HISTORY OF INSURANCE

1. HISTORY OF INSURANCE • England in the 1600s • Ships and cargoes • Owners and merchants • Lloyds of London • Common Law

2. MARINE INSURANCE • OCEAN - cargo over water • INLAND - cargo over land

3. SHIPS AND CARGOES

4. INSURANCE IN THE USA • FIRE INSURANCE • Other perils added gradually • Each company wrote own contracts • Contracts were long, complex, varied

5. INSURANCE IN THE USA • STANDARDIZED POLICIES • Massachusetts first - 1880s • NY standard fire policy - adopted by all states 1943 • More policies being standardized every year

6. INSURANCE IN THE USA • CURRENT • All states but 4 have same basic standard fire policy. Texas is one. • Many states have similar auto policies. Most use same rates (ISO). Texas is different. • Texas Dept. of Ins. sets rates, forms and rules for personal auto and property insurance. But many types of policies not regulated by State.

7. TYPES OF INSURANCE COMPANIES • STANDARD (ADMITTED) CARRIERS • GOVERNMENT INSURERS • NON-STANDARD (NON-ADMITTED) CARRIERS • REINSURERS

8. Standard (Admitted) Carriers • Stock Companies - Owned by stockholders/investors. Managed by Board of Directors. Purpose to make a profit. Examples: Aetna, Travelers. • Mutuals -cooperatives - operate like stock companies but owned by members. Can pay dividends (Ex: USAA) or can use profits to give lower rates ( Ex: State Farm). • Exchanges - groups of individuals (subscribers) who insure each other (reciprocal). Managed by Attorney in Fact. Example: Farmers

9. Government Insurers • FEDERAL - NFIP, Crop Insurance, FDIC • STATE - Texas auto & windstorm pools, now MAP

10. Non-Standard (Non-Admitted) Carriers • ALSO KNOWN AS THE EXCESS & SURPLUS MARKET • NO MARKETS AVAILABLE THRU STANDARD INSURERS • Must be declined by standard markets • Example: Jet Skis, Hot Air Balloons

11. Reinsurers • FORM OF INSURANCE BETWEEN INSURERS. • HELPS INSURERS EXPAND THEIR CAPACITY (Example: $2,000,000 home) • TAKES SOME “HEAT” OFF PRIMARY INSURERS. • Primary - the first insurer who pays on a loss • Excess - the second company that pays on a loss after insurance limits of first company are used up.

12. BASIC INSURANCE DEFINITIONS • RISK - Uncertainty regarding (financial) outcome (loss). • INSURANCE - A social device for dealing with risk • POLICY - a contract of insurance which promises to provide protection in the event of a covered loss.

13. DEALING WITH RISK • INDIVIDUALS • RETAIN RISK • Can’t do anything about it (airplane falls on house) • Choose to ignore risk (don’t buy flood insurance) • AVOID RISK • Don’t buy in earthquake area • Move away from flood areas • REDUCE RISK - good roof or alarm system • TRANSFER RISK - buy insurance

14. DEALING WITH RISK • INSURANCE COMPANIES • SPREAD RISK • Geographical - different. areas • Financial - different $ ranges • REDUCE RISK • Underwriting guidelines • Discounts (alarms, non-smokers, defensive driving)

15. LAW OF LARGE NUMBERS • The larger the number of separate-but-similar risks in a group, the more predictable future losses become. • Insurance companies must predict losses on a group basis in order to arrive at fair premiums for individuals within groups.

16. MORE INSURANCE DEFINITIONS • PERIL - the immediate, specific cause of a loss. • Named Perils - such as fire, lightning. Burden of proof of loss is on insured. Must be able to prove loss occurred from a covered peril. • All Risk - everything covered except what’s excluded. Burden of proof is on company. Must prove the loss was excluded or pay.

