Chapter 5 Insurance Occupations

1. Chapter 5Insurance Occupations

2. Scope of chapter • Some fundamental principles of agency law • Describe an insurance agent’s duties • Describe the difference between insurance agents and brokers • Explain the insurance underwriter’s functions • Identify a loss adjuster’s responsibilities • Main focus of this chapter is to explain the internal functions of insurance companies by looking at different insurance specialists contribute to the overall operations of the insurance company.

3. Insurance Occupations One purpose of studying the insurance occupations is that to counteract the usual feeling of students about the insurance agent and to explain the role of professional agent as a knowledgeable financial advisor who must acquire much expertise before being able to work with the public.

4. Insurance Marketing and distribution • Insurance agents and brokers keep important link connecting the insurance companies and insurance consumers(traditional pattern). • In some lines of insurance such as personal auto insurance or term life insurance the marketing model has significant change from the traditional pattern. “ Direct marketing accounted for about 30 percent of the policies sold.” • Direct marketing include mail solicitations or Internet solicitations .

5. E-Commerce • Explain the use of the Internet to automate insurance and other transactions. • Insurers and personal consumers usually do the insurance transactions on the Internet. • From the insurer’s viewpoint e-commerce provide cost-cutting efficiencies and direct contact with customers. From the consumers’ viewpoint, e-commerce allows transaction possibilities at a location and at a time of their choosing. • E-commerce will result in lower insurance costs. • Personal automobile insurance and term life insurance due to frequently purchased or relatively simple insurance products have been the most popular insurance products sold on the Internet.

6. Purchase insurance without any needs to an agent or broker • The Internet has not yet had results in commercial insurance comparable to the results in personal auto or term life insurance because of the complicated loss exposure of commercial coverages than personal loss exposure. • Those companies needing insurance increasingly will seek for commercial coverage and those insurers willing to provide the coverage will use the Internet to complete commercial insurance transactions. Example: A firm needing commercial coverage for a warehouse could post architectural drawings and a virtual tour of facility on a Web site. Likewise, the basic parameters the insurer uses for worker’s compensation or some other commercial coverage might be post by insurer and insurance coverage is sold without an initial contact to an agent or broker.

7. Insurance agents and brokers • Agent: A person authorized to act for another person. The agent may create, perform, or terminate a contract for another person. • Principal: The person on whose behalf the agent acts. By law, an insurance company, like other companies , is considered a person. Generally, the insurance company is the principal employing or contracting the insurance agent. • Duties that agents owe the principals defined by law: - Duty of loyalty( not further their own interest at their principal’s expense) - Duty of care ( the duty not to be negligent) - Duty to obey instructions

8. Duties of agent and principal • If the interest of agent is adverse to the principal’s interest , the agent must inform the principal. • The agent can not serve two principals with adverse interests unless both principals agree. • The agent has the duty to inform the principal of all relevant information and to keep a proper account of all money or other assets. • The agent has a duty of responsible care, meaning the agent should not attempt to do business he or she cannot perform properly. • The principal has the duty of paying for the agent’s services and honoring all agreed-on commitments to agent.

9. Two other basic duties relating to agency • Knowledge given to the agent is considered to be provided to the principal as well. • Payment made to the agent is considered to be conveyed to the principal when the agent has actual or apparent authority to receive the premium payment. - In cases that information or payment is not forwarded to the insurer after the insured gives it to an agent, the insurer may deny a loss claim believing it has been misinformed or unpaid. If the agent is responsible for the problem , a court will require the insurer to pay the claim .

10. Rights and duties imposed by an agency contract • An agency contract between two parties establish the rights and duties of each party. • Actual authority is given to agents through the agency contract or agreement. • Express Authority providesdetails of the agent’s duties and responsibilities and identifies specific acts an agent may do. • Incidental authority covers all the details necessary to accomplish the agent’s work, which are too numerous to specify in an agency contract.

