all of the premiums
paid by customers into fund from which it pays losses.

Pooling

 Pooling is an arrangement that facilities the grouping together of loss exposures and the
resources to pay for any losses that may occur.
 Insurers combine all the premiums collected from customers into a fund that is used to pay
losses as they occur.
 The pooling mechanism also allows the insurer to more accurately project what it will have
to pay in losses.
 An insurer can use statistics and historical loss information to accurately project the total
amount of losses a pool of insureds is likely to experience in a given time period.
 The accuracy of the insurer’s projection increases as the number of insureds in the pool
increases.

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Frequency: The frequency of risk measures the number of losses in a given period.

Severity: The severity of risk measures how much the loss will cost.

Insurance is an appropriate method of risk transfer for low-frequency, high severity losses, as well
as for high frequency, low severity losses

Principles of Insurance

Insurable Interest: policy owner must be likely to suffer a genuine loss or detriment should the
event insured occur.

Insurable Interest is intended to:

 prevent one person to benefit from loss of another person

 prevent use of insurance as a profit making mechanism
 Applicable to all lines of insurance

Utmost Good Faith: The duty of Utmost Good Faith states that both the Insurer and the Insured
should disclose all material facts

For Example:

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Insurer Should:

 Disclose all terms and conditions

 assess claims promptly
 not delay paying claims without proper cause
 not refuse to pay claims without proper cause
 in some circumstances, specifically advise the consumer of what risks the policy covers

Insured Should:

 disclose all information relevant to the insurer’s decision to accept the risk
 not make false or exaggerated claims
 cooperate with the insurer when making claims

Principle of Indemnity: Insurance is a mechanism for

 providing a loss payment will replace what is lost
 putting the insured back to where it was financially prior to the loss without rewarding or penalizing
the insured for its loss
 The recovery of actual loss from the insurer and to prevent profit making from a loss

Subrogation: is defined as a legal right that allows an insurer to make a payment that is actually owed by
another party and then collect the money from the party that owes the debt after the fact

Contribution: Contribution is a right that an insurer has, who has paid under a policy, of calling other
interested insurers in the loss to pay or contribute ratably to the payment

Proximate Cause: Active, direct, and efficient cause of loss in insurance that sets in motion an
unbroken chain of events which bring about damage, destruction, or injury without the intervention of a
new and independent force. Also called direct cause.

If there are so many causes acting, Proximate Cause would be the most prominent cause for loss

It may not always be the first or the last cause

Loss Minimization: In an uncertain event, it is the insured’s responsibility to take all precautions to minimize
the loss on the insured property.
The insured must not neglect and display a behaviour of irresponsibility just because his property is insured

Insurable Risk- Characteristics

Occur by Chance:
 The loss that are incurred must occur by chance
 For a potential loss to be insurable, the element of chance must be present
 Intentional losses cannot be insured
Definitive:
 Insurer should be able to determine when to pay policy benefits and how much those benefits
should be (measurable)
 the loss should be definite as to cause, time, place, and amount
Significant:
 Only significant losses are considered to be insurable
 The size of the loss must be meaningful from the perspective of the insured

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  Insurance premiums need to cover both the expected cost of losses, plus the cost of issuing and
administering the policy, adjusting losses, and supplying the capital needed to reasonably assure
that the insurer will be able to pay claims
Predictive:
Law of Large Numbers permits an insurer to estimate future losses with some accuracy

 Law of large numbers is a statistical law that underlies insurance pricing.

 According to this statistic law, estimate based on large amount of consistent data trends to
be more accurate than estimate based on small amount of consistent data.
 There are two limitations of law of large numbers – one, it cannot predict losses in case of a
natural catastrophe and second, it cannot predict the losses an individual will incur in a
given pool for a given year.

Must not be Catastrophic to the Insurer

All the insured events should not occur at the same time.

However, insurers spread their risk to diverse geographies, enter into reinsurance contracts, and
purchase Catastrophic Bonds to neutralize the effect of a Catastrophic Loss

NOTES

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 Unit 2
Types of Insurance

Types of
Policies

Life Health P&C

Personal Commercial

Commercial
Personal Personal Commercial Commercial Workers Commercial
Homeowners Personal Auto General
watercraft umbrella Property Auto Compensation umbrella
Liability

Life Insurance

Life insurance is an insurance coverage that pays out a certain amount of money to the insured
or their specified beneficiaries upon a certain event such as death of the individual who is
insured.

Medical and Health Insurance

Medical and Health Insurance (MHI), is an insurance policy which is designed to cover the cost
of private medical treatment, which can be very expensive, especially with hospitalisation and
surgery. MHI also ensures that you won't have to worry about the cost of seeking treatment
during emergencies. In addition, MHI also provides you with an income stream while you
undergo treatment.

Property & Casualty Insurance

Property and casualty insurance is insurance that protects against property losses to your
business, home or car and/or against legal liability that may result from injury or damage to
the property of others.

Personal Insurance Policies

Personal property and casualty insurance covers the property losses and liability losses
experienced by individuals and families. It does not include life and health insurance.

