RISK MANAGEMENT AND INSURANCE

1. RISK MANAGEMENT AND INSURANCE TOPIC 8 BONDING, CRIME INSURANCE, REINSURANCE

2. Bonding and Crime Insurance • Provide financial guarantees of human performance, or indemnity payments in cases where people fail to perform with integrity.

3. Bonding and Crime Insurance contn’d.. • Fidelity bonds protect a firm against losses caused by its own dishonest employees. e.g. bank teller • Crime insurance covers losses caused by nonemployees. • Reinsuranceis a transaction engaged in by almost all insurance companies.

4. Surety Bonding • A surety bond is an instrument under which one party guarantees to another that a third will performa a contract. • It involves 3 distinct parties: • Surety : Surety bonding requires the surety to pay a second party (insurance company). • Obligee : Second party (e.g: theschool board). • Principal: If it fails to fulfill an obligation to the obligee. ( e.g.construction company)

5. Reason for Surety Bonding • When the breach of contract occurs then the board will get the satisfaction of claim promptly(compared with the court case). • Litigation is avoided by the board. A new contractor may be employed to complete the school in time.

6. What is the Advatage of Surety Bonds to Contarctors? • In today’s competitive market, a surety bond is a valuable commodity for a contractor. • Obtaining a surety bond shows your company’s best face to both potential customers and lending institutions. • A surety bond amounts to a seal of approval from an independent third party, the surety bond company, which has evaluated your work. • The surety bond that the surety company issues shows that it believes in your ability to perform.

7. Comparison of Insurance and Surety

8. Difference in Relationships • In insurance, the relationship between the insurer and the insured : • If an insured`s negligence results in a claim against the insurer, the insurer normally has no recourse or a claim for damages against its own insured. (e.g. damage on insured`s home by him or her). • In surety bonding, there is no result. If a contractor`s negligence or frauds result in a claim being paid by the surety to the obligee, the surety in turn will look the contractor for whatever satisfaction it can obtain.

9. Underwritting Bonds • There are three factors to be evaluated before any suretyship agreement: • the character of the principal • the financial capacity of the principal • the experience of the principal

10. Fidelty Bonds • Fidelity bonds protect employers from loss caused by dishonest acts of employees. • Dishonestyincludes larceny, theft, embezzlement, forgery, misappropriation of funds and other fraudulent or dishonest acts. • Financial institutions are most likely to buy FIDELITY BONDS: bankers, stockbrokers, S&L Associations, credit unions, and other similar institutions in which many employees have access to valuable assets need this protection.

11. Commercial Fidelty Bonds • Commercial Fidelity bonds are purchased by non-financial business firms, educational institutions or other groups where one or more employees handle significant of funds.

12. Crime Insurance • It covers the losses caused by outside the firm. It typically covers theft, robbery, burglary. • Banks, by their nature, present a special need for crime insurance and loss prevention. • Not only burglary and robbery but for safety of deposit boxes.

13. Crime Insurance contn’d.. • Blanket Coverage protects the banks from losses caused by any employee. • Scheduled Coverage specifically named people or specific positions are identified as being capable of causing an insured loss.

14. Reinsurance • Reinsurance is a transaction between two insurance companies in which one insurance company purchases insurance from another insurance company. • Reinsurance is a separate kind of insurance transaction rather than a separate branch of the insurance industry. • Reinsurance transactions occur in all branches of the private insurance system (both life and nonlife). • Primary insurer( ceding company) sells insurance to the insurer. • Reinsurer agrees to indemnify the primary insurer in accordance with the reinsurance contract.

15. Reinsurance Arrangements • A Facultative Reinsurance • It occurs when a primary insurer makes a separate agreement each time it desires reinsurance on a particular exposure to loss. Each time primary company will enter the reinsurance market and negotiate then terms of coverage and the premiums and commissions it will pay. • A Treaty Reinsurance • It is called automatic reinsurance, implies a standing relationship between a primary insurer and a reinsurer in which a portfolio of the primary insurer`s exposures is covered by reinsurance, without specific arrangements for any particular exposure. • The treaty can be renewal and non renewal, the primary insurer is committed to `cede` and the reinsurer is committed to accept all the business covered by the treaty.

16. Reinsurance Coverage • Prorata Quota Treaty Reinsurance • means that the losses, premiums and expenses are divided proportionately by the primary insurer and the reinsurer. • Excess of Loss (XL) • Excess of loss coverage commits the reinsurer to pay part of the claim only after the primary insurer`s coverage has been exhausted. • The reinsurer pays only the excess of loss beyond what the primary insurer has retained

17. Catastrophe Reinsurance • One particular type of excess of loss reinsurance is a special one. • Catastrophe reinsurance is distinguished by very high retentions by the primary insurer before the reinsurer becomes liable. • It has very high upper limits on the reinsurance policy; millions of dollars