17. MORE INSURANCE DEFINITIONS • PROXIMATE CAUSE - a covered peril is the proximate cause (immediate, specific) of a loss if it initiates an unbroken chain of events leading to a covered loss. Without it no loss would have occurred. • DIRECT PHYSICAL LOSS (lightning strikes building) • INDIRECT/CONSEQUENTIAL LOSS (loss of use)

18. MORE INS. DEFINITIONS • HAZARD -situation that introduces or increases chance of loss from a peril. • Physical Hazards (mfg. fireworks in garage, child care in home, unfenced pool) • Moral Hazards - dishonest acts of insured which increase chance of loss. Character, living habits, financial responsibility. (Fake claims to get money when out of a job). • Morale Hazards - attitudes of insureds that increase possibility of loss. (Fails to fix roof when needed: let insurer pay after storm).

19. BASIC INSURANCE PRINCIPLES • INDEMNITY - property insurance is a contract of indemnity - it returns insured to financial position prior to loss. No profit permitted. Life ins. is not indemnity: it pays total sum if loss (death) occurs. • LIABILITY - legal responsibility for a loss to someone else (3rd party). BI or PD. Casualty insurance provides this type of coverage.

20. INSURANCE PRINCIPLES Cont’d. • INSURABLE INTEREST must exist in order to have a legally enforceable contract • Life Insurance - not required if insured purchases policy: if other party purchases, must have I.I. at the time of purchase • Property/Casualty Insurance - all parties named must have I.I. at time of loss. Each party with interest is covered only up to that amount.

21. INSURANCE PRINCIPLES Cont’d. • COINSURANCE - requirement that property be insured to at least 80% of replacement cost or be penalized in the event of a partial loss. • VALUED POLICY - In Texas full policy amount is paid in the event of a total loss.

22. INSURANCE PRINCIPLES Cont’d. • BASIS OF COINSURANCE • Actual Cash Value- what item(s) worth at time of loss (value of used goods). • Replacement Cost - what it would cost to replace item(s) at today’s prices

23. INSURANCE PRINCIPLES Cont’d. • CALCULATING COINSURANCE • Amount of insurance the client purchased • Divided by amount of insurance client should have purchased • Multiplied by the amount of the loss • Less the deductible • Equals the amount which will be paid on the loss

24. INSURANCE PRINCIPLES Cont’d • AMBIGUITY in policy language is interpreted in the insured’s favor by the courts. The state and/or insurance company writes the insurance contract and it’s assumed that they write it in their favor. • IMPORTANCE OF COURTS IN INSURANCE DECISIONS - new policy language and provisions are tested through court system

25. AGENTS DUTIES AND RESPONSIBILITIES • AGENT - the authorized representative of an insurance company • Has authority to act for insurer by written contract. Contract may be terminated if agent acts improperly • Is paid commission for work done for the company • Has binding authority as granted by the company • Owes primary allegiance to the company

26. Agent’s Duties and Responsibilities Cont’d. • AGENCY - a fiduciary relationship in which one entity (the principal) authorizes another (the agent) to act on its behalf in dealings with 3rd parties • FIDUCIARY - a relationship in which agent takes in/handles money and signs contracts on behalf of the principal and is accountable.

27. Agent’s Duties and Responsibilities Cont’d • AGENTS AUTHORITY • EXPRESS - whatever is agreed to in the contract • IMPLIED - other acts necessary to carry out express authority (Examples: advertising using company’s logo; hiring a solicitor) • APPARENT - based on 3rd party’s reasonable belief that the agent has the authority. (Example: agent has binders, applications, company logo in office; therefore assumed to represent company

28. Agent’s Duties to Company • LOYALTY - to interests of company • OBEDIENCE - to all lawful instructions. (Ex: binding authority suspended during hurricanes) • REASONABLE CARE - to avoid injury to the principal. • ACCOUNTING - for principal’s property/money. (Ex: premium pmts., computer equipment, manuals) • INFORMATION - disclosure of all known facts about accounts

29. THE END