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  Homeowners Policy is a package policy. This means that it covers both damage to your
property and your liability or legal responsibility for any injuries and property damage
you or members of your family cause to other people. This includes damage caused by
household pets.
 Auto Policy provides insurance coverage for damage or injury to others, in the form
of liability insurance, physical damage to automobile and can also provide coverage for
injuries or damages to the insured. The PAP covers personal vehicles, but not
recreational vehicles.
 Watercraft Policy covers not only legal liability that may arise from accidents involving
the boat, but also physical damage to the boat.
 Umbrella liability Policy provides excess coverage above underlying policies and may
also provide coverage not available in the underlying policies, subject to self-insured
retention.

Commercial Insurance Policies

Loss exposures that arise from a business operation are covered under commercial insurance
policies. These are common types of commercial insurance:

 Commercial Property insurance covers damage to buildings or contents that results

from fire, vandalism, and other causes of loss.

 Commercial General Liability insurance protects the insured against claims alleging that
the insured is legally liable for bodily injury to others and for damage to the property of
others. For example, a retail store could be responsible if a customer falls on the store’s
wet floor and is injured.

 Commercial Auto insurance protects a business organization against claims for legal
liability to others for bodily injury or property damage resulting from the use of vehicles
owned or operated by the business.

 Workers Compensation insurance provides coverage for benefits an employer is

obligated to pay under workers compensation laws. These benefits are payable
regardless of who caused the injury or illness.

 Commercial Umbrella Liability Policy, which is similar to personal umbrella policy,

provides additional limits beyond those provided by the CGL, commercial auto, other
policies, protecting the insured in the event of a large liability loss.

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Multi-tiered Insurance Program

Umbrella Insurance

A liability policy that provides excess coverage above underlying policies and may also provide
coverage not available in the underlying policies, subject to self-insured retention. It provides limits
in addition to those available under a primary policy

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Speciality Insurance

Individuals, businesses and other organizations buy specialty insurance to provide protection
against financial losses. This type of insurance coverage goes beyond ordinary policies and often
centres on providing insurance for more exclusive or difficult risks.

Types of Speciality Insurance

There are different types of specialty insurance provided, they are:-

 Aviation

Aviation insurance is insurance coverage geared specifically to the operation of aircraft and
the risks involved in aviation. Aviation insurance policies are distinctly different from those
for other areas of transportation and tend to incorporate aviation terminology, as well as
terminology, limits and clauses specific to aviation insurance

 Marine

Marine insurance covers the loss or damage of ships, cargo, terminals, and any transport or
cargo by which property is transferred, acquired, or held between the points of origin and
final destination
Hull & Machinery Insurance – Hull & Machinery insurance is fundamental protection of a
vessel against damage
Cargo Insurance – Insurance that covers cargo as it is transported to another location. It can
be further segregate in two segments

 Aerospace

Pre-launch – Covers all the loss or damage to the satellite or its components from time they
leave the manufacture premises, during the transit to the launch date, through testing,
fueling till the time the launcher’s rocket engines are not ignited.

Launch – Insurance provides coverage for the period from the intentional ignition of the
engines until the satellites separates from the final stage of the launch vehicle or it may
continue until completion of the testing phase in the orbit.

In Orbit – Coverage while in orbit provides for physical loss, damage, or even failure of the
insured satellite while in orbit or during orbit placement.

TPL – Third party liability is the final section of the policy which is the statutory requirement
of the Government of the nation where the launch will take place.

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 Aerospace insurance deals with the insurance of Space Shuttle from the launch till the life
span of it in the outer orbit. It may also provide coverage for the separation of the space
shuttle from the launching device. This type of insurance covers

 Terrorism

Terrorism coverage provides protection for any loss arising out of terrorist activities. It may
also cover claims arising from riots, political violence, and other violent public disturbance

Terrorism coverage can be purchased with other insurance policy; however it can also be
taken separately for specific perils like riots and political violence

 Programs

It provides coverage to an organization which hires agents or executive to directly deal with
their customer. As an example a life insurance company which works with thousands of
insurance agents or may be a pizza restaurants with counter executives and thousands of
delivery man

It provide different coverage as per the need of the organization in bulk

 Specie and Fine arts

Specie insurance is usually divided into three separate sub classes; cash, fine art, and
general specie.

It provides coverage for valuable arts and museum organizing exhibition or art gallery from
different types of perils. It also provides coverage for jewelry trade, armored car industry
and financial institution-related premises and transit risk.

This insurance requires art valuation from different auction house, private and corporate
collector, curators etc. Along with that it requires valuation from experienced consultant
and specialized market analysts to arrive at a value

 Bloodstock

Bloodstock insurance covers individual horses or a number of horses under common

ownership. Coverage is typically for mortality as a result of accident, illness or disease but
may extend to include infertility, in-transit loss, veterinary fees, and prospective foal

Reinsurance

 Reinsurance is an agreement between two insurers to share the financial consequences

of a loss.

