HISTORY OF INSURANCE

 England in the 1600s

 Ships and cargoes
 Owners and merchants
 Lloyds of London
 Common Law
MARINE INSURANCE

 OCEAN - cargo over water

 INLAND - cargo over land
SHIPS AND CARGOES
INSURANCE IN THE USA
 FIRE INSURANCE
– Other perils added gradually
– Each company wrote own contracts
– Contracts were long, complex, varied
INSURANCE IN THE USA
 STANDARDIZED POLICIES
– Massachusetts first - 1880s
– NY standard fire policy - adopted by all
states 1943
– More policies being standardized every
year
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.
TYPES OF INSURANCE
COMPANIES

 STANDARD (ADMITTED)
CARRIERS
 GOVERNMENT INSURERS
 NON-STANDARD (NON-
ADMITTED) CARRIERS
 REINSURERS
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
Government Insurers

 FEDERAL - NFIP, Crop Insurance,

FDIC
 STATE - Texas auto & windstorm
pools, now MAP
 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
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
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.
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
DEALING WITH RISK

 INSURANCE COMPANIES
– SPREAD RISK
» Geographical - different. areas
» Financial - different $ ranges

– REDUCE RISK
» Underwriting guidelines
» Discounts (alarms, non-smokers, defensive
driving)
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.
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.
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)
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
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.
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.
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.
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
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
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
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
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.
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;
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
THE END