11. The agents are legally obligated to promote the insurer’s interest and they are responsible to provide appropriate contracts and interpret the contracts for consumers. • Court recognize the agents as professionals and many agents promote this image by advertising their professionals and educational accomplishments. • Court can protect the consumer ‘s interest when disputes arises as a result of an agent’s action or inaction. Example: An agent encouraged a person to change insurer. The consumer agreed if the coverage is “the same as before". If shortly after the new policy was in place a loss occurred that would have been covered by the original policy but excluded by the replacement policy. This is an example that insured sued the agent for professional negligence. The court held that the agent was responsible for uncovered losses until the insured received the newly issued policy and had the opportunity to read it.

12. Insurance Broker • An insurance broker is an agent with limited authority to find an insurer that will accept the risk transfer. • The insurance broker’s function is the same as real estate broker who is hired to find a buyer for a client ‘s stock. • The broker’s principal is the insurance applicant, not the insurance company. If an applicant tells the facts to his or her own agent , the broker , that does not necessarily inform the insurance company of the facts. • Brokers cannot bind insurers to contracts because they are agents of the applicant.

13. Insurance Brokers useful in commercial insurance • Businesses often have unique property or liability exposures or require insurance contracts written to their specifications. • The broker can help write the specifications for the insurance or even design the insurance program and then find an insurer willing to provide the coverage. • Brokers shop for insurance on a daily basis, they have information about pricing and coverage availability unknown to business that shop for insurance only annually.

14. Loss adjuster or claim adjuster • After a loss, the insured must notify the insurance company for claim payment. • Before settling the claim , the insurer will conduct a claim investigation by loss adjuster. • Loss adjusting is most important in property insurance, where many losses are partial and where the extend of property damage is not always clear. • Loss adjusting is not a problem in life insurance because insurers make no payment for partial losses and pay the full amount due after receiving proper notification of the insured’s death. • Loss adjusting is used by life insurance companies in cases involving death claims arising shortly after policies are purchased. • Life insurers use loss adjusting to investigate some claims for accidental death benefits, disability income benefits , and health insurance benefits.

15. The property adjuster investigates reported losses, determines if the insurer is liable to pay the claim , or recommends that the insurer deny the claim if the facts appear to indicate denial is appropriate. • One of the first tasks the adjuster completes is to make sure that the insurance company is responsible for paying the loss. Example : -The claimant reports the loss to the wrong company or reports property as destroyed that is different from the property covered in the insurance policy. - Insureds make claims after policies expire or after the time for premium payment has elapsed. - Claims when losses are caused by perils , such as floods, that are excluded specifically from coverage in the insured’s policy. - Insured make claim that fraud in involved in the loss. "uncovering insurance fraud makes the loss adjuster’s job very important”.

16. After the adjuster determines that the company should pay for the loss, the adjuster must form a judgment of the dollar amount of the damage. • Often adjuster and insure can agree on the amount of the claim. • A dispute between the adjuster and insured may occur about the amount of loss. • The adjuster , who evaluate claims daily , is more familiar with the value of property and does not have personal attachment to the destroyed property that the insured dose. • If the insured and adjuster cannot agree on the amount of the claim , appraisal or distribution provisions in property insurance policies provide for resolving disputes without court litigation.

17. If the loss adjuster and the insured agree on the amount of the loss, the adjuster will complete the investigation by recommending the claim payment to the insurer. • If adjuster feel that the claim has no validity , they will recommend that the insurance company deny it. • If the insured still believes the denied claim to be valid, he or she can hire a lawyer and sue the insurance company for breach of contract. In this case a court decides whether the insurance company should pay the claim.

18. Underwriter • One of the most challenging activities in an insurance company. • The underwriter reviews applications for insurance and then insurer either accepts them at an appropriate rate or rejects them. • The underwriter makes a decision based on criteria established by the company’s management. • Example: No drivers accepted with three previous accidents or no insurance provided for restaurants. • The goal of underwriting is to produce a pool of insureds based on classified risk whose actual loss experience will approximate closely the expected loss experience of a given hypothetical pool of insureds.