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  A primary insurer buys reinsurance for the same reasons that individuals and businesses
buy insurance that is to transfer some risk and share losses.
 Almost every insurer, whether property-casualty or life and health, purchases
reinsurance.
 Policyholders of a primary insurer are unaware of the transaction and are seldom
affected by it.

Reinsurance Terminology

 In the Reinsurance parlance, the primary insurance companies are called cedants as they
cede a part of the risk to reinsurance companies by paying a premium.
 Act of ceding the risk by insurance companies is called cession
 A Reinsurance company can also cede a part of its risk to another reinsurance company
and this is called Retrocession
 Retrocessionnaire is the reinsurance company that provided reinsurance to another
reinsurance company
 Retrocession recoverable is the amount of money that a reinsurance company is to
receive from another reinsurance company for their share of a claim

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 NOTES

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 Unit 3

Insurance Function: Marketing

Overview of Insurance Functions

Marketing

 Market research to determine the needs of potential customers

 Advertising to inform customers about product and services
 Select marketing system
 Train the sales force to meet the customer’s need

Underwriting

The process of selecting insureds, pricing coverage, determining insurance policy terms and
conditions are activities performed by the underwriters. The underwriter always have 3 options
that he can execute

 Accept without modification

 Reject
 Accept with modification

Actuarial

 Actuaries are well-trained professionals in mathematics and statistics

 The actuarial department develops and maintains pricing techniques and rating plans
 Their primary role is to predict, with reasonable accuracy, the probability that people of
a particular risk classification will suffer a financial loss
 Actuaries ensure the company’s products meet the necessary regulatory requirements
related to pricing. They also make sure the insurance company has enough funds in
reserve to pay future claims and provide advice on how to invest the insurance
company’s assets

Claims

This department records, investigates and settles every claim submitted to the insurer. The process
are made up of six activities:

 Acknowledge a claim and assign to a representative

 Identify the policy

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  Contact the insured
 Investigating and documenting the claim
 Determining cause of loss and loss amount
 Concluding the claim

Risk Control

 This department only works on commercial account. The primary purpose of insurer’s
risk control function is to suggesting ways by which the losses could be prevented or
reduced.
 For example, a risk control representative can provide expert advice concerning
sprinkler systems for fire suppression.

Premium Audit

 Methodical examination of a policyholder's operations, records and books of account to

determine the actual exposure units and premium for insurance coverage already
provided.
 They only work on commercial accounts at the end of the policy period to determine any
adjustments to the premium that may be required based on the insured’s actual loss
exposures during that period

Parties to the Insurance Transaction

Insured – The party protected by an insurance policy

Insurer – The second party to the insurance transaction is the insurer. If the customer’s
characteristics do not meet the insurer’s eligibility and selection guideline, the insurer will decline
to provide coverage, and the customer must then seek insurance coverage with another insurer.

Producer – Many insurance policies are sold through producers. A producer is a person who sells
insurance products for one or more insurers. They are intermediaries between organizations that
provide insurance coverage and services (insurers) and the people who needs insurance coverage.

Types of Marketing Systems

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Independent Agency – Are not employees of any insurer and are usually free to work with as many
insurers as they want.

Exclusive Agency – An insurance marketing system under which agents contract to sell insurance
exclusively for one insurer

Brokers – Is similar to an agent that is the broker also sells insurance products to individuals and
businesses and provides policy service. However, the broker represents the prospective insured,
while the agent represents the insurer.

Direct Writing – These are sales representatives who are the employees of the insurer and receive
a salary, a bonus, commissions, or a combination of the three.

Direct Response – The direct response marketing system does not use producers. Although this
marketing system is also called direct mail, where customers can contact insurers via internet or
telephone, not just by mail. Direct response relies heavily on advertising and targeting specific
groups of affiliated customers.

Expiration list

The record of an insurance company’s current policyholders and the dates their policies expire.

Producer Functions

Producers perform many important functions, which vary from one producer to another. These are
a producer’s typical functions:

 Prospecting – Involves locating persons, businesses and other entities that might be
interested in purchasing the insurance products and services offered by the insurer.

 Risk management review – Develop and analyze loss exposure information for personal or
commercial insureds.

 Sales – Selling insurance products and services is one of the most important functions of an
insurance producer because sales are essential to sustaining the livelihood of the agency or
brokerage.

 Policy issuance – Maintain a supply of an insurer’s preprinted policies and forms in their
offices and issue them as needed by their customers or insurers send it to the producers for
delivery to the insured.

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  Premium collection – Producers who issue policies might also prepare policy invoices and
collect premiums. The agency bill process be used for personal insurance policies, but it is
more commonly used with large commercial accounts. In case the insured directly sends the
premium payment to insurer, bypassing the producer. It’s known as direct bill.

 Customer service – Producers offer value added services for example policy change request,
quote a price for additional coverages, or transfer a customer who had a loss to the claim
department.

 Claims handling – In some cases, the producer may simply give the policyholder the
telephone number of the insurer’s claim department and possibly the name of a person to
speak with. Many producers are authorized to adjust some types of claims – for example
property losses under $5,000.

