Chapter 10

1. Chapter 10

2. Learning Objectives (part 1 of 3) • Identify the types of risks for which insurance coverage is appropriate • Describe the basic principles of insurance and how an insurance premium is determined • Describe the basic coverages of an automobile insurance policy • Ascertain an optimal amount of auto coverage for the minimum premium

3. Learning Objectives (part 2 of 3) • Describe the various forms of homeowner’s insurance • Explain the consequences of buying less than full replacement value coverage • Describe the appropriate coverages for owners of condos, renters, and college students

4. Learning Objectives (part 3 of 3) • Ascertain an optimal amount of homeowner’s coverage for the minimum premium • Discuss the issues associated with working with agents and representatives • Check out an insurance company’s rating and complaint record • Explain the role of an umbrella insurance policy

5. Risks for which insurance coverage appropriate Insurance should be bought to protect against catastrophic disasters, not to protect against commonplace events. • Premature death & disability • Major assets such as house & car • Major health problems • Lawsuits

6. Basic Principles of Insurance • Loss must be fortuitous • Loss must be well-defined • Loss predictable in the aggregate • Loss must be personal • Large number of policies with similar risk exposure available • Loss exposures widely distributed

7. How an insurance premium is determined • Basic premium + loadings • Basic premium based on actuarial tables that reflect likelihood of a claim • Loadings include: • Expenses of doing business • Profit margin

8. Two factors to reduce a premium • Deductibles • Insured pays for the initial expenses out of pocket • Coinsurance • The insurance is only for a percentage of the claim

9. Basic Coverages of an Auto Insurance Policy • property damage to the insured’s car • physical injury to the insured and any occupants of the insured’s car • legal liability for damage to the property of others • legal liability for injury to others

10. Description of Basic Coverage Policies normally described as XXX/YYY/ZZZ (in thousands) • XXX = extent of personal injury coverage per person • YYY = aggregate personal injury coverage per accident • ZZZ = Property damage coverage

11. Other Coverages in a Policy • Medical Payments • Underinsured/Uninsured Motorists Coverage • Collision and Comprehensive Protection • Towing Insurance

12. Extent of Coverage • The wealthier you are, the more coverage needed • Medical coverage offset by a health insurance policy • The older the car, the less need for comprehensive

13. Strategy for buying auto insurance • Obtain the highest liability coverages available (incremental coverage is relatively inexpensive) • Agree to the highest deductibles offered • A $1,000 deductible is not a catastrophic loss • Breakeven period usually about 4 years for savings

14. Factors that determine auto insurance premiums • Probability of driver having an accident • Women have fewer accidents • People over 25 have fewer accidents • Married people have fewer accidents • People with clear driver records and who had a safe driving course have fewer • Features of the car • Area in which a person lives

15. Basic Coverages of a Homeowner’s Insurance Policy • property damage to the insured’s home, its contents, and related personal property • physical injury to the insured’s guests • legal liability for damage if the insured causes damage to the property of others • legal liability if the insured causes injury to others

16. Forms of Homeowner’s Insurance • HO-1: least coverage, 11 named perils • HO-2: more coverage, 18 named perils • HO-3: comprehensive coverage on home, and named peril on contents • HO-5: comprehensive coverage on both home & content • HO-8: special policy for older homes

17. Coverages of an HO-3 Policy (1 of 2) • Coverage A: Covers the dwelling (defines amount of policy) • Coverage B: Covers detached structures (10% of A) • Coverage C: Personal property of insured (50% of A), usually based on actual cash value, and contains internal limits on special items (e.g., cash)

18. Coverages of an HO-3 Policy (2 of 2) • Coverage D: Temporary living expenses (20% of A) • Coverage E: Liability protection ($100,000 is standard amount) • Coverage F: Medical expenses ($1,000 is standard amount)

19. Buying less than full replacement value • If have at least 80% of replacement value, then no problem on “small” claims • If less than 80%, then all claims will be prorated • If at least 80% but less than 100%, then only problem is if claim is for more than 80%

20. Other types of policies • HO-4: Renter’s insurance (contents and liability only, 17 names perils) • HO-6: Condo insurance (also 17 named period • College students: • Could be covered under parent’s policies • Might need to buy renter’s insurance

21. Strategy for buying homeowner’s insurance • Set coverage A to just cover cost of rebuilding home • Land and foundations are not insured • Use maximum deductibles • Obtain maximum liability coverage • Safety features reduce cost (e.g., alarm system, deadbolt locks)

22. Agents vs. Representatives • Agents will sell policies for multiple companies • Representatives will sell for only one company • Agent may be more supportive of customer in a dispute • Representatives tend to have lower premiums

23. Selecting an insurance company • Check out rating of company, to assure it is in good financial health • Check on any publicly available complaint records for company & avoid those companies with high ratios of complaints per policy outstanding

24. Umbrella Insurance • Provides back-up liability coverage • Sold in increments of $1 million. • Usually require a minimum liability coverage on auto & homeowner’s • Best strategy is to buy an umbrella and set other liability coverages to the minimum designated (most coverage for the least $$)