19. Contrary to some opinion , the underwrite is not supposed to reject so much unit exposures that the insurer experiences no losses. • If the underwriter rejects all but the exceptionally safe exposures, much desirable business has been turned away. • Insurance companies expect losses, and it is just as much an underwriting error to reject profitable business as it is to accept loss-prone business. • The function of the underwriter is to accept applicants so that the losses paid by the insurance company closely match the losses that the company expects to pay. • If management feels that regulators have provided inadequate rates for a class of business , the underwriter must narrow the range of acceptability to produce the expected results.

20. Adverse Selection ( antiselection ) • Describe the process whereby those individual s who are more than likely to experience loss try to purchase their insurance at average rates that do not truly reflect the above- average cost of their exposure. • Adverse selection is as a result of unequal possession of knowledge(information asymmetries). • The underwriter must always recognize the possibility of adverse selection and therefore must screen and rate all applications for insurance carefully. “ proper classification of risks by dealing with potential adverse selection is the essence of the underwriter’s task”. “one function of insurance underwriting is to prevent the adverse selection”.

21. Example of adverse selection : People whose property is prone to fire, those who are more than likely to have automobile accidents ,and people whose health is not good need the financial security. • In many cases insurance companies accept such exposures , however, they must be charged a premium that reflects their increased costs. • The potential conflict always exist between the underwriter and the insurance agent in terms of underwriter’s performance is judged primarily on the quality rather than the quantity of successful applications whereas the agent is compensated based on quantity of production.

22. The conflict between the two parties is more apparent than real. • The agent has the responsibility for an initial screening of applicants. If the agent knows that a company will not accept a certain class of business or there is possibility of moral hazard, he or she should not submit such applications. • The underwriter knows the greater amount of the business , the better the law of large numbers will operate. • The agent knows that if the applications submitted consistently result in an above-average number of claims, the company will end the agency relationship. • Although a potential for conflict appears because of the different objectives of the underwriter and agent , in practice they both are working toward the same goal. “ producing a large group of properly classified insureds”

23. Property Insurance Underwriting • Selecting proper insureds and charge them a rate that fairly reflects the expected loss is the essence of underwriting. Example: in underwriting and rating property for fire insurance the underwriter consider the following factors: - the type of construction - the occupancy or use of the building( commercial or residential) - the nature of the surrounding property - The fire protection provided by the community where the property is located. - any safety features incorporated in the property , such as fire sprinklers or alarms.

24. Factors have been used to determine an appropriate rate for an applicant in underwriting and rating automobile insurance: - The age of the driver - The use to which the automobile will be put - The driver’s accident and moving violation record - the driver’s gender • Sources for obtaining underwriting information: - Public records on traffic violations - Investigation by the insurer’s employees - Credit- rating agencies to provide supplemental information .

25. Life insurance underwriting • Factors determine an insured’s life insurance rate are: 1- The applicant’s age 2- The applicant’s gender 3- The status of applicant’ health Medical staff to assist in assessing an applicant’s health. In addition to variables cited, the life insurance underwriter will be interested in such items as the insured’s occupation, hobbies, total amount of life insurance owned, general financial condition, and any indications of a moral hazard. “ Like the property insurance underwriter, the life insurance underwriter constantly must be alert to the possibility of adverse selection”.

26. Medical Information Bureau(MIB) • Provide assistant to life insurance underwriters • The MIB was formed in 1902 by physicians who were medical directors of about 15 life insurance companies. • MIB provide a central location for storing information about life insurance applicants. • The MBI maintain records on people who have taken medical examinations in connection with the purchase of life insurance. • All member companies submit reports on their applications to the MIB ,and all are able to request MIB review in writing during the application process.