Lifecycle of an Insurance policy

 The procedure for selling insurance begins when the prospect and the producer completes a
survey questionnaire through which a producer evaluates the insurance needs of an
insurance buyer.
 Bases the insurance needs, both producer and insurance buyer fill an application form. The
process of filling up the application is called Interview. The application is used by the
underwriters to evaluate requests for coverage.
 The customer service representative at the producer’s office sends the package of material
to underwriter. This process is called Submission. Application is a major part of Submission.

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  Once all information is provided to the underwriter he has three options with him – Accept
without modification, Reject or Accept with modifications.
 A quote on the coverage that can be provided is shared by the underwriter with the broker
or applicant.
 If the provided insurance policy needs the applicant needs, he can accept the quote else
reject it and start the entire process again.
 If the applicant accepts the quote, the insurer temporarily extend him coverage, while the
underwriting company is reviewing his application. This is called bound insurance and the
coverage is extended based on the assumption that the applicant will be approved for the
insurance plan that he applied for. Applicants are required to pay all of their premium in
order for the bound insurance to become active.
 Finally the policy is issued to the applicant by the insurance company.

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 NOTES

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 Unit 4

Insurance Function: Underwriting

Purpose of Underwriting

Develop and maintain a profitable book of business by

 Minimizing adverse selection – The tendency for people with the greatest probability of
loss to be the ones most likely to purchase insurance. Underwriters reduce the
likelihood of insured loss levels that would result in unprofitable business
 Protecting the insurer’s capacity – The amount of business an insurer is able to write,
usually based on a comparison of the insurer’s written premiums to its policyholders’
surplus
Written Premium (3:1) Surplus

The Underwriting Process

Whether replying on independent judgment or the guidance of expert systems, underwriters

engage in an underwriting decision-making process designed to ensure that, ultimately, insurers are
able to reach their business goals. Insurers increasingly use expert systems, which help them make
better and more consist underwriting decisions.

The underwriting process consists of these activities

 Gathering the necessary information

 Making the underwriting decision
 Implementing the underwriting decision
 Monitoring the underwriting decision

Gathering the necessary information

The application for insurance contains the applicant’s responses to questions the insurer has asked
and thus provides essential underwriting information. Underwriters can obtain information from
various other sources, such as these:

 Producers – They might provide information which is not included on application or

renewals such as a business’s annual report.

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  Inspection reports – Risk control representatives, who duties include physically inspecting
the premises, reviewing the operations of applicants and preparing reports for
underwriters.
 Government records – Motor vehicle records (MVRs) are commonly used in underwriting
auto insurance. MVR are moving violation such a speeding tickets and serious accidents that
a driver has had in the past several years.

 Financial Reports – Underwriters are interested in financial condition of insurance applicants

for two important reasons:

 If a business face financial problems, maintenance programs might suffer

cutbacks, and it might have more claims.
 Underwriters want to make certain that the applicant will be able to pay
insurance premium.
 One of the best sources of unbiased financial information is Dun & Bradstreet
report which is the world’s largest credit reporting organization.

 Claim files – An applicant’s loss history is usually provided to an underwriter when an

application is submitted to the insurer.

 Applicant’s or insured’s records – Underwriters can obtain information from copies of

property bills of sale, jewelry appraisals, financial statements etc.

Making the Underwriting Decision

In evaluating each application, an underwriter has three options:

 Accept the application without modification

 Reject the application
 Accept the application with modification

When customer request a set of policy provisions, then the underwriter can add deductible to it
and give the same coverage even if it’s not preferred risk.

Implementing the underwriting decision

All decisions are clearly communicated to the producer and insured. Incase decision made using
expert systems and the application is approved, the policy will automatically be issued else
underwriter can approve the application for policy issuance.

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Some applications may exceed the underwriter’s authority and require a supervisor’s approval.

Monitoring the underwriting decision

By monitoring the nature and number of claims that develop, underwriters can evaluate whether
additional underwriting action is required

Recommending additional risk control measures, modifying the terms of the coverage, canceling
coverage (if permitted by regulatory authorities), or making the policy for nonrenewal at the end of
the current policy term

Premium Determination

Premiums for many kinds of insurance are developed by applying “rates” to “exposure units”. An
insurance rating system is an orderly method for arriving at an appropriate premium which can
broadly be divided into two categories:

 Class Rating - Class rating places similar insured’s into categories, or “classes”, and applies
same rate to all insured’s in the particular class.
 Individual Rating – A type of insurance rate that reflects the unique characteristics of an
insured or the insured’s property

Exposure Units

Exposure units are the standard units used in insurance rating.

Insurance rates

Insurance rate is the price of insurance for each unit exposure. The rate is multiplied by the number
of exposure units to arrive at a premium.

Number of items divided by unit size = Number Of units

Rate per unit x No. of units = Premium

For example

A commercial property policy has a rate of $0.50 per $100 of building insurance, and the building is
being insured for $600,000.

