Topic 8 Definition Characteristics of Insurance Use of Insurance as a Risk Management tool Why Firms people buy insurance What commodity are you buying o Peace of Mind o Certainty o Safety o Protection of assets on a Balance Sheet o Tax Benefits 1 Premise of Insurance uses funds that are paid into a group Group combination of Loss exposures of individuals a b Members of the group pay for losses of anyone who is a member of c the group Insurance Trading an unknown loss For a known Loss Premium Trading uncertainty for certainty d Transfers Financial responsibility for payment of Loss from the insured to the insurer e Pooling Sharing losses among a group i Insurance A contract 2 Indemnification a Where the insurer agrees to indemnify compensate the insured Insurance coverage will put the insured in the b Fully Indemnified same financial position as before the loss 3 Forms of Indemnification a Repair the asset before replace i Fair Market Value Depreciation Value b Cash up front OR Reimburse you Insurance companies may have preferred body shop i Or they may pay a 3rd party ii iii Pay Shop directly No out of pocket for you iv Or 2 3 estimates from non approved shops 1 Pay lowest estimate v Insurance Companies paying amount determined after a loss c Services i Additional Costs expenses 1 Rental Car d Provide an Attorney Legal Fees Insurance Defense Panel Counsel i ii Settlement Verdict Award iii Loss Settlement Rule In the contract 1 Determine if there is a loss 2 Pay you actual cash value 3 Replace 4 Pay you Market Value Blue Book Depreciated Value iv Can the Loss amount be determined prior to a Loss 1 Pre determined Value a Life Insurance Policy for a specific amount i Total Loss 2 Unique Items Irreplaceable a Want to Predetermine the Value before the Loss Occurs i Antiques ii Art iii Collectables 3 Insurable Interest If you have Insurable Interest you can insure anything 4 50 000 Antique Reassess Reappraise 5 Constantly Reappraise agree to a pre loss value How and why is insurer able to accept Risk Financial Loss Transfer o Transferred Risk for payment to insurance company o Premium Ability to predict the future o Actuary Rates Predictions o Law of Large Number s As Number gets bigger Fairer Know Experience o Captive One client No numbers o Higher Increased Premium Best Industry practices Consultant Experience o Insurers have many clients in Risk Pool reflects losses for whole group NOT for one particular individual o With the Law of Large Numbers Insurance Company is able to accept the risk financial transfer Invest premium until they have to pay Accurate predictions Risk is still present for the insured Not Cover Deny Exclude Bankrupt
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