for Policymakers Four assignments Insurance Principles Insurance Coverages Property and Casualty Insurance Coverages Life and Health Insurance Regulation and Legislation Insurance ID: 576319
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Slide1
Insurance Fundamentals
for
PolicymakersSlide2
Four assignments:
Insurance PrinciplesInsurance Coverages: Property and CasualtyInsurance Coverages: Life and HealthInsurance Regulation and Legislation
Insurance
Fundamentals for
PolicymakersSlide3
Insurance Basics
Economic Issues Related to Insurance PricingCharacteristics of the Insurance ProductInsurance as a Risk Management TechniqueWhy Insurance Operations Are Regulated
Insurance Principles TopicsSlide4
Insurance
provides financial security, and it does so based on principles that ensure that all covered losses will be indemnified.
Insurance BasicsSlide5
Risk
PerilsHazardsFoundational Insurance TermsSlide6
Losses
Loss frequencyLoss severityFoundational Insurance TermsSlide7
A means of treating risk by transferring the financial consequences of a loss to an insurance company
A means of protecting financial interests when losses occurWhat Is Insurance?Slide8
Pays insured’s covered losses (indemnifies)
Reduces uncertaintyEncourages efficient use of resourcesHelps reduce and prevent lossesHow Insurance Benefits InsuredsSlide9
Supports credit
Satisfies legal requirementsSatisfies business requirementsProvides sources of investment fundsReduces social burdensHow Insurance Benefits Business and SocietySlide10
Premiums
Opportunity costsCosts of Insurance to InsuredsSlide11
Operating costs – including profit
Fraudulent and inflated claims (moral hazards)Claims caused by carelessness or indifference (morale hazards)Frivolous lawsuits that are settled as nuisance claimsCosts Associated With InsuranceSlide12
These principles help ensure that the insurance mechanism is actuarially sound:
IndemnificationLaw of large numbersInsurable interest
Fundamental Insurance PrinciplesSlide13
Insurance should not benefit an insured beyond the value of a loss.
Violations of this principle can increase the frequency and severity of losses.The Principle of IndemnitySlide14
The mathematical basis of insurance.
Insurance coverage provided is large relative to the premium paid.What would be an unexpected loss for an individual becomes an expected loss in aggregate for an insurer.The Law of Large NumbersSlide15
Means that the insured must suffer financially should a loss occur
Supports the principle of indemnity—one cannot gain from an insurable lossInsurable InterestSlide16
An
insurance policy is priced to reflect the loss exposures the policy covers while allowing for expenses, profit, and contingencies.
Economic Issues Related to Insurance PricingSlide17
Adverse selection
Moral and morale hazardEquity: actuarial and socialTimingKey Issues in PricingSlide18
Adverse selection increases insurers’ costs.
Those with the greatest probability of loss are most likely to buy insurance.They tend to have more losses and higher claims than insureds with an average loss probability.
Adverse SelectionSlide19
Insurers need information about
insureds to set prices that reflect risks.Data collection raises privacy concerns:What information is relevant?How much information is too much?
Avoiding Adverse Selection: Data CollectionSlide20
Behaviors that increase loss frequency and/or severity
Moral—dishonestyMorale—carelessness or indifferenceCommon in auto, products liability, and general liability insuranceCan be discouraged with policy risk-sharing features (deductibles)Moral and Morale HazardSlide21
Fair discrimination—equitable premium for each insured—is essential to insurance pricing.
State insurance laws prohibit unfair discrimination in insurance pricing.Opinions vary about what is fair and unfair.Actuarial Equity Versus Social EquitySlide22
Premium is directly proportional to each insured’s loss exposures.
Cost-based pricing—identifies every variable unique to each insured.Use of some variables may be prohibited by state law.Actuarial EquitySlide23
Social equity involves two concepts:
Pricing should relate to ability to pay.Factors beyond an insured’s control should not affect premium.Social EquitySlide24
Most losses are recognized, valued, and settled quickly (short-tail losses).
Some losses take a long time to manifest, value, and settle (long-tail losses).The longer the tail, the greater the uncertainty in expected losses. TimingSlide25
An ideally insurable risk has six characteristics.
Insurers use these characteristics to decide which risks to insure. Insurers select only those risks that meet most of the criteria.What Is an Ideally Insurable Risk?Slide26
A large quantity of similar people or objects may be subject to a loss.
Loss would be fortuitous.Loss would not be catastrophic to the insurer.Characteristics of Insurable RisksSlide27
Time, location, and extent of a loss can be determined.
The amount of an expected loss can be predicted.Covering the expected loss is economically feasible for the insurer.Characteristics of Insurable RisksSlide28
Insurance
products share several characteristics that distinguish them from other types of consumer products.
Characteristics of the Insurance ProductSlide29
The insurance product
Lacks physical characteristicsIs more than the policy on paperRepresents a promise (to pay in the event of loss)IntangibilitySlide30
An insurance policy contains complicated terms and concepts.
An insurance policy is a legal contract.Insureds and claimants may hire attorneys to resolve or clarify issues.Some issues may involve courts, regulators, or legislators.
Complexity and Legal StatusSlide31
Product benefits become most apparent at time of loss.
Insureds or claimants may be facing unpleasant circumstances.Heightened emotions may complicate transactions.Insurance CircumstancesSlide32
Loss
exposures with serious financial consequences typically require the purchase of insurance.
Insurance as a Risk
Management TechniqueSlide33
Retention
AvoidanceControlPreventionReductionTransfer (including insurance)Risk Management TechniquesSlide34
Some loss exposures have the potential to cause financial ruin.
Others present minimal potential costs and can be safety retained.Retaining Loss ExposuresSlide35
Ceasing or never undertaking an activity eliminates potential loss from that activity.
Example: Not owning or driving an auto eliminates potential auto liability losses.Avoiding Loss ExposuresSlide36
Loss prevention measures reduce the frequency of injuries.
Loss reduction measures reduce the severity of fire losses. Controlling Loss ExposuresSlide37
Some loss exposures are most effectively managed by transfer.
The financial consequences of loss are borne by another party.Insurance is a common risk transfer technique.Transferring RiskSlide38
The
fundamental purpose of insurance regulation is to protect the public as consumers and policyholders
Why Insurance Operations Are RegulatedSlide39
To protect consumers
To maintain insurer solvencyTo prevent destructive competitionReasons for RegulationSlide40
Regulating and standardizing insurance policies and products
Controlling market conduct and preventing unfair trade practicesEnsuring that insurance is available and affordableConsumer ProtectionSlide41
Ensure an insurer’s claim-paying ability
Protect the public interestSafeguard insurer-held fundsInsurer Solvency RegulationSlide42
To ensure the availability of insurance by controlling rates
Insurers, to compete, may lower rates.Intense competition can drive down rate levels across the market.Some insurers may become insolvent.An insurance shortage may result.
Prevention of Destructive CompetitionSlide43
Insurance is
A risk management technique that involves transfer of risk to an insurance company A complex legal contractAffected by adverse selection, moral and morale hazard, actuarial and social equity, and timingRegulated to protect consumers and policyholders
Summary