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 Insured value / Unit size = Number of exposure units

$600,000 / $100 = 6,000 Units

Rate per unit x Numbers of exposure units = Premium

$0.50 x 6,000 = $3,000

Insurance Advisory Organizations

 Insurance advisory organizations work with insurers in developing insurance rating systems
 Insurance Service Office, Inc. (ISO) – analytical and decision-support products and services
to the property casualty industry
 National Council on Compensation Insurance (NCCI) – manages database of workers
compensation insurance information, analyzes industry trends, prepares workers
compensation rate recommendations and assists in developing state-specific workers
compensation forms and endorsements

Measuring underwriting Results

Financial Tools

These three ratios are typically used to assess an insurer’s underwriting result

Loss ratio: Percentage of the premium that goes to pay claims

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 Loss Ratio = Incurred losses (including loss adjustment expenses) / Earned Premium

Expense Ratio: Percentage of the premium that goes to pay the insurance company’s operating
expenses.

Expense Ratio = Underwriting expenses / Written Premium

Combined Ratio: Sum of the Loss and Expense Ratio

Combined Ratio = Loss Ratio + Expense Ratio

Non-Financial Tools

In the insurance industry, nonfinancial tools used to assess an insurer’s underwriting results often
include these:

 Product mix - Product mix pertains to the variety of products a company sells
 Pricing – levels of premium adequacy by comparing the premiums actually charged to the
standards
 Retention ratio – The percentage of insurance policies renewed
 Success ratio – The ratio of insurance policies written to those that have been quoted to
applicants for insurance
 Customer service – Measure services insurer provided directly to their insureds

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 NOTES

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 Unit 5

Insurance Function: Claims

Claims

A claim is a demand by a person or business seeking to recover for a loss. A claim can be made
against an individual or insurance company.

Insureds or others present claims to the insurer after they suffer a loss that they believe is covered
by the policy.

Basic terms related to claims

 First party claim – Claims by an insured seeking to recover from its insurer for a loss to its
property.

 Third party claims – A demand of payment against and insured by a person or organization
other than the insured, seeking to recover damages that may be payable by the insured’s
liability insurer.

 Claimant – A party that makes a claim and it can be either a first party claimant or a third
party claimant.

 Claim Representative – A person responsible for investigating, evaluating, and settling

claims.

 Independent Adjuster – An independent claim representative, who handles claims for

insurers for a fee.

 Public Adjuster – An outside organization or person hired by an insured to handle a claim on

insured’s behalf.

 Third party administrator (TPA) – An organization that provides administrative services to

insurer for claim handling etc.

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The Claim handling Process

The claim handling process is made up of six activities:

 Notifying the insurer

Whenever a loss occurs, the insured has an important duty to notify the insurer as soon as
possible. Timely notification is vital to the insurance company due to the fact that investigation
of the claim can best take place when the evidence is fresh and when the memory of witnesses
is clear.

 Identifying the coverage

Making sure that claim is covered by an insurance policy that is in effect

 Contacting the insured

The claim representative may schedule a time to meet with the insured or a party representing
the insured as part of the initial contact and verification of coverage

 Investigating and Documenting the claim

The claim representatives commonly conduct many investigations, such as insured/witness

investigations, claimant investigations, accident scene investigations, and medical
investigations.

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 Documenting a claim can involve these activities:

 Gathering records
 Photographing or taking video recordings of loss scene
 Drawing diagrams of damaged areas of accident scenes
 Reviewing the loss notice and financial records or examining inventory to
determining the scope of loss
 Taking statements of the involved parties and witness
 Obtaining medical records

 Determining cause of loss and loss amount

The claim representative compares the information from the loss investigation to the terms of
the policy to determine whether the policy covers the cause of loss. If so, the claim
representative determines the amount of the loss.

 Concluding the claim

Once the cause of loss and the loss amount have been determined, the claim can be concluded
by issuing appropriate payments. Claims not covered by the policy are denied.

Roles of Claim Personnel

Claim department structures and the job titles used to describe claim personal vary among
different types of organizations.

The various roles of claim personnel are discussed here using these common job titles:

 Claims managers
 Supervisors
 Claim representative
 Technical specialists
 Customer service representative
 Producers

Claims managers

A claims manager directs and supervises the activities of some portion of an insurer’s claim
department

Their responsibilities would be:

 Setting goals
 Developing staff members’ skills

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  Monitoring workloads
 Monitoring losses and expenses
 Establishing claim producers and ensuring compliance

Supervisors

Claim supervisors support the claim management functions of the managers to whom they report

Their responsibilities would be:

 Monitor claim files

 Evaluate performance
 Develop strategies for solving problems
 Determining training needs

Claim Representatives

Different types of claim representatives, including telephone claim representative, field claim
representatives, field claim representatives, and specialized claim representatives

 Telephone claim representative

An insurer employee who handle claims that can be settled by phone, mail, or e-mail from
inside the insurer’s office. They generally handle small claims.

 Field claim representative

An insurer employee who handle claims that are best handled in person; much of the field
representative time spent visiting the scenes of a loss; interviewing witnesses; investigating
damage; and meeting with insured’s claimants, lawyers, and person involved in the claim.

