Chapter 2: Defining the Insurable Event

1. Chapter 2:Defining the Insurable Event

3. Insurable Loss Exposures • Introduction - Not all exposures to loss are insurable - Which ones are? • Gambling versus Insurance • They are opposites • Gambling increases risk (speculative) • Insurance reduces risk (pure)

4. Characteristics of Ideal Insurable Loss Exposures • Point of view of the insurance company • Large number of homogeneous units • Accidental and unintentional losses (from the point of view of the insured) • Definite in time and in place, measurable and of sufficient severity to cause economic hardship • Non-catastrophic

5. Characteristics of Ideal Insurable Loss Exposures • Point of view of the insured • Does the exposure warrant protection? • Is the probability of loss low? (How much is the premium for loss probability exposures?)

6. Insurance Works Well When..... The industry adheres to the above guidelines resulting in: A balance that is maintained between the number of insured exposures and the number and severity of the losses in the pool.

7. Insurance Will Have Difficulties Or Fail To Function When.... • More and more people collect • Frequency and/or severity increases • Price must rise • Fewer people buy • Risk premiums increase • Pool shrinks in size and cycle starts again ! • Results in small pools, many collecting and unaffordable premiums

8. Adverse Selection and Subsidization • Adverse selection - undisclosed information caused people to pay less than their ‘fair’ share • Causes subsidization - because included with people paying more than their ‘fair’ share • Self-selection

9. When Subsidization Is Caused By Government • Setting or eliminating classification schemes prevents competition • Called mandated subsidization • Example: • Males vs. females • Annuity • Life insurance • Group employee pension benefits

10. Principles of Risk Classification • Used to: • Minimize subsidization • Minimize adverse selection • Goal is to have all pay a "fair" share • Evaluation of classification schemes

11. Principles of Risk ClassificationFactors 1) Separation and Class Homogeneity • Each classification will have a significantly different chance of loss • Each member (in a classification) will have approximately the same chance of loss

12. Principles of Risk ClassificationFactors 2) Reliability • Information is easily obtained and not subject to manipulation • Information is verifiable

13. Principles of Risk ClassificationFactors 3) Incentive Value • Provides incentive to act in socially and economically positive ways

14. Principles of Risk ClassificationFactors 4) Social Acceptability • Mathematically fair outcome conflicts with social goals • Some rating criteria is socially or legally unacceptable because it is beyond the insured's control

15. Branches of Insurance - Successful transactions • Private Insurance • Non-life - fire, marine, casualty, bonding • Life - life health, annuities • Other - weather, municipal bond, boiler and machine, motion picture completion

16. Liability Insurance • The (English Common Law) American legal system is based on the notion that a person should be responsible for the damage caused to others • Types of Damages • Bodily Injury • Personal Injury • Property Damage

17. Legal Liability • Legal liability arises out of: • Torts - civil wrong done to another • Breaches of contracts • Criminal wrongs • Which of these is insurable?

18. Torts - An Insurance Categorization • Negligence • Failing to use reasonable care according to a “reasonable man” standard • A reasonableperson thinks before speaking or acting, and is honest and moderate in all activities • Question of fact • Other parties can be held liable • Vicarious liability • Joint-and-several liability

19. Establishing Negligence • Plaintiff must show: • Legal duty • Failure of the duty • Injury • Causal connection between the injury and the failure • Jury must weigh the facts based upon “the preponderance of evidence” not “beyond all or reasonable doubt”

20. Types of Damages • Compensation for Personal Injuries • Includes medical, lost wages, future wage loss, and pain and suffering • Punitive Damages • Compensation to punish a defendant for outrageous acts • Punitive damages against insurers • When insurers act in bad faith in resisting an insured’s legitimate claim • Other Damages • Hedonic damages - loss of life’s pleasures • Mental anguish

21. “Res Ipsa Loquitur” • Tactic used in court to shift a legal burden to the defendant • Requires: • The defendant has exclusive use of the instrument or process that caused the loss and the plaintiff did not • Use of the instrument or process does not normally cause injury unless there was negligence

22. Defenses in a Negligence Suit • Show there was no injury, duty, or failure • Contributory negligence - common law • Comparative negligence - statutory modification • Last clear chance rule - statutory modification • Assumption of the risk - common law

25. Torts - An Insurance Categorization • Deliberate or Intentional Interference • Assault, battery, liable, false arrest • Can result in civil as well as criminal actions • Liability Without Fault (Strict and Absolute Liability) • Laws or court precedent mandate liability in some circumstances: explosives, dangerous animals • Worker’s compensation, pure no-fault

26. Important Social Issues and Subsidization • Acquired Immune Deficiency Syndrome (AIDS) • Automobile Insurance • Pension Benefits • Catastrophes

27. Example Cases: • Girlfriend infected with herpes • BB Gun shot into crowd • Molestation of relative • Home day care operator injures child