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Insurance Business

I. Risk and Risk Management Risk A condition in which there is a possibility of an adverse deviation from a desired outcome that Is expected or hoped for (possibility of loss) Uncertainty concerning loss Risk Distinguished from Peril and Hazard a. Peril - a specific contingency that may cause of a loss - fire, explosions theft, storm, etc. b. given peril. 1. Physical Hazard - physical condition that increase the chance of loss from various perils. 2. Moral Hazard - the increase in the probability of loss that results from dishonest tendencies in the character of the insured person. 3. Morale Hazard - acts to increase both the frequency and severity of losses when such losses are covered by insurance. Risk Management - Process to systematically manage risk exposures by anticipating possible losses and designing and implementing procedures that minimize the occurrence of loss of the financial impact of the losses that occur. Risk Management Process 1. Identify Risks 2. Evaluate Risks 3. Select Risk Management Techniques 4. Implement and Review Decisions Risk Management Techniques: Non- insurance 1. Risk Avoidance Conscious decision not to expose oneself or ones firm to a particular risk of loss Not always desirable because when a risk is avoided, the potential benefits, as well as the costs, are given up. 2. Loss Control Actions taken to reduce the frequency or severity of losses Different in risk avoidance because the firm or individual is still engaging in operations that give rise to risk. 3. Risk Retention Handling risk by bearing the results of risk, rather than employing other methods of handling it Hazard - factors that affect the extent of loss - a condition that may create or increase the chance of loss arising from a

Planned vs. Unplanned o Planned Retention - Conscious and deliberate assumption of recognized risk o Unplanned Retention - When a firm or individual does not recognize that a risk exists and unintentionally believes that no loss could occur Funded vs. Unfunded o Funded Retention - Preloss arrangement to ensure that money is readily available to pay for losses that occur o Unfunded Retention - Absorbing the expense of losses as they occur, rather than making any special advance arrangements to pay for them 4. Risk Transfer Risk management technique whereby one party (transferor) pays another (transferee) to assume a risk that the transferor desires to escape. Hold- Harmless Agreements/ Indemnity Agreements Incorporation Diversification Hedging Insurance II. Insurance as a Risk Management Technique Insurance (Defined in two major contexts) A. Economic/ Social Institution - Insurance involves Risk Transfer, Pooling and Risk Reduction. Insurance reduces risks by combining under one management a group of objects situated so that the aggregate losses to which the insureds are subject become predictable within narrow limits; insureds transfer various risks to the group and exchange a potentially large, uncertain loss for a relatively smaller certain payment. (Premium) Pooling sharing of total losses among a group which facilitates risk reduction

B. Legal Contract between two parties (Insured and Insurer) - Insurance is usually implemented through legal contracts, or policies, in which the insurer promises to reimburse the insured for losses suffered during the term of the agreement.
Principles Underlying Insurance Mechanism 1. Principle of Indemnity - An insured may not collect more than the actual loss in the event of damaged caused by an insured peril; serves to control moral hazards that might exist. 2. Principle of Insurable Interest - An insured must demonstrate a personal loss or else be unable to collect amounts sue when a loss caused by an insured peril occurs. 3. Principle of Subrogation

One who has indemnified anothers loss is entitled to recovery from any liable third parties who are responsible. 4. Principle of Utmost Good Faith - A higher standard of honesty is imposed on parties to an insurance agreement than is imposed through ordinary commercial contracts. - Both parties to the contracts are bound to disclose all the facts relevant to the transaction. Representation Statement made by the insured in applying for insurance, usually in response to a question by the insurer. Misrepresentation voids the insurance if it is material to the risk. Warranty A clause in an insurance contract stating that before the insurer is liable, a certain fact, condition or circumstance affecting the risk must exist. Creates a condition of the contract, and any breach of warranty, even if immaterial will avoid the contract. Express Warranties stated in the contract Implied Warranties not found in the contract but are assumed by the parties to the contract Promissory Warranty describes a condition, fact, or circumstance to which the insured agrees to be held during the life of the contract Affirmative Warranty one that must exist only at the time the contract is first put into effect Concealment Failure to reveal certain facts known to the insured that are not such common information that the insurer should also know them. The applicant must also volunteer material facts even if the disclosure of such facts might result in rejection of the application or the payment of a higher premium. Mistake Refers to situation where it can be shown that the actual agreement made was not the one stated in the contract. Requisites if Insurable Risks 1. There must be sufficiently large number of homogenous exposure units to make the losses reasonable. 2. The loss produced by the risk must be definite and measurable. 3. The loss must be fortuitous or accidental 4. The loss must not be catastrophic Requirements if an Insurance Contract 1. Agreement must be for legal purpose. 2. Parties must have legal capacity to contract 3. There must be valid offer and acceptance 4. Promises must be supported by the exchange of consideration. (value given to each contraction party) Distinguishing Characteristics of Insurance Contracts