 Specialized representative

Depends on the size of the organization, claim representative may be specialized in a

particular type of claim. The increasing complexities in the claim handling environment
often requires such specializations.

 Technical Specialized

Technical specialists include these: Origin & cause experts, material damage appraisers,
reconstruction experts, medical consultants and rehabilitation nurses

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Customer Service Reps and Producers

Customer service representative are most often the insured’s or claimant’s first contact in the claim
handling process.

Producers

Insurance producers are often involved in the claim handling process. Some insured’s call their
producers first when the claim occurs. Most insurance companies gives the draft authority to the
producers, which is the right to pay small claim amount such as $2,500 at their own end.

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 NOTES

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 Unit 6

Insurance Regulation

Insurance Regulation

McCarran – Ferguson Act (Public Law 15)

The McCarran-Ferguson act, also called Public Law 15, gained congressional support and was
passed in 1945. The law established that the insurance industry was not subject to most federal
laws and that regulation of insurance was primarily the responsibility of the states

Federal laws still apply to insurance industry in areas such as:-

 Labor
 Tax
 Security

The main goal of insurance regulations is to ensure that insurance companies:

 Remain solvent
 Conduct their businesses fairly and ethically

Insurance regulations vary from country to country e.g. In India, authority over regulation is under
the supervision of national Insurance Regulatory and Development Authority (IRDA).

Why Insurance Operations are regulated

Insurers are regulated primarily for three reasons:

 To protect consumers

 To maintain insurer solvency

 To prevent destructive competition

Insurer Licensing

Most insurance companies must be licensed by the state insurance department before they are
authorized to write insurance policies in that state.

 Domestic Insurer – An insurer doing business in the jurisdiction in which it’s incorporated

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  Foreign Insurer – An insurer licensed to operate in a state but incorporated in another state

 Alien Insurer – An insurer domiciled in a country other than the United States

 Admitted Insurer – An insurer to which a state insurance department has granted license to
do business within that state

 Nonadmitted Insurer – An insurer not authorized by the state insurance department to do

business within that state

Insurance Rate Regulation

When deciding to approve or disapprove an insurer’s request for a rate, a state insurance
commissioner usually considers three major criteria:

 Adequate
 Not excessive
 Not unfairly discriminatory

Different states meet these criteria by different types of rating laws that vary in the type and extent
of control the state asserts over insurer’s rates:

 Mandatory rate law – State law under which the rates are decided by the state agency or
the rating bureau and all the licensed insurers are required to use those rates.

 Prior-approval law – An insurance rating under which the rates and the supporting rules
must be filled with and approved by the state insurance department before they can be
used.

 File-and-use law – An insurance rating law in which the rates must be with the state
insurance department for approval prior to use, however they can be used immediately
post filling.

 Use-and-file law – An insurance rating law in which the rates must be filed with the state
insurance department within the specified period after they are put into use.

 Flex rating law – An insurance rating law under which approval is required only when the
rates exceed the certain defined percentage above or below the rates previously charged.

 Open competition – An insurance rating law which permits the insurance companies to use
the rates without filing or getting approved. This is driven by the market demand and
supply.

Administer IRIS

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  Regulators administer the Insurance Regulatory Information System (IRIS), which helps them
identify insurers with potential financial problems

 Uses data from an insurer’s financial statements to develop financial ratios that assess the
insurer’s overall financial condition

 Meant to be early warning system

 Guaranty fund may be available to reduce the effects of the insurer insolvency

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 NOTES

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 Unit 7
Insurance Policies

Insurance Policy Structure

Forms Format

 Pre-printed Forms

An insurance form that meets the needs of many policyholders and is therefore printed in bulk
for future use

 Manuscript Forms

An insurance form that is drafted according to terms negotiated between a specific insured (or
group of insureds) and an insurer

Policy Format

 Self-contained policy

A single document that contains all the agreements between the insured and the insurer and
that forms a complete insurance policy

 Modular policy

An insurance policy that consists of several different documents, none of which by itself forms a
complete policy

Policy Provision

Declaration Page

The declaration page of an insurance policy contain information that the policyholder declared as
on application for insurance such as:

 Name and address of policyholder

 Policy number
 Policy inception and expiration dates
 Insurer’s name
 Producer’s name
 Physical address and description of covered property or operation

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  Numbers and edition dates of all attached forms and endorsements
 Dollar amounts of application policy limits, deductible (If any)
 Premium amount

1. Policyholder name and location of insured dwelling

2. Company name
3. Policy number
4. Premium
5. Mortgage holder name and address
6. Summary of basic coverages and limits
7. a.) Deductible (amount policyholder must pay per claim or accident)
b.) Hurricane deductible

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8. Liability protection
9. Type of policy (in this case, HO-3)
10. Optional coverage (called an endorsement) for special items such as jewellery or silverware
11. Coverage offered or required under Florida law
12. Name of agent or company representative

Insuring Agreements

Insuring agreement is an insurance policy provision that states, in broad terms, the promises made
by insurance company. An insurance policy provision coverage only if the claim is within the scope
of the promise expressed in an insuring agreement. The insuring agreement is usually so broad that
it includes coverage for some losses that the insurer does not intend to cover. A policy can more
than one insuring agreement, however it’s not necessary that everybody buys all the portions.

 For example, the personal auto policy (PAP) contains provisions for liability, medical
payments, uninsured motorists, and physical damage coverages , and each coverage has its
own insuring agreement

Conditions

Insurance policy conditions explain duties, rights and options of the insured and insurance
company.

The insurer’s obligation, may include these duties

 To pay covered losses

 To defend the insured from lawsuits
 To provide other services to the insured

The insured’s obligation, may include these duties

 To pay premiums
 Provide all information at the time of applying for Insurance
 To report losses promptly and accurately

Exclusion

Exclusions are policy provision that restrict the broad terms of the insuring agreement by stating
some exceptions to coverage – certain activities, loss causes, property, person and places for which
the insurer does not provide coverage. IT is necessary to keep exclusions in insurance policies so
that insurance premium can be kept reasonable. Also some exclusions eliminate duplicate
coverage. They are also used to eliminate coverages that are not needed by a typical policyholder.

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Endorsements

A document that amends an insurance policy

Adds or modifies an insurance policy. An endorsement may be a few words handwritten into a
policy, or it may be a separate document of one or more pages – preprinted, computer-printed,
typewritten, or handwritten – that is attached to the policy.

Definitions

Most words in an insurance policy provision have the standard meaning that appears in a
dictionary. The definitions in insurance policy state the special meaning that applies to some words
and expressions when used in the policy. Words defined in some policies are printed in bold face
type or in quotation marks.

Miscellaneous Provisions

Miscellaneous provisions are insurance policy provisions that do not fit into any of the other
category.

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 NOTES

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 Unit 8

Commercial Property Insurance

Commercial Insurance

Business owners are concerned about insurance on building and their contents. Some properties
require special insurance coverages. A business might be unable to operate because of damage to
business property. A business interruption might be accompanied by a loss of business income.

Three aspects of commercial property loss exposures

 Types of property
 Buildings
 Contents
 Property in Transit
 Property in the Possession of others
 Floating Property

 Causes of loss to property

 Financial consequences of property loss

Commercial Property Insurance Coverage

Covered Property - Business and personal property coverages

 Buildings
 Completed additions to covered building
 Fixtures (including outdoor fixtures)
 Permanently installed machinery and equipment
 Personal property owned by the insured

 Business Personal Property

 Furniture
 Machinery and equipment
 Stock including merchandise, finished goods

 Personal Property of Others

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This coverage is designed to protect the insured against loss or damage to the personal property of
others while such property is in custody of insured. Customer’s property in custody such as
laundries, dry cleaners and appliance repair shops

For example Bailee – The party temporarily possessing the personal property in a bailment

Covered locations

 The determination of the location of covered property do not necessary remain at a fixed
location. For example, the building contents might be removed from the premises for repair
or storage.
 BPP and similar policies provide coverage for property that is on or within 100 feet of the
insured premises
 Inland marine insurance covers many loss exposures that the BPP and similar forms
exclude. These exposures include property in domestic transit; property situated at the
premises of others; and “floating property,” such as a contractor’s tools and equipment,
which could be situated at several different jobs sites during the policy period

Covered causes of loss

These are the three different levels of coverage for commercial property policies on buildings:

 Basic form coverage – The lowest cost version that provides coverage for approximately
one dozen named perils like fire; lighting; explosion; windstorm or hail; smoke; aircraft or
vehicles; riot or civil commotion; vandalism; sprinkler leakage; sinkhole collapse; volcanic
action; and fungus, wet rot, dry rot, and bacteria

 Broad form coverage – A higher cost version that adds several perils to those covered by
basic coverage. The additional causes of loss covered are falling of objects; weight of snow,
ice, or sleet; water damage; and collapse caused by certain perils

 Special form (open perils) coverage – The highest cost version that covers all causes of loss
that are not specifically excluded. It covers all the perils of Broad form coverage, as well as
other perils

Covered financial consequences

Commercial property insurance also can cover other financial consequences of a property loss like:-

 Extra expenses

 Business income insurance – Insurance that covers the reduction in an organization’s

income when operations are interrupted by damage to property caused by covered
perils

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  Extra expense coverage – Insurance coverage for extra expenses incurred by the named
insured to avoid or minimize the suspension of operations resulting from direct damage
caused by covered cause of loss

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 NOTES

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 Unit
Unit9 9
Commercial Liability Insurance

Commercial Liability Loss Exposure

Elements of liability loss exposure

 Basis for legal Liability:

 Tort – A wrongly cat or omission other than a crime or breach of contract, for which
the remedy is usually monetary damages. The most common tort is negligence that
occurs when a person fails to exercise a reasonable degree of care that a person in a
similar situation would exercise to avoid harming others

 Statute – It is a written law enacted by legislature. Workers compensation and no-

fault auto laws are the examples of statutes.