A. Aleatory Contract - The values exchanged by the contracting parties are not necessarily equal - Due to the fact that the outcome of the contract depends on the risk of whether a loss will occur. B. Conditional Contract - Insureds must perform certain acts or conditions of recovery are to be made. ( payment of premium, providing adequate proof of loss, and giving immediate notice to the insurer of a loss) C. Contract of Adhesion - Any ambiguities or uncertainties in the wording of the agreement will be construed against the drafter the insurer. D. Unilateral Contract - Only one of the parties makes the promises that are legally enforceable. Roles A. of Agents and Brokers Insurance Agent Assumed to be the legal agent of the insurer Person given the power to act for a principal, who is legally bound by the act Authorized Agents General Agent person authorized to conduct all of the principals business of a given kind in a particular place Special Agent authorized to perform only a specific act or function B. Insurance Broker - Legal agent of the prospective insured and is engaged to arrange insurance coverage on the best possible terms

Insurance Policy 1. Declarations identify the insured describe the property, activity or life being insured state the types of coverage purchased, the applicable policy limits, and the term of the coverage indicate the premium paid for each separate coverage purchased

2. Insuring Agreement States what the insurer agrees to do and the major conditions under which it so agrees Describes the characteristics of the events covered under the contract

3. Exclusions Define and limit the coverage provided by an insurer May exclude certain perils, property, sources of liability, persons, losses, locations or time periods

4. Conditions

Define terms used in the other parts of the contract prescribe certain conditions that must be satisfied before the insurer is liable may describe the basis for computing the premium

Fields of Insurance (based on the perils insured against) 1. Private Insurance Consists of those insurance programs that are available to the individual as protection against financial loss

a. Life Insurance Protection against undesirable financial consequences of premature death and superannuation

b. Accident and Health Insurance Insurance against loss by sickness or accidental bodily injury

c. Property and Liability Insurance Protection against losses resulting from damage to or loss of property and losses arising from legal liability

d. Casualty Insurance Insures against accidents, not necessarily tied to any specific property

e. Credit Insurance Repays some or all of a loan when certain things happen to the borrower such as unemployment, disability, or death

2. Social Insurance Compulsory insurance, usually operated by the government, whose benefits are determined by law and in which the primary emphasis is on social adequacy Provides compulsory protection for personal risks those that involve the possible loss of income or assets because of premature death, dependent old age, sickness or disability or unemployment

Types of Insurance Business / Companies (according to the insurance they offer) 1. Life Insurance - life insurance, annuities and pensions products 2. Non-Life Insurance / General Insurance - other types of insurance Forms of Insurance Business / Companies Stock Companies

Organized as a profit-making venture in the field of insurance owned by stockholders

Mutual Companies Organized under the insurance code of each state as a nonprofit corporation owned by the policyholders

Reciprocals Owned by policyholders who exchange coverage with each other or reciprocates in sharing risks

Lloyds Associations Organization of individuals joined together to underwrite risks on a cooperative basis Reinsurance companies - Insurance companies that sell policies to other insurance companies, allowing them to reduce their risks and protect themselves from very large losses. -

Captive insurance companies


Limited-purpose insurance companies established with the specific objective of financing risks emanating from their parent group or groups

INTERVIEW: Life Insurance Company PNB Life Insurance Non-life Insurance Company PNB General Insurers, Co., Inc.

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