General Liability Insurance:

Coverage A – Bodily Injury and Property Damage Liability

Subject to application exclusions and conditions, coverage A insures two general categories of loss
exposures:

 Premises and operations liability – It entails the possibility that an organization will be held
liable because of bodily injury or property damage caused by accidents either occurring on
premises or occurring away from the premises.

 Products and completed operations liability – Products Liability relates to the potential
legal liability of the manufacturer, distributor, or retailer to the user or consumer of a
product because of injury or damage resulting from the product. Competed Operations
Liability is for injury or damage due to work completed by the exposed party.

Coverage B – Personal and Advertising Injury Liability

Injury arising out of several specified offenses that could be committed in the course of the
insured’s operations or advertising activities.

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Examples are libel, slander, false arrest, and use of another’s advertising idea

 Libel – A written or printed untrue statement that damages a person’s reputation

 Slander – A defamatory statement expressed by speech

 False Arrest – The seizure or forcible restraint of a person without legal authority

Injury to financial condition, injury to reputation, and psychological injury

Coverage C – Medical Payments

Medical payments coverage pays regardless of whether the insured is legally liable. It is not
technically liability insurance, even though it is commonly included in liability insurance policies.
Purpose is to provide a modest amount of insurance for settling minor injury cases without
requiring a determination of liability

WC and EL Liability Insurance

The WC & EL policy provides its two basic coverages in these coverage sections:

 Part 1 – Workers Compensation Insurance

Unlimited medical expense benefits for a covered injury or disease. Disability income
benefits, which compensate an injured employee for wages loss due to a covered injury or
disease. Rehabilitation benefits, which include expenses for complete medical rehabilitation
following a covered injury and disease. Death benefits, which includes a flat amount for
burial expenses as well as partial replacement of wages.

 Part 2 – Employers Liability Insurance

Bodily injury claims made by an employee whose occupation is not covered by the
applicable workers compensation law.

Umbrella Liability

An umbrella liability policy provides limits of insurance that apply in addition to the limits of the
insured’s primary liability policies, including CGL, business auto, employer’s liability and other
liability policies.

This coverage becomes applicable when the amount of damages for which the insured is liable
exceeds the limit of an underlying policy.

Umbrella policies may also cover, on primary basis, some claims that are not covered at all by the
underlying policy. Such coverages are often referred to as “Drop down Coverage”

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 NOTES

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Terminologies

Words Definitions
Insured The person or company transferring the risk of loss to a third party through a
contractual agreement. This is the person or entity who will be compensated
for loss by an insurer under the terms of the insurance contract.
Insurer A person or company that accepts the risk of loss and compensates the
insured in the event of loss in exchange for a premium or payment(usually
an insurance company)
Deductible A provision in an insurance contract stating that the insurer will pay that
amount of any insured loss that is in excess of a specified amount. The
specified amount is the deductible.
Prospective "Prospective clients" or sometimes we call them "potential clients” refers to
Clients /Potential those people/agencies whom you expect to become your clients in near
Clients future. They are not your clients (insured) as of now but, there is reason to
believe that if you follow a good marketing strategy, they can be your
genuine clients in the near future.
Binder A temporary insurance contract that provides proof of coverage until a
permanent policy is issued
Underwriter The person who reviews an application for insurance and decides if the
applicant is acceptable and at what premium rate
Submission A proposal for insurance submitted to an underwriter. The term implies
more than simply a completed application unless the application contains all
the information needed by the underwriter
Insurance Quote An insurance quote is an estimate of what your rate could be with a
potential insurance carrier. Quotes are subject to change depending on how
much information you give at the time of the quote. The more forthcoming
you are with information, the more accurate your insurance quote
Cancellation Termination of an insurance policy by the company or insured before the
renewal date
Occurrence An occurrence-based policy provides insurance coverage for a loss that
Based Policy "occurred" during the policy period, no matter when the claim is brought
against the insured.
Claims Made A claims-based policy provides coverage for a claim that is brought within
Policy the policy period, no matter when the loss occurred.
Cover Note A document used to provide evidence of insurance if policy documents are
not immediately available. It is similar to a "binder" in U.S. insurance terms
ALAE It stands for Allocated Loss Adjustment Expense. These are the expenses
incurred for a specific claim settlement. For instance, in the event of a
surveyor assessing the extent of damage of an insured vehicle, the costs
incurred for appointment of the surveyor become part of the allocated loss
adjustment expense.
ULAE It stands for unallocated loss adjustment expenses. These are the expenses
that are incurred by the insurer for routine operations of the claims
department like salaries, maintenance, etc. These costs are not incurred for
a specific claim but are incurred for the overall operations of the department

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 Reserves The claims reserve is money that is earmarked for the eventual claim
payment. The claims reserve funds are set aside for the future payment of
incurred claims that have not been settled and thus represent a balance
sheet liability
Deductible The amount the insured must pay in a loss before any payment is due from
the company
Bodily injury (BI) Physical injury to a person, including death
Property damage Physical damage to property
(PD)

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